Macro: China's foreign trade momentum remains strong

[Market Information]

1) ADP Weekly Employment Report: Over the four weeks ending May 23, private-sector employers added an average of 29,000 jobs per week. The data shows that U.S. job growth has slowed for the third consecutive week.

2) Middle East situation —

① Trump claimed Iran shot down a U.S. Apache helicopter but that the pilots were unharmed, adding that the U.S. would respond. Iran denied deliberately targeting the U.S. helicopter. Trump later downplayed the incident, saying it was 'no big deal.'

② The U.S. military launched strikes against Iran in response to the helicopter incident, targeting air defense and radar systems. Iran stated it would respond firmly. U.S. officials described the strikes as a warning and said they would not hinder negotiations.

③ U.S. media reported four key issues in U.S.-Iran nuclear talks: Iran halting uranium enrichment for 15 years, diluting its existing stockpile of enriched uranium, dismantling nuclear facilities, and accepting snap inspections.

④ CNN: Trump has claimed 37 times that a U.S.-Iran deal is 'imminent.'

⑤ Vance: A deal could be reached soon, but it will 'absolutely' be finalized before the midterm elections.

⑥ Trump said he might participate in rebuilding Iran—but would take half of its oil.

3) China's foreign trade continues to grow at a faster-than-expected pace. According to customs statistics, in the first five months of this year, China’s total goods trade imports and exports reached RMB 20.68 trillion, up 15.3% year-on-year; in May alone, imports and exports totaled RMB 4.45 trillion, rising 16.9%, with exports up 13.8% and imports surging 21.5%. China’s exports to the U.S. in May climbed to USD 39.03 billion, an increase of 35.4% year-on-year. Prices of chips, computer components, and electronic parts continued to rise, further boosting export values.

【Nanhua Perspective】Both imports and exports in May reached record highs for a single month. The most fundamental shift is that the renminbi has continued to appreciate this year while export growth remains robust—a combination that defies the traditional economic logic that currency appreciation necessarily suppresses exports. This divergence reflects a fundamental restructuring of China's core export competitiveness, which is now reshaping the pace of macroeconomic policy and market style in capital markets.

This round of export resilience rests on three irreplaceable advantages: First, China’s pivotal role in the global AI supply chain. China is no longer merely an assembly hub but has become a critical integration node linking upstream core components—such as Korean memory chips—to downstream global end markets. In electronics manufacturing and semiconductor intermediates, China has built monopolistic supporting capabilities that no other economy can replicate in the short term. Exports of integrated circuits and smartphones have surged in price with virtually no volume growth—a healthy pricing dynamic driven jointly by the global AI capex boom and China’s enhanced supply chain clout. This directly translates into corporate profits, signaling China’s upgrade from an assembler to a core manufacturing center with pricing power, where high value-added itself acts as a moat against exchange rate pressures.

Second, China’s coal-dominated energy structure has delivered a significant supply chain security premium amid geopolitical conflicts that have pushed global energy prices higher. This has ensured stable industrial production and cost advantages. While manufacturers in Europe, Japan, and Korea have been forced to cut output due to soaring energy costs, and Southeast Asian capacity has suffered from supply shocks, China has not only held onto its traditional manufacturing share but also absorbed substantial redirected orders. Simultaneously, it has amplified its competitive edge in new energy vehicles, photovoltaics, and lithium batteries—effectively turning geopolitical tensions into tangible competitive barriers.

Third, China’s enhanced overall export pricing power has become evident. Despite RMB appreciation and partial reductions in U.S. tariffs, exports of traditional labor-intensive goods—such as textiles, apparel, and furniture—have remained stable rather than declining. This stability stems both from restored price competitiveness following the narrowing of Sino-U.S. tariff differentials and from the premium placed on China’s reliability amid global supply chain turbulence.

Beneath the impressive headline figures, however, lies a deep structural divergence rooted in two distinct pricing dynamics: Price increases in high-end manufacturing sectors like AI and rare earths stem from the convergence of surging demand and scarcity premiums—a virtuous pricing trend that directly boosts corporate profits and marks a turning point in sector-wide earnings. In contrast, imports of crude oil and other commodities show falling volumes alongside rising prices, reflecting cost-push inflation driven by geopolitical supply shocks. Most of the pressure from soaring upstream raw material costs is borne by downstream and midstream small and medium-sized enterprises lacking pricing power. This has created a bifurcated landscape: high-end manufacturers capture profits while mid- and downstream firms absorb costs. This divergence extends beyond industries, spilling over into employment and income distribution, becoming the core contradiction constraining balanced economic recovery.

This structural split directly manifests at the macro level: Strong exports alone are sufficient to anchor China’s annual growth target, significantly reducing the need for large-scale, aggressive stimulus. Policy is likely to favor targeted measures and preserve firepower for the future. This shift in expectations has driven capital markets toward a 'buy tech, sell domestic demand' style, with funds continuously rotating from consumer and real estate sectors into AI and semiconductors. As long as export resilience holds, systemic reversal opportunities in domestic demand sectors will remain elusive.

Meanwhile, the substantial trade surplus not only provides solid support for the RMB exchange rate and safeguards monetary policy independence but also mirrors weak domestic demand, reflecting the reality of passively exported excess capacity.

Looking ahead to the second half of the year, exports are expected to remain resilient overall. The global AI investment cycle has yet to peak, with capital expenditures now extending from high-end chips to computing infrastructure and power support systems. Domestic investments in new infrastructure like data centers will continue to drive related product trade. New energy products still enjoy ample room for growth amid the global green transition, and the window for improved China-U.S. economic and trade relations remains open. However, export growth will likely gradually normalize from current elevated levels. Three key risks warrant vigilance: If Middle East tensions ease and oil prices drop sharply, China’s energy cost advantage and the substitution demand for new energy products could both weaken simultaneously; the EU, concerned about its trade deficit with China, may impose additional trade restrictions on leading Chinese industries such as photovoltaics and electric vehicles; and as global chip capacity ramps up, the tight supply-demand balance for AI hardware will ease, making it difficult to sustain high growth rates in semiconductors and related categories over the long term.

More profoundly, there is a growing concern over the persistent imbalance between external and domestic demand. The current boom in the AI industry remains confined to a few sectors and has yet to broadly lift the entire economy. A genuine recovery in domestic demand will require either a tangible rise in household incomes driven by new industrial waves like AI or a coordinated policy push after export momentum wanes. Until one of these conditions is met, the pronounced divergence in sectoral profits and asset prices will persist. Thus, May’s data not only confirms that China’s industrial upgrading has already been fully validated in global markets but also reveals a critical gap: to move from export-driven structural gains to society-wide endogenous growth, China must finally address the domestic demand challenge.

Author: Assistant Director of Nan Hua Research Institute, Zhou Ji Z0017101

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