To achieve its development ambitions, China’s industrial might must pay off for households.
The first half of 2026 has highlighted China’s industrial strength, the trade surplus widening back to near record highs and investment in high-tech manufacturing and services continuing at pace while authorities’ strategic reserves and pro-active decision making offered robust protection against an extended loss of oil supply. Ahead, China’s greatest opportunity is also its biggest threat – a recovery in the Chinese consumer.
Before we delve into the detail of the consumer outlook, it is important to dig deeper into recent industrial developments and their implications. Having narrowed sharply in March to USD51bn, China’s monthly trade surplus snapped back to USD85bn in April and USD105bn in May. The average for the year-to-date is now USD91bn, just inside 2025’s USD99bn and roughly triple 2019’s USD35bn. May’s 19% annual export growth is arguably outsized, but high single-digit gains are possible, if not probable, on a recurring basis. Note that it isn’t just export demand that is buoying the surplus. Chinese production is also increasingly outcompeting imports when it comes to domestic demand, motor vehicles being a prime example. This is also contributing to the widening trade surplus year-on-year.
Total fixed asset investment has disappointed of late, year-to-date growth contracting 4.1% in May. While a loss of momentum in utilities and transport and mixed results within manufacturing allowed the headline contraction to occur, it was education, health and property that drove the decline. With respect to trade income generation, it is important to recognise that investment has only plateaued after years of rapid growth. Each year that new investment holds at this level, a wave of additional capacity and efficiency is unleashed. Strengthening relationships with neighbouring nations also hold considerable promise. Indonesia and Vietnam are prime examples, having youthful and driven populations of circa 300mn and 100mn and Governments open to large-scale foreign investment.
The compounding income returns China has received through trade post pandemic should have resulted in a strong and confident household sector with burgeoning wealth. Yet, highlighted by annual nominal retail sales growth of -0.6% y/y and entrenched weakness in property, this is not the case. In part this is due to the hyper-competitive behaviour of Chinese firms which has suppressed profitability – an issue authorities are now seeking to redress through their anti-involution initiatives. But the primary cause of consumer hardship is instead the disconnect that has emerged between aggregate household income and the growth of Chinese industry. If consumers are to find their feet, the benefits of trade must pass through.
We expect this to occur but as a multi-stage, likely multi-year, structural process beginning with pro-active stimulus later this year. Initial steps are likely to focus on additional support for the housing sector and renewed subsidies for discretionary consumption. These steps are critical not only to incentivise current demand but also to promote employment in related sectors. Hiring by high-tech manufacturing and service firms is, in contrast, unlikely to accelerate given these sectors’ long-standing preferences for capital over labour as well as the efficiency benefits of automation and AI. To receive direct benefits from China’s industrial development, the average household will arguably need to wait until the equity valuations of these titans of industry reflect their future promise. Households will also need to have the confidence to put their wealth ‘at risk’. Authorities could accelerate the development of this linkage via incentives to directly invest in financial securities and/or by building trust in wealth and retirement solutions, but we suspect this will not be an immediate priority.
If authorities take the initiative in coming months and reset the consumer story, GDP growth can be sustained at or above 4.5%, even as the impetus from trade fades. But, if the Government only guards against the downside, growth is likely to slow to 4.0% and become increasingly fragile.
With respect to currency markets, success with the consumer through 2028 should be enough for the Renminbi to sustainably appreciate back to 2022 and 2018’s, then short-lived, highs against the US dollar around USD6.30. Breaking through that level is entirely possible, albeit more likely outside our current forecast window once the Renminbi’s growing share of global trade and financial flows are more widely accepted. For China’s competitiveness and the long-term trajectory of the currency, it is important to emphasise that the nation’s economic and financial development are not occurring in a vacuum but rather in concert with the rest of Asia. On a trade-weighted basis, the anticipated currency gains will be limited and most likely offset by continued productivity wins.
The implications for Australia and our dollar are difficult to discern at this juncture. China continues to expand not only its production chain but also its sourcing network across Asia, Africa and Latin America. As such, while commodity prices should remain supportive, Australia is unlikely to receive a material, lasting dividend from increased commodity export volumes. Very clearly though, not only in China but across Asia, a broad range of new opportunities are opening up. If, as a nation, we lean into this economic and financial development, our productivity and income prospects will grow, benefitting the dollar. For now at least, the market is likely to take a wait-and-see approach with respect to our prospects, the Australian dollar lagging the performance of the Renminbi and potentially other nations across Asia who are poised to outperform.
