China economy grows thanks to AI export boom but domestic slump remains a drag

By John Liu, CNN

Hong Kong (CNN) — China reported better-than-expected Q3 growth on Monday as robust exports of chips and electronics components on the back of a global artificial intelligence boom buoy the world’s second-largest economy, despite sluggish demand at home.

China’s National Bureau of Statistics said the economy grew 4.5% from a year earlier in the quarter ending September, a slight improvement from the more than three-year low of 4.3% last quarter and meeting the lower end of Beijing’s 4.5-5% annual target.

This came as China has demonstrated its resilience in weathering the economic shocks of President Donald Trump’s tariff offensive – now on pause after both sides agreed to a truce – as well as the US’s war with Iran, which has dragged down growth in other nations.

For the first nine months of 2026, the economy expanded 4.6%.

The latest quarterly figure underscores the continuing challenge facing China’s leadership: the deepening imbalance that has made the country increasingly reliant on manufacturing and overseas markets.

The phenomenon has come to be described by economists as a “two-speed economy”: a thriving export engine powered by high-tech manufacturing, alongside weak investment and stagnant domestic consumption. A prolonged housing market downturn, now in its fifth year, remains a drag, as an estimated 70% of Chinese household wealth is tied up in property.

Property investment plunged 20.2% in the first three quarters of the year, indicating that the country’s real estate woes persist.

Investment in general, a major pillar of the Chinese economy, was also weak, Monday’s figures showed. Fixed-asset investment, which includes spending on infrastructure, factories and property, fell 7.2% in the first nine months of the year from the same period in 2025, declining at the same pace as the first eight months, according to data released on Monday.

However, retail sales, a key gauge of consumption, saw a remarkable rebound, growing 1.1% in September, an improvement from the modest 0.4% increase in August and the fastest growth since March.

“The economy moved forward under pressure and developed in a newer and better direction, with an increase in positive changes in key indicators,” said Mao Shengyong, vice-minister of the National Bureau of Statistics, at a Monday press conference.

“At the same time, we must also recognize that the international environment is complex and volatile, the problem of insufficient domestic demand remains relatively prominent, and the foundation for the steady and positive growth of the economy still needs to be consolidated,” he added.

Beijing has made expanding domestic demand a top priority for 2026. Last month, the government unveiled a mix of limited stimulus measures, including mortgage subsidies for first-time home buyers and targeted rate cuts, after the cabinet pledged to step up support to meet its annual growth target.

But more support may be needed if the momentum fails to sustain into the fourth quarter, economists say.

Last week, the IMF downgraded its growth forecast for China this year from 4.6% to 4.5%, citing persistent weakness in domestic demand. It also revised down its 2027 projection for China from 4.1% to 4%.

“Sluggishness in domestic consumption and weakening investment amid continued property sector strains were only partly offset by robust export performance,” the IMF said in its latest global growth outlook report. Meanwhile, the financial organization upgraded its global economy growth forecast this year from 3.0% to 3.1%.

Strong exports

Trade remained the main engine for the Chinese economy over the third quarter, paving the way for the country to reach a new record in trade surplus this year.

China’s exports surged 36.3% last month from a year earlier, marking the biggest jump since early 2021, according to the latest data released from the country’s customs last week. Exports to the United States also jumped 39.6% year-on-year in September.

AI-related exports and green-tech products like batteries drove the bulk of the export boom, contributing to $938.1 billion in trade surplus for the first nine months of the year, compared to $875.1 billion the same period in 2025.

While exports from the world’s factory have increasingly drawn the ire of countries around the world, Beijing has managed so far to calm trade tensions with major trading partners, such as the US and the European Union.

At their summit last month, Chinese leader Xi Jinping and US President Donald Trump secured an extension of their trade truce to January next year, and agreed to tariff reductions on $60 billion worth of goods. The two are expected to meet again in November at the APEC summit in Shenzhen.

Beijing and Brussels also reached an initial agreement on trade this month, including capping China’s hybrid vehicle exports to the EU and improving market access, narrowly avoiding an all-out trade war between the country and the bloc. But the agreement could also dent the booming auto export, experts said.

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