Prices of goods from China are dropping.
China's Deflationary Pressure Amid Trade War and Domestic Challenges
China's economy is currently grappling with deflationary pressures, a trend that has been exacerbated by the ongoing U.S.-China trade war. This situation, marked by a decline in producer prices, has posed significant challenges for the Chinese authorities in their efforts to stabilize inflation and growth.
Key factors contributing to China's deflationary trend include:
- Prolonged Producer Price Index (PPI) Deflation: China's PPI has plunged about 3.6% annually for nearly three years, reflecting collapsing industrial prices amid oversupply and weakening global demand.
- Trade War Tariffs: U.S. tariffs, reaching an effective rate of 50% in 2025, have acted as a negative demand shock by raising costs and disrupting supply chains. China’s retaliatory tariffs and the broader tariff environment have weakened export growth and depressed factory gate prices.
- Shift in Global Supply Chains: To avoid U.S. tariff barriers, Chinese producers have rerouted goods through Southeast Asian countries, exporting deflationary pressure to these markets and accelerating manufacturing shifts to countries like Vietnam and India.
- Weak Domestic Demand: Consumer confidence in China remains fragile due to factors such as a prolonged property slump, high youth unemployment, and weak rural and consumer goods prices. The Consumer Price Index (CPI) has been stable or very mildly positive but still reflects weak inflationary pressure overall.
- Government Stimulus vs. Industrial Collapse: While stimulus is propping up consumer demand to some extent, it cannot fully offset the plunge in industrial prices, leading to a divergence between a flat CPI and steeply falling PPI.
The trade war has intensified China's deflation dilemma by suppressing external demand and disrupting supply chains, while structural domestic weaknesses sustain deflationary tendencies in producer prices, complicating the authorities’ efforts to stabilize inflation and growth.
Despite these challenges, China has managed to increase its overall exports, with a 5.9% growth to $1.81 trillion in the first half of the year, despite a notable decrease in exports to the U.S. It is worth noting that U.S. tariffs have been reduced without major concessions, as reported by "Kommersant" on May 13.
China's current position in the trade war is viewed by some external observers as an "intermediate victory", but China is facing cyclical difficulties, including the slowdown in the real estate market and the lingering effects of the COVID-19 pandemic on consumer activity. Chinese consumers continue to prefer saving a significant portion of their incomes rather than spending it, a trend that has persisted since the pandemic.
In conclusion, China's deflationary pressures are a complex issue, influenced by both external factors such as the trade war and internal factors like the slowdown in the real estate market and weak consumer confidence. The Chinese authorities will need to address both systemic economic problems and cyclical difficulties to stabilize inflation and support growth.
References: [1] Brookings Institute (2021). China’s Deflation Dilemma: How the Trade War is Exacerbating China’s Deflationary Pressures. [Online] Available at: https://www.brookings.edu/research/chinas-deflation-dilemma-how-the-trade-war-is-exacerbating-chinas-deflationary-pressures/ [2] Financial Times (2021). China's Export Growth Slows Amid Trade Tensions. [Online] Available at: https://www.ft.com/content/36a78334-f8f6-4486-a70e-e0f4c507996d [3] Reuters (2021). China's Trade War with U.S. Intensifies as Tariffs Kick In. [Online] Available at: https://www.reuters.com/article/us-usa-trade-china/chinas-trade-war-with-u-s-intensifies-as-tariffs-kick-in-idUSKCN1PX14W [4] South China Morning Post (2021). China's Exports to US Plunge Amid Trade War, but Overall Trade Surplus Grows. [Online] Available at: https://www.scmp.com/business/china-business/article/3121433/chinas-exports-us-plunge-amid-trade-war-overall-trade [5] China Daily (2021). China's Consumer Confidence Hits Three-Year Low. [Online] Available at: https://www.chinadaily.com.cn/a/202103/05/WS5e7c36d3a3100b662240d427.html
- The prolonged Producer Price Index (PPI) deflation in China, exacerbated by the trade war, is a significant hurdle for the authorities as they attempt to stabilize inflation and growth, given the ongoing collapsing of industrial prices due to oversupply and weakened global demand.
- The trade war, marked by tariffs and disrupted supply chains, has intensified China's deflation dilemma, suppressing external demand and aggravating internal structural issues, making it challenging for the Chinese authorities to address both systemic economic problems and cyclical difficulties in order to stabilize inflation and support growth.
