China’s economy is experiencing deepening deflation, with May marking the worst producer price drop in nearly two years. The Producer Price Index (PPI) fell 3.3% year-on-year, surpassing April’s 2.7% decline and hitting its deepest contraction in 22 months. This trend reflects the ongoing challenges of a prolonged property market slump and rising global trade tensions, especially with the United States. These issues have dampened business sentiment and increased expectations for further government intervention to stabilize the economy.
Fierce Price Wars and Tariff Pressures Weigh Heavily on China’s Manufacturing Sector
Economists point to the intensifying price competition, especially in the auto sector, as a sign of widespread market stress. Companies, facing weak consumer demand and income constraints, are cutting prices to stimulate sales. Zhiwei Zhang from Pinpoint Asset Management expressed concerns about both the ongoing price wars in the auto industry and the renewed decline in property prices. The Chinese government has urged an end to destructive pricing tactics, recognizing the strain it places on already weakened profit margins.
China’s Deepening Deflation Sparks Alarm as Price Wars and Trade Tensions Undermine Economic RecoveryThe manufacturing sector, central to China’s economy, continues to suffer from the impact of U.S. tariffs. Factory activity has slowed, and despite some growth in services, the overall recovery remains sluggish. High-level discussions between U.S. President Donald Trump and Chinese President Xi Jinping are ongoing, with trade and access to critical minerals among the key issues. However, these talks have yet to produce decisive outcomes, keeping markets on edge.
Subdued Consumer Inflation Reflects Weak Demand and Persistent Structural Deflationary Pressures in China
Consumer inflation also remained subdued, with the Consumer Price Index (CPI) declining 0.1% in May—the same as April—and aligning closely with analyst forecasts. On a monthly basis, CPI dropped 0.2%, reversing a 0.1% rise in the previous month. These figures indicate ongoing weakness in domestic demand, with households hesitant to spend due to job insecurity and stagnant wages, contributing to the broader deflationary environment.
While core inflation, which excludes food and fuel, inched up to 0.6% year-on-year in May, up from April’s 0.5%, analysts remain cautious. Zichun Huang of Capital Economics warned that the improvement is fragile and unlikely to reverse the broader trend of deflation. Persistent overcapacity and structural issues are expected to keep China trapped in a deflationary cycle through at least next year, highlighting the need for sustained and targeted policy support.
