In February, China saw its first decline in consumer prices in a year, with a CPI drop of 0.7%, raising deflation concerns amid sluggish consumer spending post-Covid-19. The government is addressing weak domestic demand with measures like interest rate cuts and increased spending. The ongoing U.S.-China trade conflict further complicates the situation, as new tariffs threaten exports, which have slowed significantly, highlighting the need for proactive fiscal policies to stimulate economic growth.
In February, China experienced a notable decline in consumer prices for the first time in a year. This decrease comes as Beijing actively works to rejuvenate the world’s second-largest economy amidst an ongoing trade conflict with the United States.
Since the conclusion of the Covid-19 pandemic, consumer spending in China has exhibited a degree of stagnation, raising concerns about a potential deflationary spiral.
According to the National Bureau of Statistics (NBS), the consumer price index (CPI), a vital measure of inflation, reported a year-on-year decrease of -0.7% in February.
This marks the first reduction in consumer prices since January 2024, when they fell by 0.8% year-on-year, representing the most significant contraction in 14 years.
This gauge of consumer spending and economic health has shown a decline that surpasses the expectations of economists surveyed by Bloomberg, who had predicted a drop of -0.4%.
In January, the index remained in positive territory, reaching 0.5%—its highest level in several months—largely due to increased spending during the Lunar New Year celebrations.
The persistent real estate crisis in China continues to erode confidence among economic participants, which in turn hampers household spending and investments, all while perpetuating fears of deflation.
Understanding Deflationary Pressures
China faced a period of deflation for four consecutive months beginning in late 2023.
Deflation signifies a decrease in the prices of goods and services, reflecting a slowdown in economic activity, contrasting sharply with inflation.
Additionally, domestic consumption remains weak, as evidenced by a reported 8.4% decline in imports during January and February compared to the previous year, according to Chinese customs data released on Friday.
At the major annual political event known as the ‘Two Sessions,’ Beijing vowed to address the weakness in domestic demand—especially in household consumption—swiftly.
The government’s aim is to transform domestic demand into the primary engine and foundation of economic growth, as outlined in a recent government report.
In recent months, the Chinese government has implemented measures such as reducing interest rates, easing home purchase restrictions, and increasing the debt limits for local governments.
During the same political event, Prime Minister Li Qiang set an ambitious growth target of ‘around 5%’ for 2025 while also announcing an increase in the budget deficit.
Adding to the economic strain, Donald Trump, who resumed his presidency in January, has announced further tariffs on Chinese imports entering the United States.
In response, Beijing has decided to impose its own tariffs on American agricultural products, including corn and chicken, which are set to take effect soon.
The tariffs imposed by the U.S. could have a significant negative impact on Chinese exports, which were crucial for the country’s growth last year. In fact, export growth has already slowed to a mere 2.3% year-on-year in January and February, a stark contrast to the 10.7% growth seen in December.
Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, notes, ‘The Chinese economy is still grappling with deflationary pressures.’
He emphasizes the need for more proactive fiscal policies as exports face risks due to the ongoing trade conflict while domestic demand remains subdued.