China’s Record Trade Surplus Raises a Puzzling Question: Why Reserves Aren’t Keeping Pace

China’s trade surplus topped US$1 trillion in 2025, yet foreign exchange reserves rose only slightly. Analysts say the gap reflects private-sector capital outflows, not missing funds. Chinese firms are investing abroad, paying down foreign debt and holding earnings offshore, signalling a shift from state-led reserve accumulation to market-driven global expansion.

China’s external accounts are sending mixed signals. On one hand, the country’s trade surplus has surged to unprecedented levels, crossing the US$1 trillion mark in the first 11 months of the year. On the other, its official foreign exchange reserves have grown only modestly. The contrast has sparked debate among economists and market watchers over what is happening to the proceeds of China’s booming exports.

According to analysts, the apparent disconnect is less mysterious than it seems. Rather than swelling the central bank’s coffers, a significant share of China’s trade surplus is being channelled back overseas through private-sector investment. As a result, the country’s overall external position appears more balanced than the headline trade numbers suggest.

Han Shen Lin, capstone director of the quantitative finance master’s programme at New York University Shanghai, said that a large surplus in goods trade no longer translates automatically into rising official reserves. Instead, much of the surplus is being recycled through market-driven channels.

“What we are witnessing is a transition away from state-led reserve accumulation toward capital flows led by private actors,” Lin said. Chinese companies, he explained, are using foreign earnings to reduce overseas liabilities, acquire assets abroad or retain profits offshore. “The money hasn’t vanished; it’s just not sitting on the central bank’s balance sheet anymore.”

This shift mirrors the growing international footprint of Chinese firms. As profit margins at home narrow and industrial capacity expands, more companies are seeking growth opportunities abroad. The push to “go global” has become increasingly pronounced in recent years.

China’s role as the world’s manufacturing hub has long resulted in a sizeable goods trade surplus, but that surplus has expanded sharply. In the first 11 months of 2025, it reached US$1.076 trillion, surpassing the previous annual record of US$992.6 billion set last year. By comparison, China’s full-year trade surplus in 2015 stood at US$593.9 billion, according to data from financial information provider Wind.

Yet official figures show that China’s foreign exchange reserves totaled US$3.346 trillion at the end of November, only slightly higher than the US$3.202 trillion recorded at the end of last year. The modest increase has fuelled questions about where the surplus funds are going.

Chinese officials and economists have repeatedly pointed to private-sector activity as the answer. In 2023, Wang Chunying, then a deputy head of the State Administration of Foreign Exchange, said inflows from trade and foreign investment were largely offset by outbound investment by companies and individuals. These flows primarily took the form of overseas direct investment and purchases of foreign securities.

With the central bank reducing routine intervention in currency markets, Wang noted, cross-border movements have increasingly been driven by transactions among private market participants.

Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis, said China’s current account surplus—which includes trade in goods and services as well as income flows—is significantly smaller than the headline trade surplus. She attributed the difference to outbound investment that is not fully captured in official statistics.

Much of China’s outward direct investment, Garcia-Herrero said, is heading to Southeast Asia and Europe, financing projects in sectors such as batteries, electric vehicles, semiconductors and pharmaceuticals. Portfolio investment, meanwhile, has been gravitating toward US dollar–denominated assets, influenced by global interest rate differentials.

“In my discussions with clients in China, the common theme is a preference for US dollar assets,” she said. “These are not necessarily US Treasuries, but private-sector investments through financial institutions.”

That trend is visible in official data. As of October, China’s holdings of US Treasury securities had fallen to US$688.7 billion, the lowest level in 17 years, according to the US Treasury Department. China slipped to third place among foreign holders of US government debt in March, behind Japan and the United Kingdom, continuing a gradual retreat that began during Donald Trump’s first term as US president.

At the same time, economists have urged Beijing to rethink the structure of its trade-driven growth model—a view that appears to be gaining traction among policymakers.

“China’s enormous trade surplus is starting to blur the traditional division of roles in the global economy,” said Lin. While China has emerged as a dominant manufacturing power, the United States continues to anchor the global financial system. What once looked like a purely economic imbalance, Lin added, is increasingly framed in Washington as a national security issue.

“China’s trade surplus bolsters its financial resilience,” he said, “but it also accelerates geopolitical pushback and the formation of competing economic blocs.”

Yu Yongding, a former adviser to China’s central bank, echoed these concerns in a commentary published on December 16. While acknowledging the competitiveness of Chinese exporters, Yu argued that the swelling surplus also highlights deeper structural problems. He called for a faster shift toward growth driven by domestic demand and a reduced reliance on overseas markets, particularly the United States.

Signals from Beijing suggest policymakers are thinking along similar lines. An official from the Central Financial and Economic Affairs Commission told state news agency Xinhua that China plans to roll out targeted measures next year to encourage imports of high-quality consumer goods and critical equipment. Following the recent central economic work conference, the official said achieving a “basic balance of international payments” has become an explicit policy objective—potentially through offsetting capital outflows with export earnings.