China's exports saw a notable rise in June, driven by orders for microchips and computing power to fuel the global artificial intelligence boom, increasing producers' reliance on foreign buyers, while policymakers in the world's second-largest economy continue to seek ways to boost domestic demand.

The stronger-than-expected trade performance keeps China on track to achieve a surplus exceeding $1 trillion for the second consecutive year, with factories maintaining sales despite slowing growth in major economies and trade tensions with Washington.

Customs data released on Tuesday showed exports rose 27 percent from a year earlier in US dollar terms, marking their best performance in four months, surpassing the 19.4 percent recorded in May and the 18.2 percent economists had expected.

Imports jumped by 36 percent compared to 27.4 percent in the previous month, the highest level in five years. Economists had expected growth of 24 percent for June.

Xu Tianchen, a senior economist at the Economist Intelligence Unit in Beijing, said: 'Continued export strength, driven mainly by AI, suggests better performance in the second half of the year, alongside a mix of expansionary policies, accelerated government spending, moderate monetary easing, as well as a cooling of the situation in the Middle East, which will benefit China through lower oil prices.' He added: 'But domestic demand remains a drag. Retail sales are largely flat, and fixed-asset investment was negative last month.'

China's trade surplus reached $125.6 billion in June, up from $105.4 billion the previous month. The trade surplus year-to-date stands at $575.98 billion compared to $585.96 billion last June, although imports have grown faster than exports for several consecutive months.

With policymakers still unable to find a solution to the protracted real estate crisis that has weighed on domestic demand for years, Chinese manufacturers appear to have few options other than selling abroad.

The ratio of annual exports to total manufacturing sales reached 24 percent during the first four months of this year, according to a recent report by consultancy Gavekal Dragonomics, the highest level since China joined the World Trade Organization in 2001. In 2019, the ratio was 18.3 percent, then rose to 22.3 percent last year. The report stated: 'This figure is high for a small, export-oriented country; for the world's second-largest economy, it is remarkable.'

Qu Zhang, chief economist at Pinpoint Asset Management, said: 'I believe exports will remain strong in the second half of the year... at the same time, this increases the intensity of trade tensions between China and its trading partners, particularly Europe.'

Offsetting Losses

The massive rise in global investment in artificial intelligence is helping the world's largest manufacturer offset expected export losses resulting from Middle East turmoil.

China appears to be drawing down its energy inventories rather than raising prices for its producers. Oil imports for the world's largest energy importer in June reached their lowest level since October 2016, according to Reuters calculations.

Natural gas purchases year-to-date have fallen 3.4 percent compared to last year, suggesting China is relying on coal to cover the shortfall. Coal imports jumped by an annual rate of 29 percent in June.

Strong global demand for microchips means that some sectors of China's $20 trillion economy will continue to thrive while others remain in a slump.

Julian Evans-Pritchard, head of China economics at Capital Economics, said that the rise in import values 'should not be seen as evidence of booming domestic demand.' He added: 'As with exports, high semiconductor prices are playing a major role in inflating import values.'

Data showed that imports from South Korea, a leading microchip manufacturer, rose 85 percent from a year earlier, while purchases from Taiwan, another leading semiconductor manufacturer, rose 41.1 percent during the same period.

Confidence despite pressures

Deputy Minister of Customs Wang Jun expressed confidence that China's exports, a leading manufacturing powerhouse, would remain strong during the second half of the year despite external pressures, specifically noting technology exports.

Separate industrial activity data for June, released late last month, showed that external demand had begun to recover, but factory gate prices continued to fall as companies cut prices in a bid to win over customers hurt by rising energy costs linked to the Iranian conflict.

The problem is that technology exports alone are not enough to support an entire economy, at least not for long.

Weak domestic demand is expected to be a burden, with forecasts indicating that GDP will grow by only 4.5 percent year-on-year for the period from April to June, down from 5.0 percent in the first quarter, according to a Reuters poll. GDP data is scheduled for release on Wednesday.