The three pillars behind China's export boom: AI, EVs and rare earths

• China's exports hit a record USD 376.8 billion in May 2026, growing 19.4% year-on-year and exceeding market expectations.

• AI, EVs and rare earths are the primary drivers of growth, reflecting China's continued move up the value chain into higher-value and strategically important industries.

• Export growth increasingly comes from value rather than volume, particularly in semiconductors and rare earths, where higher prices and more advanced products are boosting revenues despite modest shipment growth.

• Market diversification is reducing reliance on the US, with ASEAN, Europe and Hong Kong now surpassing the US as China's largest export destinations.

• In 2H26, export momentum should remain positive but moderate, as favourable base effects fade, front-loaded demand unwinds and protectionist measures from major trading partners become a growing risk.

• We remain constructive on China’s ability to navigate an increasingly fragmented global trading environment, but more support is still needed to boost consumption, lower financing costs, and stabilise the property sector.

China's export engine roared back to life in May 2026. Shipments surged 19.4% year-on-year in USD terms, comfortably beating market expectations of 15% and reaching a record-high USD 376.8 billion.

Behind the headline number lies a deeper story. China's export success is no longer being driven by low-cost manufacturing alone. Instead, the country's growth is increasingly powered by three strategic sectors: artificial intelligence, green energy, and rare earth materials. Together, they highlight China's continued ascent up the global value chain.

AI, green energy and rare earth led the charge

One of the most striking growth drivers is green technology. New energy passenger vehicle exports reached 424,000 units, soaring 112.6% from a year earlier. As domestic demand remains subdued, Chinese automakers have accelerated their push into overseas markets, particularly across Latin America and Europe.

At the same time, renewed geopolitical tensions in the Middle East have reinforced the global shift away from fossil fuels. Higher fuel prices are boosting demand for affordable electric vehicles, creating a favourable backdrop for Chinese manufacturers. The dynamic bears some resemblance to the oil shocks of the 1970s, when Japanese automakers successfully expanded global market share by offering fuel-efficient alternatives.

Artificial intelligence has emerged as another powerful growth engine. The global race to build AI infrastructure is generating enormous demand for semiconductors, servers and advanced electronic components. Chinese manufacturers are increasingly embedded within this supply chain. In May, exports of integrated circuits surged 110.9% year-on-year by value, while exports of technology hardware rose 66.1%. Over the first five months of 2026, high-tech products recorded export growth of 35.4%, making them one of the largest contributors to China's overall export expansion.

However, a closer look reveals an important nuance. While integrated circuit export values more than doubled, export volumes increased by only 2.1%. This suggests that much of the growth came from higher pricing rather than significantly larger shipment volumes. Two factors likely explain the divergence. First, China's semiconductor exports are increasingly shifting away from low-margin legacy chips towards higher-value products, including advanced computing components and sophisticated packaging solutions. Second, global shortages in chips have driven prices sharply higher, lifting export values even when shipment volumes remain relatively stable.

Rare earth exports tell a remarkably similar story. Export values jumped 237.3% year-on-year in May, while export volumes actually fell 6.4% in May. For the first five months of 2026, export volumes rose by only 2.2%. The disparity reflects significant price appreciation across key rare earth materials. Neodymium-Praseodymium Oxide, for example, has risen roughly 69% from a year ago. China's export restrictions on rare earth materials have tightened global supply, reinforcing its pricing power in a market where it remains the dominant producer and processor.

The broader theme is clear. In both semiconductors and rare earths, China is increasingly exporting fewer units but capturing substantially more value. The country's export model is evolving away from high-volume, low-margin manufacturing towards high-value, strategically important technologies that the world urgently needs.

US rebound and market diversification keep exports growing

The geographic story is equally compelling. China's export growth is no longer dependent on a single market. Instead, trade flows have become increasingly diversified across Asia, Europe, Latin America, Africa and the Middle East.

Exports to the United States rebounded sharply in May, rising 35.4% year-on-year. However, much of the strength reflects favourable base effects. In May 2025, exports to the US had fallen to just USD 28.9 billion after the Trump administration imposed cumulative tariffs of up to 145% under its "Liberation Tariff" programme before subsequently reducing them to 30% following the Geneva negotiations on 12 May. Year-to-date exports to the US remain down 2.7%, highlighting the continuing impact of tariffs and China's ongoing effort to reduce reliance on the American market.

Figure 1: Exports to the US rebounded sharply due to favourable base effects

Diversification has become a key source of resilience. Exports to South Korea surged 42.1% in May, while exports to Taiwan rose 32.2%, supported largely by demand for AI-related hardware and semiconductor components. ASEAN exports grew 24.3%, reflecting both genuine consumer demand across Southeast Asia and the region's growing role as an assembly hub for Chinese intermediate goods destined for Western markets. Beyond Asia, exports to Russia increased 35.8%, Africa 18.6%, and Latin America 6.1%.

