BEIJING – China’s economy is experiencing heightened deflationary pressures, with the producer price index witnessing a significant decline of 3.3% in May compared to a year earlier, marking the worst drop in nearly two years. This sharp descent follows a 2.7% decline in April and came in worse than expectations of a 3.2% drop forecasted by economists. The situation reflects ongoing challenges related to trade tensions with the United States and a persistent downturn in the housing market.
Experts highlight that the ongoing tariff war with the U.S. has negatively impacted sentiment and consumption within China, prompting calls for further government intervention to combat deflation. Zhiwei Zhang, chief economist at Pinpoint Asset Management, emphasized the effect of a price war in the automotive sector, which has exacerbated competition and driven prices down. He expressed concerns about declining property prices, which have recently resumed their downward trend after a brief stabilization.
Consumer sentiment remains cautious, largely due to income pressures, which has led companies to implement discounts to stimulate sales. The decline in consumer prices is consistent, with the consumer price index dipping by 0.1% in May, similar to the previous month, though slightly better than a forecasted 0.2% decline.
Amid reports of weakened domestic demand, retail sales growth slowed, reflecting increased job insecurity and stagnant home prices. Nonetheless, there was a slight rise in the core inflation measure—excluding food and fuel prices—recording a 0.6% increase year-on-year.
Looking ahead, Zichun Huang, an economist at Capital Economics, cautioned that despite the recent improvement in core inflation, the underlying economic conditions suggest that China may remain in a state of deflation over the next couple of years due to persistent overcapacity.
While the situation appears challenging, there are ongoing discussions regarding trade resolutions as U.S. President Donald Trump and Chinese leader Xi Jinping engaged in talks that could potentially provide a pathway for improved economic conditions.
This article underscores the complexities of navigating economic challenges while relying on strategic policy efforts to foster stability in a fluctuating environment.