Structural Divergence Between China's Trade Surplus and Domestic Deflation: Causes and Investment Implications

• Coexistence of trade surplus and deflation (user-provided background): From January to November 2024, the trade surplus was approximately $1.07 trillion, up 21% year-on-year; during the same period, CPI rose by about 0.7% year-on-year and PPI fell by about 2.2% year-on-year, combined with a 22% year-on-year increase in unemployment insurance expenditures, showing a structural divergence of ‘strong exports vs. weak domestic demand’.
• Market performance verification (Brokerage API Data, [0]):
  • A-shares: The Shanghai Composite Index closed up about 12.90% in 2024, indicating a certain pricing of growth resilience and policy support; however, as of the latest data, it has risen about 19.51% YTD in 2025, which more reflects risk appetite and valuation repair, and does not equate to the elimination of domestic demand deflationary pressure.
  • Exchange Rate: The USD/CNY appreciated slightly by about 2.60% in 2024 (from 7.3366 to 7.1460), and turned to a slight depreciation of about 4.69% YTD in 2025 (from 7.0018 to 7.3301), indicating two-way fluctuations in the external exchange rate environment and cross-border capital flows, which resonate with the ‘surplus-deflation’ combination but do not automatically reverse domestic price downward pressure.

Based on the above data and user-provided background, it is evident that the coexistence of ‘surplus-deflation’ is not a short-term disturbance but a structural mismatch between external and domestic demand, income distribution and financial transmission (see the logical deduction below).

• Income side: Strong exports mainly drive the income of the enterprise sector and high-skilled workers, but there is a time lag in transmission to household consumption; the employment structure shows the characteristic of ‘limited employment pull from technology-intensive industries’, and the improvement in labor income is weak in magnitude and sustainability.
• Expenditure side: Under deflationary expectations, households’ willingness for precautionary savings rises and marginal propensity to consume declines; coupled with the weakening wealth effect from valuation adjustments of real estate and financial assets, domestic demand fails to resonate with external demand.
• Outcome: Export improvement → enterprise sector income improvement → but household sector demand weakness → price pressure (sluggish CPI, negative PPI), forming the macro pattern of ‘surplus-deflation’.

• Technology-intensive dominance: The weight of integrated circuits, automobiles, high-end equipment, etc. in exports has increased, with higher added value and capital intensity, but the direct employment increment per unit export value is lower than that of labor-intensive industries.
• Industrial chain regionalization and re-export trade: Some trade partners have shifted to Asia, Africa, etc., with re-export trade and regional value chain restructuring; the distribution of added value in the chain is not fully linear with domestic employment pull.
• Mechanism: Improving export quality → improving total factor productivity is a good thing, but in the short term, it has limited absorption of low-skilled workers, coupled with automation and technological substitution, inhibiting the pulling effect of labor income expansion on domestic demand.

• Overseas profit retention: Multinational or overseas enterprises retain new profits overseas for reinvestment, mergers and acquisitions or debt repayment, which do not form domestic capital expenditure and employment increments in the short term.
• Exchange rate and capital control environment: Enterprises are more inclined to maintain overseas liquidity under the dollar cycle and external interest rate environment, providing limited direct support for domestic credit and investment, exacerbating the structural割裂 of ‘surplus does not equal domestic financial easing’.
• Mechanism: Trade surplus → overseas profit accumulation → overseas reinvestment cycle → weakened transmission to domestic money supply and credit expansion, and the country still faces the structural contradiction of ‘abundant broad liquidity, tight实体 credit’.

• Industrial policies are biased towards exports and technological upgrading, with insufficient support for rebalancing domestic consumption and employment.
• The automatic stabilizer role of the fiscal and social security system has not been fully exerted, with limited buffering of the negative feedback of ‘weak employment → weak income → weak consumption’, as reflected in pressure points such as rising unemployment insurance expenditures.
• Mechanism: The pattern of strong supply side and weak demand side continues, deflationary expectations self-reinforce, monetary policy is restricted in traditional transmission channels, and it is easy to form a cycle of ‘sustained price pressure → high real interest rates → declining investment willingness’.

