China’s Trillion-Dollar Trade Surplus: The Biggest Lie of 2025? | Digging into China

Hi, I'm Dong Shong. Welcome to Digging into China, where we take a deep dive into what's really happening in China and share some unique insights. In this year's global economic landscape, China's economy has presented a statistical paradox that baffles traditional economist. And here's something really amusing. The trade surplus figures from the General Administration of Customs keep smashing records. The official line from the Communist Party side is that in 2025 the surplus has crossed the $1 trillion threshold. If that trillion dollar surplus were genuine, in theory, it should translate into surge in domestic liquidity, a sharp jump in the central bank's foreign exchange reserves, and expanding corporate balance sheets. But when we examine Banks of China's 2024 annual reports, its 2025 interim reports and the third quarter analysis as a window into reality, we see the complete opposite. Domestic liquidity isn't rising, it's shrinking. Bank of China's operating cash flow has dropped off a cliff. foreign exchange reserve growth has basically stalled and companies are prioritizing debt repayment over capacity expansion. This disconnect goes beyond a simple data manipulation. It's a structural geopolitical shift in China's trade model along with a defensive overhaul of balance sheets. First, there's been a very aggressive switch in settlement currencies from dollars to remimb. This sharp pivot is closely linked to the redirection of trade towards developing countries. Second, the financialization of China's over capacity absorption is glaringly obvious. Much of the export growth depends on sellers credit extending R&B loans to countries with weak purchasing power simply to keep Chinese factories running. Third, and this is the most bizarre part, Bank of China has dramatically increased its provisions for export related risks, setting aside a staggering 562 billion yen. This isn't covering existing bad loans in manufacturing because the non-performing loan ratio for export and manufacturing is actually declining. So what is this massive provision for? It's the bank acknowledging just how risky these seller loans are and how shaky the credit of these buyers really is. They are ramping up the provisions now to isolate the future responsibility. To challenge this claim, the $1 trillion trade surplus. Let's look at the two separate worlds. The invoice world and the cash world and the huge gap between them. Before 2020, in the classic macroeconomic model, a country's trade surplus had a clear direct link to domestic money supply. Each dollar of surplus flowed through the central bank's balance sheet to create equivalent R&B based money. Trade surplus was one of the main drives of China's money creation and the forex reserves long dominated the people's bank's assets. But the 2024 2025 data has shattered that straightforward relationship. The old direct foreign investment figures have disappeared. So how are the physical trade world and the financial cash world coming apart? The first is the invoice world or physical world. Customs data shows exports are exceptionally strong with the surplus exceeding $1 trillion. This reflects real goods moving out. The second is the cash world. Bank system data shows liquidity drying up. Bank of China's third quarter 2023 report already revealed that the cash flow from operating activities a true gauge of corporate liquidity plummeted 70% year on year what does that signal either companies have zero interest in converting forex earnings or capital outflows are equal to the surplus why focus on bank of China data to analyze the real scale of exports first It has a deep roots in foreign trade settlement. It was once the specialized forex and trade bank. Even today, it holds the leading position in import export settlement. Its 2025 interim report confirms it still commands the top market share international trade settlement. Second, the sheer volume. In 2024, it handled more than $4 trillion in international settlements. enough to cover roughly half of China's total trade. That's statistically powerful. Third, it's a subject to real audits. As a listed company, its financials are reviewed by international firms like Ernest and Yong. Compared to purely administrative macro data, faking here carries a higher cost. So, Bank of China's balance sheet not only shows its own health, it also exposes the truth behind China's supposed massive trade surplus and how it's constructed. For an ordinary observer looking at China's export numbers with major developed countries like the US, EU, and Japan imposing drisking measures and high tariffs, how is China moving its goods out besides re-exports? The clues lie in the financial data bearing the CCP's distinctive mark, a shift in settlement currency. Developed countries have hard currencies, dollars, euros, yen, and a strong bargaining power. So, they insist on settling in their own money. Developing countries often short on dollars are more open to remb settlement or Chinese seller credit. Bank of China's settlement data clearly shows this currency switch. Crossborder R&B settlements reached 16 trillion yen up 26%. Who is using R&B? It's unlikely to be Europe, Japan or Korea. It's mainly countries in Asia, Africa and Latin America with limited forex reserves. This shift in settlement structure confirms one thing. Exports are being redirected to developing countries. While this strategy keeps export growth and capacity utilization alive on paper, it comes with a serious downside, a steep decline in surplus quality. When China exports to these countries and accepts R&B or local currency in exchange, the surplus doesn't boost foreign reserves. It only appears as a trade surplus in custom data. In financial terms, it's just R&B moving offshore or a ledger entry for claims. That's why the CCP boasts a trillion dollar surplus while the central bank's foreign reserves stay flat. Because what's coming back isn't the real money. The dollars and euros are money. What China gets instead, debt from poor countries. R&B loans or offshore R&B. It's a form of sellers credit or what we might call exportdriven credit expansion. In simple terms, the CCP is issuing these countries huge IUS. This approach stems from the manufacturing over capacity crisis, producing means losses, stopping means collapse, a no-win situation. To sustain exports, the CCP must sell the goods. When developing countries are the buyers and lack strong currencies, China's financial system steps in as their