Today, China is facing unprecedented economic strife. In June, in fact, its producer prices fell an extraordinary 3.6 percent, the biggest decrease in nearly two years. This drop marks the latest in a multi-year deflationary streak that started in September 2022. Chinese authorities have vowed to crack down on anti-competitive, price-cutting behaviors among domestic companies. Second, they want to overall stabilize the economy during these turbulent, recessionary times.
Consumers paid 0.1% less than a year ago in June according to the consumer price index (CPI), a sign of continued deflationary pressure. Sadly, this modest uptick does little to offset some harsh realities illustrated by the producer price index (PPI). The drop in producer prices was worse than economists predicted, as they had only predicted a 3.2% drop. That’s the largest month-to-month decrease since July 2023.
Industrial profits suffered, sinking by 9.1% in May, adding to the economic headwinds. It is this fierce price competition the Chinese policymakers are decrying in their domestic firms. They underscore the importance of enhancing product quality and phasing out old, polluting production capacities. A statement from a Chinese state-backed newspaper highlighted this sentiment:
“Businesses should be guided to improve product quality and support the orderly phasing out of outdated production capacity.” – Chinese state-backed newspaper
Taking out the volatile food and energy costs, the core CPI shot up 0.7% from a year earlier. It’s a big increase — the biggest in 14 months — but deflationary pressures continue to weigh heavily. Larry Hu, chief China economist at Macquarie, emphasized the severity of these conditions, stating:
“Without a strong policy stimulus, it’s hard to escape the ongoing deflationary spiral.” – Larry Hu
China’s economic situation is further complicated by external factors, particularly the ongoing U.S. tariff measures that threaten the viability of selling to one of the world’s largest consumer markets. Policymakers seem to be waiting for a sharper decline in exports before taking more decisive actions to stimulate the economy.