Asia’s China trade deficit reflects deeper supply-chain integration, but its benefits are increasingly uneven

Overview

This monthly report examines changing Asian trade links with China, updates macro forecasts across major Asian economies, and reviews selected policy, credit, semiconductor, foreign-investment and financial-conditions developments. Its central conclusion is that China’s role has shifted from final assembler to a major supplier of producer goods to Asia, creating both supply-chain benefits and uneven competitive effects.

Core views

Nomura frames Asia as the epicenter of today’s trade imbalances. In the 12 months to July 2026, Asia ex-China ran a USD517bn trade deficit with China, versus USD286bn for the US and USD323bn for Europe. Asia’s imports from China increased from 18.9% to 24.2% of total imports over the past decade, while its exports to China fell from 16.2% to 14.0% of total exports. The report argues that the composition matters: Asia’s deficit is predominantly in intermediate and capital goods, unlike the consumer-goods-heavy deficits of the US and Europe. Chinese inputs can therefore help Southeast Asian production hubs integrate into global value chains and support their exports to the rest of the world. The report divides the relationship into three phases. From 2002 to 2013, Asian economies supplied components and capital goods to China’s export assembly base, producing an Asian trade surplus with China. From 2014 to 2021, China’s self-sufficiency drive and movement up the value chain reduced demand for Asian intermediate and high-end capital goods; Asia’s exports to China slowed more sharply than imports. Since 2022, the imbalance has accelerated: Asia’s total exports to China grew only 3.0% annually, while imports from China grew 9.7%; intermediate-goods exports contracted at a 3.7% CAGR while capital-goods imports grew 11.1%. China is now described as the “lead goose,” supplying inputs and capital goods to newer manufacturing hubs in Southeast Asia and India. Consumer-goods pressure is also emerging, especially from Chinese electric vehicles. The regional effects are not uniform. Vietnam and Malaysia are viewed as larger beneficiaries because their deficits with China are accompanied by trade surpluses with the rest of the world. India, the Philippines and, more recently, Thailand have seen worsening balances with both China and the rest of the world, suggesting import competition without commensurate export gains. Korea, Japan and Taiwan face a dual challenge of softer Chinese demand for their exports and more Chinese competition in third markets. Nomura therefore argues that Southeast Asian economies dependent on Chinese inputs and US end-demand have incentives to remain strategically neutral, whereas Japan, Korea and Taiwan have stronger incentives to align with the US; India is likely to pursue selective engagement with China. The report also contends that Asia has become less exposed to China as a source of final demand while becoming more linked to China as a supplier, helping explain why growth elsewhere in Asia has remained resilient despite weak Chinese domestic demand. China’s domestic outlook remains subdued. Real GDP growth slowed to 4.3% year-on-year in Q2 from 5.0% in Q1, and Nomura maintains a below-consensus 4.3% forecast for Q3. It expects only limited near-term support from recent measures and believes more policy steps may emerge later in 2026, though the report does not expect large-scale stimulus in a K-shaped economy. It revised its 2026 CPI and PPI forecasts to 0.9% and 2.5%, from 0.6% and 1.0%, respectively, owing to imported oil and chip-price pressures. The report expects proactive fiscal spending and accommodative monetary policy, but no reserve-requirement-ratio or policy-rate cuts in the baseline this year. The China property-policy review sees longer-term structural benefits but a difficult transition. The 28 August package largely dismantles presales in favor of completed sales, shifts more construction financing toward development loans, delays mortgage disbursement until completion, extends maximum mortgage terms to 40 from 30 years, and raises the total debt-to-income ceiling to 60% from 55%, while the 50% mortgage-payment-to-income cap remains unchanged. Nomura argues the change should reduce home-delivery risk and rebuild buyer confidence over time, but financially stretched private developers may struggle because presale-related funds still account for about 45% of development funding. Banks and capital markets will bear more project-financing risk, while the scale and execution of the new urban-renewal loan remain uncertain. On China credit, Nomura estimates that RMB7.5trn of the RMB10trn local-government debt-swap package had been issued by end-June 2026. It estimates roughly half had removed bank loans, about 13% had retired LGFV bonds, and the remainder had gone to non-standard debt and arrears. The swap’s drag on headline loan growth fell to 0.5 percentage points in Q2 2026 from 1.1 percentage points in Q3 2025, but adjusted loan growth and aggregate financing still weakened, which the report interprets as genuine weak private credit demand. It estimates RMB3.7trn of bank loans had been swapped out by June 2026. Household loans contracted RMB367bn in H1 2026, versus RMB1,170bn growth a year earlier, while medium- to long-term household lending fell to RMB221bn as mortgage demand weakened. The report argues this household balance-sheet repair could continue to restrain consumption while property-sector conditions remain weak. AI demand and semiconductor scarcity are a key regional counterweight. Nomura’s Chip Shortage Index, designed to nowcast the balance of chip demand and deliverable supply, stood at 103.8 in July, close to a record high; readings above 100 denote shortage. Using panels of macro and industry indicators and a vector autoregression model, the report finds the current cycle combines an unusually large shortage shock with positive industry momentum. It argues this could sustain the semiconductor upcycle through 2027 and beyond. Nomura’s leading index of Asian exports, NELI, slipped slightly to 122.9 in September after six consecutive monthly gains but remained near historical highs, which the report interprets as consolidation rather than the start of an export downturn. Country updates show divergent growth and policy settings. Australia is expected to receive another 25bp RBA hike on 29 September, followed by sub-trend growth and rate cuts in late 2027. India’s FY27 GDP forecast was raised by 0.4 percentage points to 7.0%, while inflation was raised to 5.1%; Nomura still expects policy rates to remain unchanged through 2026 despite food-inflation and hawkish risks. The FCNR(B) scheme drew approximately USD127.2bn, versus expected inflows of USD80-90bn, and Nomura forecasts a FY27 balance-of-payments surplus of about USD66bn after a FY26 deficit of USD23.6bn, though surplus-liquidity management is now a challenge. Korea’s chip boom supports strong exports and investment, and Nomura expects two further 25bp BOK hikes in November 2026 and February 2027, taking the terminal rate to 3.50%. Malaysia’s 2026 GDP forecast was raised to 5.6% on strong investment and electronics demand, with a 25bp BNM hike to 3.00% expected in Q4. Singapore is forecast to grow 5.7% in 2026 as AI-related activity, construction, financial services and credit growth remain strong; loan growth reached 12.5% year-on-year in July, the fastest since 2014. Nomura’s modified weekly financial-conditions index still signals relatively loose conditions, but it expects domestic interest rates and SORA to rise as credit conditions mature and core inflation accelerates. Thailand remains a weaker outlier. Nomura maintains GDP-growth forecasts of 1.8% for 2026 and 2.0% for 2027 despite record FDI approvals. It argues that data centres dominate the new investment wave, have low local content and limited job creation, and contributed only 0.3 percentage points to H1 2026 GDP growth of 2.4%. Data centres accounted for 83.8% of FDI approvals in H1 2026, while TikTok’s USD25.526bn project alone represented more than 80% of quarterly approvals. Chinese EV investments are also seen as having limited local value added and potentially displacing higher-value Japanese internal-combustion-engine production. By contrast, Malaysia’s expanding electronics trade surplus and more favorable data-centre spillovers support its stronger outlook.

