China Battles Persistent Deflation As Trade War With U.S. Escalates
China, the world’s second-largest economy, finds itself at a critical juncture as new data reveal consumer prices have fallen for the second consecutive month. This decline underscores growing deflationary risks while Beijing scrambles to stimulate demand amid an intensifying tariff war with the United States.
Official data published Thursday by China’s National Bureau of Statistics show the consumer price index (CPI) dipped 0.1% year-over-year in March, easing from a 0.7% contraction in February. Although a slightly smaller drop than some forecasts, it reflects persistent weakness threatening to derail Beijing’s ambitious “around 5%” growth target for 2025.
Worryingly, producer prices — the other inflation gauge — fell for the 29th consecutive month, down 2.5% annually, marking the sharpest decline since November 2024. This signals deeper trouble in China’s factories, already rattled by shrinking overseas demand and rising input costs.
Economists warn that prolonged deflation dampens consumer sentiment as households postpone purchases in anticipation of even lower prices. According to Tianchen Xu of the Economist Intelligence Unit, “We are likely to see continued divergence between consumer prices, which show some tentative pickup at the core level, and producer prices, which are set to deteriorate given trade disruption.”
The stakes have grown with the latest salvo in the Sino-U.S. trade war. President Donald Trump stunned markets this week by increasing tariffs on all Chinese imports to a staggering 125%, from an already high 104%. Mere hours earlier, Beijing retaliated with an 84% tariff on American goods. Zhang Zhiwei, chief economist at Pinpoint Asset Management, bluntly noted that "bilateral trade is set to drop sharply soon due to the triple-digit tariffs."
Amid this backdrop, China is pivoting decisively towards domestic consumption. Bruce Pang of the Chinese University of Hong Kong observed that policy measures aimed to curb aggressive price-cutting and encourage household spending could gradually lift CPI in coming months. Likewise, government initiatives have doubled subsidies for trade-in programs to 300 billion yuan ($41 billion), covering smartphones and home appliances, in a bid to spur purchases.
Notably, this consumption push has reached unprecedented policy prominence. Laura Wang, Morgan Stanley’s chief China equity strategist, highlighted that Beijing’s latest work report mentioned the word “consumption” 27 times — the most in a decade. “Within 10 days, we will see announcements from the State Council,” said Li Daokui, a well-known Tsinghua University economist, forecasting imminent additional stimulus targeting household demand.
Yet questions linger about whether these measures can fully offset slumping exports. Julian Evans-Pritchard at Capital Economics cautioned that substantial fiscal efforts still favor traditional supply-side investments, risking an intensification of industrial overcapacity rather than reviving private sector demand.
As the trade war’s economic fallout deepens, Beijing faces a formidable challenge: spark consumer spending enough to counteract external shocks without fueling vulnerabilities elsewhere in the economy. How effectively China navigates this tightrope will shape not only its own recovery but also ripple through global growth prospects.
What do you think about China’s prospects amid deflation and deepening trade tensions? Leave your thoughts or analysis in the comments below and join the conversation.
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