Poonam Sharma
When China announced a near $1 trillion trade surplus in 2024, followed by another $1 trillion within just the first eleven months of 2025, it stunned the global economic community. Western economists scrambled for explanations. Subsidies, industrial overcapacity, tariff evasion, and an allegedly undervalued renminbi were quickly placed in the dock. A consensus began to form in elite financial circles: China was no longer an engine of global growth, but a predatory force draining wealth from the rest of the world.
That diagnosis is not entirely wrong—but it is dangerously incomplete.
From Global Engine to Global Cannibal
For decades, China’s growth was framed as mutually beneficial. A famous Goldman Sachs model once suggested that every 1% increase in China’s GDP raised global GDP by 0.2%, largely through increased imports. That relationship has now broken down.
Over the past five years, Chinese exports have surged at double-digit rates, while imports stagnated. The result is a ballooning surplus that has reshaped global trade flows. Even as the United States imposed higher tariffs, American imports still rose, while Chinese imports in dollar terms fell by 3%. Exports rerouted through third countries—particularly in Asia—masked the true destination of Chinese goods. Goldman Sachs estimates that 70% of China’s export growth to Asian economies is actually trans-shipped to the U.S.
The implications are severe. Goldman now warns that for every additional 0.6 percentage points of China’s GDP growth, the rest of the world’s GDP could fall by 0.1 percentage points. What once lifted global demand now cannibalizes foreign manufacturing, hollowing out industries from the American Midwest to Europe’s auto sector.
The Currency Debate: A Misdiagnosis
Western institutions have largely converged on two explanations: state subsidies and an artificially weak renminbi. Bloomberg models based on Goldman’s framework suggest the Chinese currency may be undervalued by as much as 25%, with the “true” rate closer to 5 yuan per dollar instead of over 7.
The policy prescription follows naturally: force China to let its currency appreciate.
But this argument collapses under scrutiny.
If the renminbi were truly undervalued, Chinese citizens would rush to exploit that arbitrage. They would exchange yuan abroad at a premium. Instead, the opposite is true. Capital controls are tightening, not loosening. Ordinary Chinese citizens face quotas, justifications, and outright denials when attempting to access foreign currency. The fear inside China is not appreciation—it is depreciation.
As former IMF chief economist Kenneth Rogoff has pointed out, if capital controls were relaxed, the renminbi would likely plunge, not rise. China’s own history proves this. In 2015, capital flight reached $770 billion, forcing the People’s Bank of China to burn through over $500 billion in reserves to defend the currency. That is not the behavior of an undervalued currency; it is the hallmark of an overvalued one held together by administrative force.
Where Did the Trillion Dollars Go?
Here lies the question Western analysts rarely ask.
China reports 5% GDP growth and records a trillion-dollar surplus. Yet none of the indicators of prosperity reflect this success. Asset prices are weak. Consumption is stagnant. Youth unemployment is high. Manufacturing wages are depressed. Industrial profits are shrinking. Prices are falling.
So where is the money?
Chinese commentators themselves offer a blunt answer: it sits in foreign exchange reserves and gold, controlled entirely by the Communist Party. The dollars earned through exports never reach households. They are absorbed by the state through a tightly controlled financial system.
This is not an export miracle. It is an extraction mechanism.
The Real Undervaluation: Labor, Not Currency
The core driver of China’s surplus is neither exchange rates nor clever tariff evasion. It is the systematic undervaluation of Chinese labor.
Chinese workers endure some of the longest working hours in the world, often six or seven days a week. Wages remain low. Social safety nets are thin. Families must save aggressively for healthcare, education, and retirement, suppressing consumption. The result is a workforce producing enormous value while capturing almost none of it.
This is why China can flood the world with cheap goods. Not because the yuan is weak—but because human labor is priced far below its true economic and moral value.
In this sense, China’s economy resembles a modern form of state-managed servitude. The trade surplus is not a sign of strength; it is evidence of desperation. The regime extracts value from its own people and exports deflation to the rest of the world.
Why the Model Persists
The Economist correctly notes that Beijing relies on foreign consumers to prop up growth because domestic demand cannot be revived without structural reform. Raising wages, strengthening labor rights, and expanding social benefits would immediately reduce export competitiveness and weaken state control.
That is precisely why such reforms are avoided.
The current model benefits the regime even as it impoverishes the population. Export dependence is not an accident—it is a political choice embedded in China’s governance structure.
A Warning for the World
Western policymakers often speak of currency realignment and industrial policy. But any strategy that ignores Chinese workers themselves will fail. Studying a coercive, extraction-based economy using tools designed for market systems leads to false conclusions and ineffective responses.
A trillion-dollar surplus built on suppressed wages is not sustainable growth. It is a destabilizing force that threatens both China’s internal stability and the global economic order.
Until the real disease is diagnosed—not currency manipulation, but systemic exploitation—the symptoms will only worsen. And if this model collapses inward, it will not fall quietly. It risks pulling the global economy down with it.
China’s surplus is not power. It is a warning.