Analysis framework

Nomura combines trade-balance decomposition by intermediate, capital and consumer goods with country-level macro forecasts, high-frequency indicators, policy analysis and cross-country comparisons. It uses selected quantitative tools, including a chip-shortage index, export-leading index, financial-conditions index, credit-gap analysis and econometric or regression-based estimates where stated.

Methodology notes

• Industry AnalysisUpstream-Midstream-Downstream Transmission

  Trade-balance decomposition by intermediate, capital and consumer goods

  Nomura separates the composition of Asia’s trade deficit with China to distinguish supply-chain integration through producer-goods imports from consumer-goods import competition.

• Industry AnalysisSupply-demand framework

  Nomura Chip Shortage Index

  The index measures the monthly balance between semiconductor demand and deliverable supply; values above 100 indicate shortage conditions.

• Other

  Vector autoregression-based chip-shortage model

  Nomura uses vector autoregression to derive factor weights from semiconductor export-price responses and assess the persistence of shortage shocks.

• MacroeconomicsCredit and Debt Cycle

  Credit-gap and financial-conditions analysis

  The report compares credit relative to GDP and aggregates FX, funding costs, asset prices, volatility and credit spreads to assess the stage of financial and credit cycles.

Key data

• Asia ex-China trade deficit with ChinaUSD517bnTwelve-month sum to July 2026; compared with USD286bn for the US and USD323bn for Europe.
• Asia’s import and export shares with China24.2% imports; 14.0% exportsImports from China rose from 18.9% of Asia’s total imports over the past decade, while exports to China fell from 16.2%.
• Phase 3 Asia-China trade growth3.0% export CAGR; 9.7% import CAGRFrom 2022 to the latest period; intermediate-goods exports contracted at a 3.7% CAGR.
• Nomura Chip Shortage Index103.8July reading, close to a record high; readings above 100 indicate supply shortage.
• China local-government debt swap issuanceRMB7.5trnIssued under the RMB10trn package through end-June 2026.
• China household loans-RMB367bnH1 2026, versus RMB1,170bn growth in H1 2025.
• India FCNR(B) inflowsUSD127.2bnProvisional total at end-August, above Nomura’s and market expectations of about USD80-90bn.
• Thailand data-centre contribution to growth0.3ppEstimated contribution to H1 2026 GDP growth of 2.4% year-on-year.

Impact & implications

Nomura’s analysis implies that Asian trade deficits with China should not be interpreted uniformly: producer-goods imports can support export-oriented value-chain integration, while countries with limited local value added or greater consumer-goods competition may face weaker gains. AI-linked electronics demand remains an important regional growth engine, but China’s weak domestic demand, property transition, credit softness and country-specific inflation or external-balance pressures create a more uneven regional outlook.

Risks

• Renewed supply-chain disruptions and soft Chinese domestic demand could weaken Asia’s otherwise robust export trajectory.
• Middle East tensions and higher energy prices are recurring risks to growth, inflation and external balances across the region.
• China’s property transition may further constrain financially stretched private developers and add bank credit risk.
• El Niño, deficient monsoons and food-price pressures are identified as important risks for several Asian economies.
• A downturn in the technology cycle would weaken economies relying heavily on AI-related electronics demand.

What to watch

• The composition of Asian imports from China and whether producer-goods imports translate into export gains for recipient economies.
• China’s additional growth-support measures, property-policy execution and evidence of private-sector credit demand.
• Chip availability, AI capital spending and whether the Chip Shortage Index remains above its shortage threshold.
• Upcoming central-bank decisions and inflation developments in Australia, Korea, Malaysia, the Philippines, Taiwan and Singapore.
• The realization rate and domestic value-added effects of Thailand’s data-centre and EV investment approvals.
• India’s management of FCNR(B)-related banking-system liquidity and the resulting balance-of-payments impact.