The author is a professor of finance at Peking University and a senior fellow at the Carnegie-Tsinghua Center for Global Policy

China on Friday reported the largest monthly trade surplus in its history. It was the latest in a nearly two-year record monthly surplus of $94.5 billion, despite stagnating Chinese consumption.

But while China’s soaring trade surplus seems like a fortune to balance stagnant consumption in time, it misunderstands the relationship between domestic consumption and trade. Contrary to what many assume, the country’s burgeoning trade surplus is not a sign of manufacturing prowess or evidence of a culture of frugality. Rather, it is the result of China’s enormous difficulty rebalancing its domestic economy and reining in soaring debt.

This is because the conditions that explain the stagnation of domestic consumption also explain the rapid growth of Chinese exports relative to imports. By the way, this applies not only to China, but also to all countries that have long maintained trade surpluses. Whether high-wage economies like Germany and Japan or low-wage economies like China and Vietnam, their international competitiveness depends largely on the low wages workers receive relative to productivity.

But it is precisely low wages relative to productivity that limit their households’ ability to consume much of what they produce. In all these countries, households have a lower share of GDP than their trading partners, which is why their consumption share is also lower.

This isn’t always a bad thing. In the 1980s, curbing consumption allowed Beijing to direct vast amounts of newly produced resources for much-needed investment. The result is rapid, sustainable growth as China builds out its much-needed infrastructure and manufacturing capacity.

However, this changed about 10 to 15 years ago when China started investing as much as possible in real estate development and infrastructure and assimilate it as efficiently as possible.At that time the debt used to finance the investment grew faster than the economic return on the investment, eventually making the country a Fastest Growing Debt Burden in history.

Beijing has known how to solve this problem for years. To rein in soaring debt and the unproductive investment it finances, it must rebalance the distribution of income so that growth is driven primarily by consumption growth, as in most other economies. But this will require a politically difficult restructuring of the economy, shifting a larger share of total income – as much as 10-15 percent of GDP – from local governments to Chinese households.

This is why the trade surplus is important. In recent years, Beijing has tried to slow debt growth by reducing unproductive investment in real estate and infrastructure.This year, as we have seen Evergrande, Beijing has cracked down on the real estate industry.

If an increasing share of China’s total income goes to ordinary households, the decline in investment by property developers could be offset by an increase in consumption. but it is not the truth. Wage growth has actually lagged GDP growth over the past two years, partly due to the impact of the Covid-19 pandemic. Chinese workers’ share of what they produce has not increased but decreased, and their share of what they can consume has increased.

That’s why China’s monthly trade surplus has nearly doubled in the past two years. A falling household share of GDP has led to a larger trade surplus, allowing Chinese manufacturers to absorb weak domestic demand without reducing output. Without these surpluses, Beijing would have to let its debt grow faster if it didn’t want factories to lay off workers.

Increased exports are usually a good thing, but for a country like China, an increased trade surplus is not. In this case, they are symptoms of deep and persistent imbalances in the distribution of domestic income. Until the country can reverse these politically difficult imbalances, these huge surpluses are just the flip side of Beijing’s attempts to rein in debt, so they will persist.

This is very important in a world with weak demand. For China to achieve a surplus of nearly 5% of its GDP, the rest of the world would have to run a deficit of a staggering 1% of its total GDP. The rest of the world will have to continue to absorb China’s burgeoning trade surplus as Beijing grapples with its burgeoning debt and difficulties rebalancing domestic income.