China’s Consumer Prices Drop Again, Raising Pressure on Stimulus
China’s consumer prices fell for the second straight month in March, stoking deflation fears and prompting calls for more stimulus as tariff risks rise.
China’s Price Slump Deepens in March as Tariff Tensions Rise
China’s economy is signaling fresh warning signs as consumer prices dipped for a second consecutive month in March, renewing concerns about domestic demand and global trade tensions. With deflationary pressures persisting and external headwinds mounting, Beijing is facing increased calls for policy action to stabilize growth and boost consumer confidence.
A Fragile Recovery Overshadowed by Deflation
March’s consumer price index (CPI) slipped 0.1% year-on-year, marking a milder decline than February’s 0.7% drop. Yet, the figures still fell short of expectations for flat inflation, according to data released Thursday by the National Bureau of Statistics. Month-over-month, prices decreased 0.4%, a steeper fall than February’s 0.2% decline.
These persistent price drops highlight an uneven economic recovery in the world’s second-largest economy. While some sectors—particularly manufacturing and retail—have shown encouraging signs, the broader economy remains weighed down by slackening demand, weak job growth, and geopolitical tensions.
Producer Prices Extend Their Slide
Compounding the issue is continued producer price deflation. The Producer Price Index (PPI) shrank by 2.5% year-on-year in March, deepening from a 2.2% decline in February and registering the largest drop in four months. The slump was also worse than the 2.3% contraction analysts had anticipated.
Falling factory-gate prices suggest weakened pricing power for producers, often a sign of tepid industrial demand and subdued investment sentiment. For exporters, it could further erode margins at a time when global demand is already under strain from tariff disputes and geopolitical fragmentation.
Economic Confidence at a Crossroads
China’s recovery from years of pandemic disruptions has been anything but linear. While retail sales ticked upward and factory activity showed strength in recent months, the labor market has lagged. Unemployment—especially among youth—remains elevated, dampening consumer sentiment.
Core inflation, which strips out volatile food and energy costs, offered a small bright spot by rising 0.5% in March compared to a year earlier. However, this uptick was modest and comes after a 0.1% drop in June, showing that underlying demand is still struggling to gain traction.
“Without a robust rebound in consumer spending, the broader recovery risks stalling,” noted Alicia Garcia Herrero, Chief Economist for Asia Pacific at Natixis. “Deflation risks could become more entrenched if left unchecked.”
Tariff Pressures Threaten Growth Ambitions
Beijing’s ambitions for around 5% GDP growth this year may come under pressure as global trade tensions re-escalate. With the U.S. signaling potential tariff hikes and China contemplating retaliatory measures, the net export contribution to growth is likely to diminish, shifting the burden to domestic demand.
Citi economists recently projected that net exports may become a drag on GDP in 2025, urging the government to intensify fiscal support. “We expect fiscal policies to lead domestic demand expansion amid external shocks,” they wrote, forecasting mid-year funding injections between 1 trillion and 1.5 trillion yuan (approx. $136–204 billion).
Among the proposed strategies are expanding trade-in subsidies for consumer durables, childcare assistance programs, and targeted aid for low-income households.
Consumer Credit Eased to Spur Spending
Chinese regulators are also working to loosen credit conditions for households. Last month, the country’s top financial authority urged banks to relax quotas and loan terms on consumer credit products. The goal: inject more liquidity into the hands of consumers and stimulate spending.
However, analysts caution that credit access alone may not be enough to lift demand. “Confidence is the missing ingredient,” said Iris Pang, Chief Economist for Greater China at ING. “People are saving more and spending less—not because they can’t borrow, but because they’re unsure about the future.”
This reflects a broader psychological shift in post-pandemic China, where economic uncertainty and job market fragility have made households more risk-averse.
What’s Next for China’s Economic Strategy?
As China grapples with these structural and cyclical challenges, its policymakers are faced with a delicate balancing act. On one hand, they must revive consumer demand without stoking asset bubbles or undermining financial stability. On the other, they must navigate an increasingly hostile trade environment that could blunt export growth.
There are signs that the government is preparing for a more proactive fiscal approach. Several local governments have fast-tracked infrastructure bonds, and state media has hinted at possible revisions to the tax code aimed at easing the burden on families and small businesses.
Moreover, Beijing may lean further into industrial policy to shore up strategic sectors such as semiconductors, EVs, and green energy—areas where investment could simultaneously serve economic and geopolitical objectives.
Global Ripple Effects of China’s Deflation
China’s economic health has implications far beyond its borders. Deflation in the country often leads to lower prices for exported goods, which can suppress inflation elsewhere but also signals weakening global demand.
For multinational corporations reliant on Chinese consumers—from luxury retailers to automakers—the current environment presents both risks and opportunities. A weaker yuan and softer domestic prices could aid exports, but a subdued consumer base may limit revenue potential in the near term.
Meanwhile, commodity exporters like Brazil and Australia are watching Chinese industrial activity closely. Falling factory prices typically translate to lower demand for raw materials, affecting global supply chains and market forecasts.
A Tipping Point for Policy Action
China’s second straight month of consumer price declines underscores the fragility of its recovery and the mounting urgency for more assertive stimulus measures. With producer deflation accelerating and trade risks on the rise, the government may soon have little choice but to act more decisively.
Whether through fiscal injections, subsidies, or structural reforms, Beijing’s next moves will be critical not just for domestic stability but for the broader global economy. Investors, policymakers, and consumers alike are watching to see whether China can shift from tentative recovery to sustained momentum—or slide deeper into a deflationary trap.
Source: (Reuters)
(Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Please consult a professional advisor before making economic or policy-related decisions.)