January 15, 2026 12:28 PM IST First published on: Jan 15, 2026 at 12:25 PM ISTFor the second year in a row, China has posted a record annual trade surplus, hitting the $1 trillion mark for the first time. According to the latest data, China’s trade surplus in 2025 reached $1.19 trillion, eclipsing the previous year’s $980 billion. The fact that this surplus was recorded despite mounting scrutiny and pushback with regard to China’s industrial overcapacity is impressive. However, it isn’t surprising. Here are four reasons that explain China’s trade surplus.First, to begin with, despite the trend towards protectionism, along with increasing securitisation and weaponisation of trade, global trade remained resilient through the year. According to UN Trade and Development’s Global Trade Update in December 2025, global trade was projected to exceed $35 trillion for the first time, an annual increase of 7 per cent. Trade in goods is expected to expand by $1.5 trillion, while services are expected to grow by $750 billion, up nearly 9 per cent year-on-year. The demand stickiness was aided by an increase in AI-related goods trade and front-loading ahead of tariff hikes to accelerate the overall trade growth in 2025. And given that China is at the heart of the global supply chains, along with being the world’s largest exporting nation, the surge in its total exports is not unexpected.AdvertisementMoreover, even as China’s exports to the US suffered as tariffs kicked in, its losses were compensated by a substantial increase in exports to ASEAN (13.4 per cent), the EU (8.4 per cent), Africa (25.8 per cent), Australia (7.8 per cent), India (12.8 per cent), and the UK (7.8 per cent).More importantly, reports suggest the Chinese goods eventually found their way into the American market via a third-country route, such as Vietnam and Mexico. China’s exports to Vietnam witnessed a massive uptick of 22.4 per cent. An increase in shipments from China to Vietnam was accompanied by a corresponding increase in shipments from Vietnam to the US. Chinese enterprises also circumvented US tariffs using transhipments via Mexico, in addition to incorporating Chinese products into North American supply chains and raising investment in the region.Second, the tariff war unleashed by Donald Trump targeting America’s allies, partners, and rivals jeopardised whatever little consensus that was beginning to take shape to counter China’s industrial overcapacity. The US was central to any potential coordinated response to China’s unfair trading practices. But once American policies began targeting partners and allies, it just didn’t make sense for them to enrage the Chinese too. Being at loggerheads with the world’s two largest economies at once isn’t a prudent choice. This has meant a reconsideration of measures by actors like India and the EU.AdvertisementThird, China continues to be the world’s largest factory with a deep presence in both low-end and high-end manufacturing. Currently, it accounts for around 30 per cent of the global manufacturing output, both by value and volume. So, replacing Chinese supplies isn’t easy. Furthermore, despite the noise, de-risking efforts around the world haven’t really had their impact. Such measures are anyway likely to be a long-drawn process, which Beijing appears committed to thwarting and delaying.Finally, China’s burgeoning trade surplus is a product of its domestic economic policies. There are several factors at play here. For instance, while it is true that the RMB (renminbi) strengthened 4.4 per cent against the dollar in 2025, analysts estimate that the Chinese currency remains undervalued by as much as 25% in real terms. Further, what the 2025 data vis-a-vis the dollar masks is that the RMB depreciated in real terms against the major trading currencies, evident in its weakening of the Real Effective Exchange Rate (REER). The impact of this can be seen in China’s trade with the EU. The depreciation of the RMB sharply against the Euro was an important factor in increased exports to the EU.most readApart from the RMB’s value, an expansive domestic industrial policy, fuelled by massive state subsidies, further aided China’s exports in 2025. The country’s solar, EVs and battery sectors continued to thrive on state support, thereby recording enormous surpluses. Deflationary pressures in general, and the race to the bottom price wars among companies, further drove down the market prices of Chinese goods in the external market, thereby increasing overall exports even as industrial profits in China declined. The Chinese leadership’s emphasis on tackling involution-style competition is an acknowledgement of this situation.Lastly, China’s domestic consumption hasn’t picked up. In 2025, consumption witnessed modest expansion, trailing overall economic expansion. This means not only that China’s imports are not increasing in tandem with its GDP, but also that its industrial output is increasingly being dumped in external markets. For instance, while China’s exports to major trading partners expanded, its imports declined sharply from the EU (0.4 per cent), ASEAN (1.6 per cent), Australia (7.5 per cent), the UK (4.7 per cent), and Canada (10.4 per cent).Kumar is a research analyst with Takshashila’s Indo-Pacific Studies Programme. Kewalramani is fellow, China Studies and chairs the Indo-Pacific Studies Programme at Takshashila