Though China recorded a record trade surplus of $1.19 trillion in 2025, its foreign exchange reserves rose by only $160 billion to about $3.36 trillion over the same period. This modest increase — just 13% of the surplus — indicates that most earnings from exports did not remain with the central bank.
The discrepancy arises because much of China’s trade is settled in yuan or other currencies, not US dollars, reducing direct dollar inflows. Additionally, substantial outbound spending on overseas investment, profit repatriation by foreign companies, and expenditures by Chinese tourists and students abroad exert pressure on reserve balances.
Significantly, a large portion of China’s foreign assets generated by trade surplus ended up in private hands and state-owned enterprises overseas, exposing China to risks of sudden capital outflows especially if the yuan strengthens. This subtle shift in where surplus funds flow underscores the complexities in China’s external sector and challenges in managing currency and financial stability.
Investors should watch China’s evolving capital flows dynamics closely, as shifts could influence global currency markets and the stability of China’s forex reserves.