lender of last resort. The mechanism is a straightforward. Big banks like Bank of China and the export import bank provides R&B loans or currency swap to foreign governments or companies. Those borrowers then use R&B to pay Chinese exporters. The money flows back. R&B returns from overseas to domestic accounts. Goods appear to have left. Capacity seems absorbed. But overall, China hasn't gained external wealth. It's traded the labor of its people for claims on developing countries. The CCP prefers to subsidize the poor country's consumption through discounted loans rather than support its own citizens incomes. You tell me, isn't that a reactionary government? This isn't just theory. It's plainly visible in Bank of China's balance sheet. First piece of evidence, overseas loans are growing despite the domestic downturn. By mid 2025, overseas loans balances reached 2.33 trillion yen, up 3.4% from year end. With the home economy struggling, they are still ramping up foreign lending. Calling Shiqinping the devoted supporter of poor countries in Asia, Africa, and Latin America isn't far off. Second, credit is flowing to sectors desperate for export outlets. Tech finance loans hit 4.6 trillion yen, covering EVs, lithium batteries. Yet these goods face 40 to 100% tariffs or anti-dumping investigations in North America, Europe, Japan, Korea, and Australia. Green finance loans stand at a 4 and a half trillion yen up 17% solar panels, wind turbines. Third, the clearest evidence operating cash flow plunged 70%. The official reason increased outflows from loans and advances but domestic lending per social financing data is crashing. So where are the loans going to Xi Jinping's struggling friends in developing countries? This reveals a remarkable money loop. Banks receive settlement funds from exporters which becomes deposits. Then they immediately lend them out as crossborder loans to overseas buyers and the domestic producers. No money settles. It's spinning rapidly to sustain an illusion of trade strength. That's why Bank of China's liquidity is shrinking rather than growing. The water flows into the pool only to be pumped right out to irrigate developing country markets. The most amusing twist. Bank of China quietly boosted its provisions to 562 billion yen which coverage at almost 200% a figure larger than many Chinese bankers total assets. Is this for existing bad debts or future risks? No bank suddenly hikes provisions without reason. If exports were fake or producers weren't getting paid and failing, manufacturing non-performing loans should be soaring. But the Bank of China's data shows the opposite. Export manufacturing non-performing loans dropped from 1.1% at the end of 2024 to 0.87% by mid 2025. Domestic exporters are healthy, getting paid, repaying loans. So this massive provision isn't for domestic problems. It's for external ones. China has extended huge R&B loans to developing countries. How risky are they? Extremely. Countries like Pakistan, Sri Lanka, Congo, Zimbabwe have fragile finances. Sovereign default would turn these loans into bad debts overnight. Another critical factor, many of these debt countries have unstable politics. Regimes like Assad in Syria could collapse suddenly. Their currencies face severe devaluation risk. If that happens, their ability to repay R&B or dollar loans would collapse. So this 562 billion provision is essentially a geopolitical risk buffer fund. It anticipates future largecale overseas defaults and books the losses now to cushion future balance sheet blows. It's not for bad debts that have already occurred. It's preparation for the subprime crisis that's coming. And who engineered this export trade subprime crisis? The CCP itself. Even with the seller credit and R&B settlement, the surplus isn't translating into domestic R&B liquidity. It's a liquidity black hole. Exports happen settled in R&B, yet domestic R&B deposits don't rise. That means even when R&B is the payment medium, the money doesn't want to stay inside, driving liquidity down. Another major factor, fake trade drains liquidity. The CCP's export tax rebate system backfires, creating an arbitrage loop. to claim the 13% rebate and inflate local GDP. Goods make a one-day trip through bonded zones or fake high value low volume exports like a Shenzhen company hauling counterfeit phones to Hong Kong by day to book huge exports then bring them back at night to claim the rebate. This creates offshore affiliates that fake payment inflows. Funds flows to domestic firms inflate settlement volumes then quickly flow out via imports or services. Settlement volumes explode. One in one out double counted. Bank of China's non-interest income surged from double fees. That's why non-interest income rose 26% but net liquidity is zero or negative. Transaction costs eat it up. No real wealth is created. The fiscal system loses out on rebates. That's the price of buying fake data. This arbitrage explains why Bank of China settlement volumes grew 20%. Non-interest income 26% but the corporate deposit and a cash flow shows no improvement. China's exports are largely a massive financial merrygoround. It inflates GDP and trade figures while draining the real strength from the fiscal and financial system. Since the CCP's so-called trillion dollar surplus is heavily inflated and impure, we need to estimate the real effective surplus entering China's economy. One method is to look at the financial asset accumulation. Commercial bank foreign currency deposits grew only $27 billion. Central bank reserves rose just $33 billion. Net debt repayment was 100 billion. total roughly $340 billion. Let's round it to $350 billion. That's the verifiable surplus in China's domestic system. Widening to offshore assets held by Chinese firms in places like Hong Kong and Singapore, 400 to 420 billion. Even counting offshore as broad surplus subtract the 562 billion about 79 billion in risk provisions. Maximum net surplus for 2025 is around $681 billion at least $300 billion is inflated or illusory. So the real surplus entering China and un and usable in international cycle is about $350 billion only 35% of the claimed trillion. The rest high-risk long-term claims on developing countries capital flight offshore or fake numbers from export rebate scams. The CCP's trillion dollar surplus fools only Xiinping. Thank you so much for watching. If you find this video helpful, please like it, drop a comment below, and hit subscribe button right here. It really helps YouTube suggest my video to others. I'll be back with more content soon. Until then, be well.