That model is beginning to change.

By April 2026, China ended nearly three years of export price deflation. The country is now exporting inflation to the rest of the world. 

Chinese export prices rose 8.2% year on year in June, following almost three years of falling export prices. The increase partly reflects higher energy costs following the conflict in the Middle East. But the scale of the increase is striking: Chinese producer prices rose by 4.1% over the same period. The gap suggests that companies are not simply passing on higher costs. In some sectors, they are achieving higher profit margins.

The change is visible in two opposite sides of the Chinese economy, to create a phenomenon we call the export inflation smile.

On one side, we're seeing higher prices in low value-added industries. This includes mineral products, oil and gas. Profit gains here are mostly opportunistic, with companies making the most of higher global prices for their goods.

On the other are advanced manufacturing and artificial intelligence-related industries, where stronger pricing appears to reflect a more fundamental change in China’s industrial strategy.

China’s export inflation smile: Export price inflation vs product sophistication

China has spent years trying to move away from an economic model based on producing more goods at lower prices. Policymakers are now trying to tackle what they call “involution”: intense competition, excess capacity and a race to the bottom on prices.

That shift has practical consequences. China has been reducing export tax rebates for industries suffering from overcapacity. Steel rebates were removed in 2021, followed by aluminium and copper in 2024, while solar rebates were scrapped in April 2026. Support for electric vehicle batteries will be eliminated by 2027.

At the same time, China has allowed the renminbi to appreciate. Since the beginning of 2025, the Chinese currency has strengthened by around 7.6% against the dollar onshore and by slightly more offshore. For exporters who traditionally invoice in dollars, a stronger renminbi reduces the amount of local currency they receive when converting overseas sales. That creates another incentive to protect margins through higher prices.

The most important point is that higher Chinese export prices do not necessarily mean every product imported from China will become more expensive.

The increase is concentrated in particular industries. Traditional sectors such as footwear, textiles and furniture remain affected by excess capacity and intense price competition. Higher prices are much more evident in advanced manufacturing and technology.

However, even within industries, Chinese producers are moving into richer product offerings with higher profit margins. Automotives is a telling example. Chinese carmakers facing European trade barriers have increasingly invested in local production, rather than simply absorbing higher tariffs. Producing closer to the customer means meeting European production, regulatory and supply-chain requirements, which raises costs. To compensate, Chinese carmakers are moving into more expensive vehicles and competing through technology, design and branding rather than price alone.

Yet they continue to gain market share even as prices rise. Chinese car brands accounted for 8.2% of the European market in the year to April, compared with 5.6% in 2025.

If the renminbi continues to strengthen, companies buying Chinese goods in dollars could face a different cost structure from the one they have become accustomed to.

For treasurers, this makes it worth revisiting how much exposure sits behind “Chinese sourcing”. The relevant question is not simply whether a supplier invoices in dollars, euros or renminbi. It is whether changes in the renminbi could eventually feed through into the supplier’s pricing.

That could make currency management and procurement decisions more intertwined. A purchasing team negotiating a multi-year contract, for example, may need to consider not only the headline price but also how that price could evolve as Chinese suppliers adjust to a stronger currency and changing domestic policy.

China’s export prices are rising, but China’s domestic inflation remains weak. Consumer price inflation was just 0.5% year on year in July, while domestic demand remains subdued and excess capacity continues to weigh on prices. NatWest forecasts China’s consumer inflation to reach 0.7% by the end of 2026.

So this is not a straightforward story of Chinese inflation suddenly accelerating.

Instead, it is a story about a two-speed economy and two-speed prices: Chinese companies are increasingly able to charge more for certain goods, particularly where technology, branding and product quality give them greater pricing power.

For many businesses, the bigger question is what happens if there is no longer an equivalent source of cheap manufactured goods elsewhere. China developed highly integrated supply chains, supported by investment, infrastructure and industrial policy. Replicating that combination in another country is unlikely to be quick or inexpensive.

Read more in-depth corporate views at NatWest Market Insights