China has just posted a record annual trade surplus with the rest of the world and the United States in particular while recording slowing growth at home. The contrast underlines the challenges facing policymakers in trying to maintain economic stability. The export surge reflects Covid-19 effects on foreign markets such as social distancing, which stimulated demand for electronics and other domestic consumer durables. But it is not being mirrored at home. China’s economy may have grown by 8.1 per cent in 2021 against an official target of “above 6 per cent”, but grew by only 4 per cent in the fourth quarter of last year, slowing from 4.9 per cent in the previous three months, having already plunged from more than 18 per cent growth in the first quarter during the recovery from the worst of the pandemic. The recovery has been losing steam since the second half of last year, prompting the central bank to cut its two major policy rates by 10 basis points yesterday following easing in December, further evidence of Beijing’s intention to stabilise growth in 2022. That said, the latest figures underscore the likelihood that as the world comes out of Covid, China may be the only major economy growing in a meaningful way. Domestic expansion, infrastructure key to China’s growth as Omicron spreads The trade surplus is widening so much, as demand for Chinese exports defies the Covid slowdown, that it is looking like the main engine of China’s growth. At the same time China has not increased domestic consumption as much as hoped, nor imported as much from the rest of world. The reasons for weak consumer spending are various. They may include the trade dispute with the US, less travel – which accounts for a lot of spending – a slowdown in real estate amid Evergrande’s problems and defaults by other high-profile property developers, as well as renewed Covid outbreaks that raised restrictions in affected areas and heightened caution nationwide. The latter especially hurt demand for services. With new outbreaks of Covid-19 in China, and the highly transmissible Omicron variant sweeping large parts of the world, it is no surprise that the National Bureau of Statistics issued a caution with the GDP figures. It warned against a complicated and uncertain external environment, and that the domestic economy faces the triple pressure of demand contraction, supply shock and weakening expectations. Assuming no major unexpected complications, the International Monetary Fund forecasts China’s economy will grow this year by 5.6 per cent, with the US growth rate expected to be 5.2 per cent. Given all the uncertainties generated by the pandemic and international tensions, that is a big If. Policymakers will need to stay ahead of changing circumstances with swift policy responses.