China’s trade defies Iran war drag as exports, goods sales beat estimates in May

China’s trade growth held up better than expected in May, as a surge in AI-related exports helped cushion the economy from disruptions from the Iran war.

Exports rose 19.4% from a year earlier in US dollar terms, trend data showed on Tuesday, accelerating from a 14.1% gain in April. Economists polled by Reuters put growth at 15%.

The pace of import growth continued to increase, increasing by 27.4% in May, which is an increase from 25.3% in April, exceeding the economist’s forecast of 25% growth. That pushed the trade surplus to $105.4 billion in May.

In the first five months of this year, China’s growth grew rapidly, increasing by 24.5% over the previous year, exceeding exports by 15.5% in the same period, which reduced the trade surplus from last year.

The increase in imports has been largely driven by higher input costs and a narrower focus on select commodities, particularly semiconductor chips and gold, and is “hardly a sign of rebalancing,” according to economists at Bank of America Global Research.

“Given weak aggregate demand and ongoing domestic reforms, trade rebalancing is still a long way off,” BofA economists said, adding that the country’s growing economy has reduced Beijing’s urgency to stimulate policy.

China’s economy has shown signs of faltering following a strong first quarter. Growth slowed in April, with industrial production and retail sales posting their weakest gains in years. In May, the official gauge of manufacturing activity also fell to 50, the threshold that separates expansion from contraction.

Chinese exporters have so far weathered the fallout from the Middle East conflict, with overseas buyers scrambling to lock in supplies before energy costs rise. But economists have warned that the cycle may be short-lived – once the drive to accumulate money abroad is over, domestic spending will not be able to fill the gap.

“We expect the AI ​​boom to support manufacturing and trade,” said Xiangrong Yu, chief China economist at Citi Bank, as higher prices for tech and semiconductor goods boost headline growth. “Domestic demand may show continued weakness,” Yu added.

Yu expects retail sales growth, a gauge of consumption, may fall to zero in May with a weakening impact from trade subsidies, which continued to slow from a three-year low of 0.2% growth in April.

A continued weak job market is also adding pressure to consumer spending. “Despite rising exports, the number of manufacturing jobs continues to contract,” said Frederic Neumann, Asia economist at HSBC Bank, as productivity gains reduce labor demand.

The strengthening of the Chinese yuan this year has led to pressure on the country’s traders – who have accumulated huge dollars in recent years – as mounting foreign exchange losses have begun to weigh on profits.

“China has delivered strong export growth despite global economic uncertainty and an appreciation of the renminbi this year,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, adding that strong export growth may strengthen policymakers’ inclination to hold off on meaningful stimulus until July.

The onshore yuan strengthened 2.8% this year to 6.7802 against the US dollar while the onshore yuan depreciated 3% to 6.7787, according to LSEG data. Both were little moved after the release of trading data on Tuesday. The CSI 300 index rose 0.6%.

China’s economy has developed into what economists call a “K-speed” growth paradigm, with growing manufacturing and export sectors offset by continued weakness in property markets and consumer spending.

Exports have always been a bright spot in the world’s second-largest economy, driven by strong global demand for AI technology and renewable energy products.

While demand remains weak, rising commodity prices from disruptions to energy flows in the Strait of Hormuz have helped ease inflationary pressures that have plagued China’s economy for years.

Economists expect the country’s producer price inflation, due on Wednesday, to rise to 3.8% in May, the strongest rate in nearly four years, as manufacturers grapple with higher input costs, according to a Reuters poll. Consumer inflation is expected to increase by 1.3%.

China, which held about 15% of the world’s oil stocks before the war, could run out of oil reserves by late October if it is forced to draw down stocks to deal with any supply shortages, according to Fitch Ratings.

“While China’s stable electricity supply can provide a buffer, supply shocks from the energy crisis will still cause pain in the Chinese economy with shortages and high prices,” said Jing Wang, China Economist at Nomura.