AI microdramas are a test case for China’s next big export wave

China’s US$1.2 trillion goods trade surplus last year has focused attention on electric vehicles, batteries, solar panels and industrial overcapacity. Tariffs, anti-subsidy investigations and localisation requirements have followed as trading partners respond to China’s manufacturing scale.

Yet the less visible shift is happening in services. Services exports rose by 17.1 per cent year on year in the first seven months of 2026, while exports of personal cultural and entertainment services surged by 57.8 per cent. China still runs a trade deficit in services, which are nowhere close to replacing manufacturing. But digital services can scale up globally without factories, containers or ports.

Microdramas generated by artificial intelligence (AI) offer an early example. China industrialised the format domestically: one-to-three-minute episodes, rapid plot twists and cliffhangers designed around smartphone viewing and payment. The sector’s revenue rose from less than 1 billion yuan in 2020 to an estimated 100 billion yuan (US$14.91 billion) last year. Chinese-backed platforms such as ReelShort already have sizeable overseas audiences.

Rather than simply exporting Chinese television, these companies are exporting a production system built around audience data, rapid localisation, performance marketing and, increasingly, AI.

Chinese factories became formidable by shortening product cycles, compressing costs, producing many variants and quickly scaling up whatever sold best. AI allows content producers to apply the same logic to entertainment. China released about 430,000 microdramas in the first eight months of 2026, as much as 13 times all of 2025, with AI accounting for over 90 per cent.

The productivity gains explain the rapid adoption. South Korean producer Vigloo cut production from three months to one and costs to about one-fifth using AI. Shenzhen studios using ByteDance’s Seedance have achieved a similar compression. But the advantage is not just cheaper video generation. China has an ecosystem capable of turning AI output into commercial content quickly and at scale. That matters because microdramas are built for rapid experimentation.

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Producers can see within the opening episodes whether viewers are staying, then redirect marketing spending towards titles gaining traction and abandon those that do not. Lower costs also mean more bets. While a traditional studio may spend months developing several expensive projects, an AI microdrama producer can launch many titles, read audience behaviour quickly and scale up only the winners.

Breakout successes are few and far between – only 0.48 per cent of AI microdramas released on Douyin in the first half of 2026 exceeded 100 million views. Still, microdramas may be a better risk model than committing millions to a long-form production: microdramas make failures far easier to discover.

Yet scale is creating its own problems. Beijing is now pushing the industry towards greater quality, originality and copyright protection, effectively telling a sector built for speed to slow down.

iQiyi shows how this is no longer a fringe format. Built around premium long-form drama, iQiyi saw its short-form titles take the top domestic market share for the first time in the second quarter this year, even as group revenue fell by 5 per cent year on year. Its response has been to push deeper into AI and short-form production. Microdramas may not explain its wider revenue pressure, but they are reshaping the economics of it.

More than a fad, microdramas are a test case. They show how China’s industrial strengths can be applied to digital services, creating exports that scale globally without the factories, shipping lanes and tariff exposure that define physical trade. A microdrama crosses borders through an app. There is no container to inspect and nearly zero marginal distribution cost, even as AI lowers the cost of translation, dubbing and localisation.

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Digital products can still face restrictions. TikTok’s case shows how the effect of national security and platform regulation can substitute for those of tariffs. But policies designed for manufacturing overcapacity work less neatly when the export is entertainment, software, intellectual property or attention.

China is applying familiar manufacturing capabilities to services: speed, scale, cost control, rapid experimentation and a ruthless elimination of weak products. Only the output has changed.

Entertainment adds another dimension because stories shape perceptions. AI amplifies not only output, but also the assumptions and stereotypes embedded in it, especially when algorithms reward those narratives with traffic. I have seen Chinese microdramas cast the United States as a bully and use a fictional small Southeast Asian country as shorthand for money laundering and corruption. Repetition can still normalise such portrayals.

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China spent four decades building an export machine around physical goods. If the same economics spread through gaming, online literature, entertainment, apps and AI-enabled services, China gains another channel for globalisation that is less dependent on factories and harder to address with conventional tariffs.

Services will not replace China’s manufacturing engine any time soon. Rather, the competitive capabilities built in manufacturing are beginning to migrate into services.

China’s trillion-dollar goods surplus is visible at the port. Its next export wave may increasingly arrive through the smartphone.