• External demand/overseas expansion chain: Continue to focus on directions benefiting from global inventory replenishment and capacity restructuring, such as high-end manufacturing, auto parts, some electronics and equipment overseas enterprises. Their orders and profits have more exogenous resilience and low dependence on domestic demand.
• Domestic demand/discretionary consumption: Continue to be under pressure in the short term, with valuations highly sensitive to income growth and profit margin repair. Strategically, focus on structural opportunities (cost dividends, policy subsidies, brand premium) rather than industry-wide beta.
• Profitability and pricing: In the context of deflation, pricing power and cost advantages become key screening criteria; enterprises that can maintain stable profit margins, realize profit reinvestment and global layout have stronger valuation support.

• Fiscal and monetary easing expectations: Facing deflationary pressure, macro policies are likely to remain loose and targeted, focusing on the phased impact of broad fiscal and consumption stimulus on discretionary consumption and infrastructure chains.
• External environment and geopolitics: Global demand and supply chain restructuring, tariffs and export controls affect export structure; dynamic assessment of ‘export concentration, market diversification, technological substitution risk’ is needed.

• Risk premium: In a weak domestic demand environment, valuation expansion relies more on profit certainty than pure valuation elevation; high dividend and stable cash flow strategies have defensive attributes.
• Industry comparison: Technology upgrading chains and policy-supported directions (high-end manufacturing, independent controllability, green transformation) are relatively dominant; traditional cycles and real estate chains are limited by demand and debt constraints, with limited beta opportunities.

• Current situation: The RMB appreciated slightly in 2024 and depreciated slightly YTD in 2025 (USD/CNY from ~7.00 to ~7.33), indicating increased two-way fluctuations, intertwined with the dollar cycle and domestic fundamentals.
• Strategy: For non-RMB investors, RMB assets need to balance growth resilience and exchange rate fluctuation risks; for RMB investors, appropriately pay attention to diversified allocation and hedging between RMB assets and foreign currency/hard currency assets.

• Interest rate center: Under the background of deflation and weak nominal growth, the downward pressure on nominal interest rates continues, but considering external interest rate differentials and policy bottom lines, ‘low interest rates + increased volatility’ is more likely to be the norm.
• Credit spread: In a weak demand environment, credit stratification intensifies; high-grade and policy-supported varieties have more allocation value, while medium and low-grade varieties need to be vigilant against regional and industry structural risks.

• Real interest rate: If deflation persists, the decline in nominal interest rates may lag behind price declines, leading to a passive rise in real interest rates, increasing the relative attractiveness of cash and cash-like assets.
• Structured deposits and money market funds: In the context of rising liquidity management needs, tools with stable returns and high liquidity remain important defensive allocations.

• Hedging function: Gold and other hard currencies play an increasing role in hedging policy uncertainty and exchange rate fluctuations in the environment of ‘low interest rates + deflation/weak growth’.
• Allocation weight: Allocate appropriately according to risk tolerance and term structure to balance the overall volatility of the RMB asset portfolio.

• Essential understanding: ‘Record-high trade surplus’ represents external competitiveness and supply-side resilience; ‘domestic deflation’ reflects structural contradictions in domestic demand and distribution. Their coexistence indicates that relying solely on external demand cannot solve domestic demand insufficiency and deflationary pressure, requiring a combination of fiscal, social security, industrial and financial policies for rebalancing.
• A-share strategy: Take external demand and technology upgrading chains as the cornerstone, maintain phased布局 for domestic demand chains; focus on pricing power, cost advantages and cash flow quality; appropriately increase defensiveness (high dividend, stable cash flow sectors) and seize phased repair opportunities of domestic demand chains when policy catalyzes.
• RMB assets: In the environment of two-way fluctuations and structural easing, focus on high-grade credit bonds, policy-benefiting varieties and stable income assets; allocate appropriately to gold and other hard currencies to hedge uncertainty and exchange rate fluctuations.

• If external demand weakens faster than expected (global slowdown, inventory cycle reversal), orders and profits of external demand chains will face downward pressure.
• If domestic deflationary expectations continue to deepen, the repair of enterprise and household balance sheets will be more difficult, and financial risk premiums will rise.
• Uncertainties in exchange rate overshooting, capital flows and external policies may amplify asset price volatility.

(Note: The elaboration of ‘deep-seated causes and investment implications’ in this article is a logical deduction and framework recommendation based on current market data ([0]) and user-provided background information, and does not represent verification through news or external reports. Specific strategies need to be continuously calibrated with the latest macro and policy information.)

[0] Jinling API Data (2024–2025 A-share Index and USD/CNY Exchange Rate)