China’s economy is in deep trouble. It’s fighting a battle against deflation, declining consumer demand, and outside factors such as U.S. tariffs. The nation’s consumer price index (CPI) has slipped into negative territory, showing declines for two consecutive months in February and March. This new trend is profoundly troubling and should alarm anyone with an interest in China’s economic future. An extended dip in the producer price index (PPI) further compounds the concern with greater instability.
The country’s urban unemployment rate is projected to average 5.7% this year, exceeding the government’s target of 5.5%. Uncertain job prospects and concerns about income stability among consumers have played a role in this lackluster demand. In turn, consumer spending is cratering, deepening the economic freefall.
In March, China’s Producer Price Index (PPI) fell for the 29th consecutive month. It logged a 2.5% drop from last year. Economists forecast continuing declines in the PPI. For 2024, they only see a 1.6% drop over the previous year, an improvement from their 2.2% decline in 2023. These numbers underscore the stubborn deflationary forces affecting all sectors of our economy, including education.
China’s situation is complicated by two significant factors: the ongoing woes in the property sector and the imposition of prohibitive U.S. tariffs. The ongoing property slump has hit investment and consumer spending hard, two of the three key drivers of economic growth. U.S. President Donald Trump has slapped tariffs on imported Chinese products. These tariffs have increased to high levels of 145%, which is the highest level of tariff in a century. In response, China has slapped a punitive 125% tariff on U.S. exports. This action has severely undermined the state of U.S.-China trade relations and increased difficulties for Chinese exporters.
Or that Chinese exporters are mischaracterizing and panicking as they lose access to the U.S. market. Now they are competing more fiercely at home, as they turn – not entirely, but increasingly — to the domestic consumer. Second, China’s domestic market is cratering. That’s because while it acts as an important shock absorber for exporters against external shocks, it’s no match to absorb the added supply that U.S. importers have abandoned.
“Prices will need to fall for domestic and other foreign buyers to help absorb the excess supply left behind by U.S. importers,” said Shan Hui, highlighting the necessity for price adjustments to maintain balance in the market.
Chinese authorities do not view this deflation episode as an imminent catastrophe. Instead, they are framing low prices as a potential buffer to support household savings during this period of economic transition. According to Wang from Eurasia Group, “Authorities do not view deflation as a crisis; instead, they are framing low prices as a buffer to support household savings during a period of economic transition.”
The continuing deflationary tide adds even more peril to SMEs across China. The repeal of the de minimis rule combined with the cash flow recession are driving many of these firms into insolvency. Wang Dan emphasizes this looming threat, stating, “The removal of the de minimis rule and declining cash flow are pushing many small and medium-sized enterprises toward insolvency.”
China’s manufacturing capacity may find it difficult to ramp up production to meet abrupt tariff escalations from the U.S. This would exacerbate overcapacity concerns in multiple sectors. Some economists argue that China’s economy is better able to endure this kind of pressure than that of the United States. While it can’t avoid the tide of global changes, it is certainly better positioned to manage that impact.
“For exporters that were able to charge higher prices from American consumers, selling in China’s domestic market is merely a way to clear unsold inventory and ease short-term cash-flow pressure,” noted Shen Meng. Though this narrow approach will likely provide welcome short-term relief, it does nothing to solve the deeper challenges the economy as a whole is facing.
Inflation indices are increasingly moderated, and consumer confidence is plummeting. Thus, China’s CPI is expected to end the year at about 0%, down from last year’s paltry 0.2% growth rate. The short-term economic outlook is bad. The consensus among analysts is for deflation in wholesale prices to increase, with a forecast drop of 2.8% in April compared to March’s 2.5%.
“The side effect is a ferocious price war among Chinese firms,” warned Yingke Zhou, pointing out that intensifying competition may drive down prices even further as companies strive to maintain market share amid dwindling demand.