China’s economy, built on an unsustainable model of a growing trade surplus—now at a record high of nearly $1 trillion—and declining domestic consumption, is not only harming itself but also the “entire world”, a US Treasury report released Friday said. It suggested Beijing to boost household consumption and reduce the “negative spillovers” of its policies on trading partners.
The observations of the assumes significance as Indian manufacturing continues to struggle to compete with Chinese imports, with the goods trade deficit crossing a record $100 billion. This comes despite large-scale use of anti-dumping duties and quality control orders over the past two years by the Ministry of Commerce and Industry.
The report said that China now accounts for over 60 per cent of global goods trade surpluses, while the share of domestic consumption, including both household and government spending, fell to less than half its pre-pandemic average in the second half of 2024.
“China’s net exports’ contribution to growth for the most recent three quarters was among the highest on record, while domestic consumption’s share, which includes both household and government consumption, fell to less than half of its pre-pandemic average in the second half of 2024,” the US Treasury report said.
A Chinese white paper in April, however, had said that trade imbalance in goods between China and the United States is both “an inevitable outcome” of structural issues within the US economy and a consequence of comparative advantages and international division of labour between the two countries—not a result of China’s deliberate pursuit of a trade surplus.
The new US Treasury report said that China remains an outlier in not disclosing its foreign exchange market interventions, forcing Treasury staff to estimate China’s activity using two proxy measures.
“The People’s Bank of China (PBOC)’s foreign exchange assets booked at historical cost—the first proxy measure—decreased by $7 billion in 2024. Meanwhile, net foreign exchange settlement data—another proxy measure that includes the activities of China’s state-owned banks—recorded net foreign exchange sales, adjusted for changes in outstanding forwards, of $165 billion last year, with $120 billion in net sales in the second quarter alone, when the Chinese yuan (RMB) faced sustained depreciation pressures,” the report said.
The US Treasury concluded that the data indicated the most significant foreign exchange sales by China’s banking sector since the 2015–16 capital outflows crisis. The divergence between these two proxy measures could suggest that monthly changes in the PBOC’s foreign exchange assets are not adequately capturing the full extent of China’s intervention methods, the report added.
“This highlights the need for China to improve transparency regarding its foreign exchange intervention activities, which would also be in China’s own interest by reducing the risk of policy miscommunication and associated market volatility,” the US Treasury said.
China’s economy continues to be characterised by historically large and persistent macroeconomic imbalances, with a share of the global manufacturing trade surplus that has surpassed the peaks once held by Germany and Japan, the report said.