The shift is now substantial. As of May 2026, ASEAN, Europe and Hong Kong each accounted for a larger share of China's exports than the US, underscoring how successfully China has diversified its export destinations over the past few years.

Is this trade boom sustainable?

The answer is a partial yes — with important caveats.

On the positive side, China's industrial competitiveness remains formidable. Its leadership in clean energy, batteries, electric vehicles and advanced manufacturing is the result of decades of policy support, supply-chain development and manufacturing scale.

The outlook for green energy exports remains particularly constructive. Ongoing instability in the Middle East continues to support higher energy prices, strengthening the economic case for electric vehicles, batteries and solar power. China's competitive advantages are difficult to replicate quickly. Battery giant Contemporary Amperex Technology Co., Limited (CATL) continues to maintain significant cost advantages over many Western rivals, while BYD is expanding manufacturing capacity globally through new facilities in Thailand and Brazil. These structural advantages are unlikely to disappear because of changes in tariff policy alone.

The AI story also appears far from exhausted. Demand for semiconductors, advanced electronics and data-centre infrastructure remains robust, providing continued support for China's technology exports.

Meanwhile, market diversification has already been achieved. The transition from US-centric trade towards ASEAN, Africa, Latin America and the Middle East is visible in the data. China has demonstrated an ability to redirect trade flows at scale, reducing vulnerability to any single market.

However, we believe a portion of the recent export boom has been driven by favourable base effects and front-loaded demand, both of which are likely to reverse as the year progresses. The extraordinary 19.4% growth recorded in May partly reflects a relatively weaker comparison against 2025. Additionally, some overseas buyers appear to have accelerated purchases in anticipation of persistently higher energy costs and continued supply disruptions stemming from Middle East tensions. Such front-loading can temporarily inflate trade figures before demand normalises later in the year.

Additionally, we expect China to face increasingly strong protectionist headwinds as trade imbalances continue to widen. China recorded a trade surplus of USD 105.4 billion in May (Figure 2), while its bilateral surplus with the US widened from USD 23.1 billion in April to USD 26.0 billion. Despite commitments to increase purchases of US agricultural products following the summit between President Trump and President Xi in May, trade imbalances remain politically sensitive. Importantly, protectionist pressures are no longer confined to Washington. With China's trade surplus with Europe remaining elevated, policymakers in Brussels are increasingly considering additional measures to protect domestic industries from Chinese competition.

Figure 2: China’s trade surplus continues to widen

Taken together, these factors suggest China's exports should remain healthy and positive, but the double-digit growth rates seen in February, April and May are unlikely to be sustained indefinitely.

Record exports buy time — next comes the domestic challenges

Overall, we remain constructive on China's ability to navigate a more fragmented global trading environment.

The country has successfully absorbed tariff shocks, redirected trade flows and continued moving up the value chain despite growing geopolitical tensions. The composition of exports - from AI-related semiconductors to electric vehicles and advanced industrial products - reflects genuine improvements in industrial sophistication rather than purely cyclical demand.

Yet strong exports alone cannot solve China's domestic challenges. The property sector remains under pressure, while household consumption recovery continues to lag as consumers remain cautious about major purchases. Export strength has bought valuable time, but ultimately China's long-term growth outlook depends on whether policymakers can translate manufacturing success into stronger domestic demand.

That will likely require further consumption support, improvements to the social safety net, lower financing costs and continued efforts to stabilise the property market. For this reason, we expect additional policy support in the second half of 2026, including measures aimed at boosting consumption and easing debt-servicing burdens.

China's export machine is firing on all cylinders. The next priority is ensuring that the benefits of that success flow back into the broader domestic economy - a transition that we believe is already underway, albeit gradually. We remain constructive on Chinese equities and expect the MSCI China Index to reach HKD 96 by FY2028, implying approximately 26% upside from current levels.

Table 1: Recommended products

	Recommended Products
Fund	·       Fidelity China Focus A-SGD ·       Blackrock Systematic China A-Share Opportunities A2 USD
ETF	·       iShares Core MSCI China ETF (HKEX: 2801)

Table 2: Earnings projection of the MSCI China Index

MSCI China Index	FY25	FY26E	FY27E	FY28E
PE Ratio (X)	12.4	11.5	10.3	9.5
Earnings Growth (YoY%)	2.8%	7.3%	12.0%	8.0%
Earnings Per Share	6.15	6.60	7.39	8.0
Dividend Yield (%)	2.2%	2.3%	2.4%	2.4%
Target Price (HKD) (Based on 12X fair P/E ratio)				96
Upside Potential (%)				26%
Source: Bloomberg Finance L.P., iFAST Estimates. Data as of 29 May 2026.

Figure 3: Price vs EPS of the MSCI China Index

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.