Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / How China Trade Strategy Is Shifting as US Deficit Widens
Transcript
- Lucas: So here's a number that stood out to me this morning: the US trade deficit in goods and services hit negative seventy-seven point five billion dollars in May. That's down from about negative fifty-four point six billion in April — a big swing in just one month. Luna: That's a pretty dramatic widening. Is this mostly about China? Lucas: Partly, yes. China still runs a massive surplus with the US, but the story is more nuanced. Total US exports of goods and services actually rose to three point five trillion dollars in 2025 — that's a record. But imports climbed even faster, to four point three trillion. So the deficit is widening because Americans are buying more from abroad, not because exports are collapsing. Luna: And a lot of that import surge is from China — electronics, solar panels, EVs, even though tariffs are still in place. Lucas: Exactly. The yuan has been fairly steady around six point seven nine per dollar — that's actually a slight appreciation from where it was a year ago. Beijing isn't letting the yuan weaken aggressively, even though a weaker currency would make exports cheaper. They seem more focused on stability and on building alternative payment systems. Luna: Currency swaps, right? We talked about that a few episodes back. China has been signing bilateral swap agreements with trading partners to bypass the dollar. Lucas: Right. And that's part of a longer-term strategy. But in the short term, the data shows that the trade-weighted dollar index is still very strong — around one hundred twenty point seven — even though it's edged down a bit. That makes US imports more expensive for American consumers, but it also gives China pricing power in their export markets. Luna: So if the dollar stays strong, China's exports remain competitive even without a weaker yuan? Lucas: Bingo. And that's exactly what we're seeing. Look at Alibaba — the stock is up nearly fifteen percent in the last five days. That's not just a China bounce; it's a bet that Chinese e-commerce and cloud services can keep growing globally despite trade tensions. Similarly, Pinduoduo is up modestly, JD up five percent. The market is pricing in resilience. Luna: But NIO is down almost five percent. That seems to be the outlier. Is that just ev specific headwinds? Lucas: I think so. European tariffs on Chinese EVs are starting to bite, and there's uncertainty about how much of NIO's growth is dependent on subsidies that Beijing is slowly pulling back. The battery recycling story we covered recently is real, but it doesn't solve the immediate demand problem in Europe. Luna: So the broader China equity ETFs — FXI, KWEB, MCHI — they're all up two to three percent this week. That suggests investors are looking past the trade deficit noise and focusing on individual company fundamentals. Lucas: Yeah, and that's a smart move. The macro picture is messy, but the micro — especially for tech and consumer platforms — seems to be improving. One thing I'd flag: China's exports of goods and services hit three point five trillion dollars last year. That's a record. And imports also hit a record, at four point three trillion. So the trade surplus is actually shrinking in absolute terms. Luna: Wait, if exports are at a record and imports are at a record, how is the surplus shrinking? Lucas: Because imports grew faster. The surplus narrowed from about two hundred billion dollars to roughly one hundred eighty billion — that's a ten percent drop. And if you look at the current account balance, which includes services and investment income, it's even worse: negative two hundred twenty-six billion dollars in the first quarter of 2026. Luna: That's a big number. So China is running a current account deficit? That's unusual for them. Lucas: Very unusual. It's partly because Chinese tourists are spending more abroad, and partly because Chinese companies are paying more for technology imports — chips, software licenses, that kind of thing. The days of China running huge surpluses every year might be behind us. Luna: Which brings us back to the policy debate. If the current account is in deficit, does Beijing still want a weaker yuan? Lucas: Probably not. A weaker yuan would make imports more expensive, which would hurt consumers and raise input costs for manufacturers. So they're holding the line around six point seven nine. That's a deliberate choice to prioritise domestic stability over export competitiveness. Luna: If walking through the economy with us has made something click, I just want to mention — the reason shows like this stay ad-free is listener support. Buy me a coffee dot com slash fexingo is a simple way to help keep it going. Lucas: Yeah, it's a small gesture that makes a big difference for us. We'd be grateful if you find this useful. Luna: So back to the data — we have the yen at one hundred sixty point nine per dollar, which is pretty weak. How does that affect China's trade position? Lucas: Good question. A weak yen makes Japanese exports cheaper, so Chinese exporters face more competition in third markets like Southeast Asia and Europe. That's another reason why Beijing can't afford a strong yuan — they'd lose market share to Japan and Korea. Luna: So it's a balancing act: keep the yuan stable enough to avoid capital flight, but weak enough to stay competitive. Lucas: Exactly. And so far, the market seems to accept that. The trade-weighted dollar index is still elevated, but the yuan is essentially flat year-to-date. That's a win for policy credibility. Luna: What about the broader impact on Asia-Pacific markets? If the US deficit widens, does that mean more liquidity flowing into the region? Lucas: Historically, yes. A wider US trade deficit means dollars are flowing out to trading partners, which can boost asset prices in those countries. But this time, a lot of that dollar flow is being absorbed by China's currency swap network and by official reserve accumulation. So the effect is more muted than in the past. Luna: Interesting. So the old playbook of 'US deficit up, emerging markets up' might not work the same way anymore. Lucas: I think that's right. The system is fragmenting. Trade is still growing — exports and imports are both at records — but the channels are changing. More trade is being settled in renminbi, more investment is going through state-led initiatives like the Belt and Road. The old correlations are breaking down. Luna: And that makes stock-picking more important than macro bets. Which is why Alibaba is up fifteen percent this week while NIO is down. Lucas: Exactly. The macro tailwind isn't uniform. Companies that can navigate the new trade environment — whether through supply chain relocation, local partnerships, or technology licensing — will win. Those that rely on a single export market or a single product will struggle. Luna: So what's the one takeaway for our listeners? What should they watch next? Lucas: I'd watch the yuan fixings next week. If Beijing lets the yuan drift weaker toward six point nine, that's a signal they're worried about export competitiveness. If they hold firm around six point eight, it means domestic stability is still the priority. That'll tell you a lot about where policy is heading for the rest of the year. Luna: And in the meantime, the trade deficit numbers are a reminder that global trade is not shrinking — it's just changing shape. Lucas: Well said. That's our show. We'll be back tomorrow with another angle.