China’s Deflation Deepens Despite Stimulus Efforts
Weak Demand and Price Wars Threaten Economic Recovery
Beijing’s attempts to invigorate its economy are struggling to gain traction as consumer prices fall for a fourth straight month, signaling persistent weakness in domestic demand and raising concerns about a prolonged period of deflation.
Consumer Price Index Declines
The consumer price index (CPI) in China decreased by 0.1% in May compared to the previous year, according to data released by the National Bureau of Statistics. This follows declines of 0.7% in February, 0.1% in March, and 0.1% in April. While core inflation, excluding food and energy, rose 0.6%—the highest level since January—it hasn’t been enough to offset the overall downward trend.
Simultaneously, factory-gate prices experienced a deeper deflation, falling 3.3% year-on-year in May, exceeding analyst expectations. Wholesale prices have remained in deflationary territory since October 2022, according to LSEG data.
Automotive Price Wars Add Pressure
A significant factor contributing to the price declines is a fierce price war within the automotive industry. “The price war in the auto sector is another signal of fierce competition driving prices lower,”
said **Zhiwei Zhang**, president and chief economist at Pinpoint Asset Management, adding that falling property prices are also exacerbating the situation.
Chinese policymakers have urged automakers to halt the aggressive discounting, which is harming profitability and efficiency. Despite these calls, competitive pressures remain intense.
The situation mirrors broader global trends; according to the International Monetary Fund, global trade volume growth slowed to 0.2% in 2023, reflecting weaker demand and geopolitical tensions. (IMF World Economic Outlook, April 2024)
Policy Response and Trade Talks
In early May, China’s financial regulators implemented a series of measures to stimulate the economy, including cutting key interest rates by 10 basis points and lowering the reserve requirement ratio by 50 basis points. These actions followed the imposition of substantial tariffs on Chinese goods by U.S. President **Donald Trump**, reaching levels of 145%, prompting retaliatory measures from Beijing.
A preliminary trade deal reached in Geneva, Switzerland, on May 12th offered some relief, with Washington reducing levies on Chinese goods to 51.1% and Beijing lowering taxes on American imports to 32.6%. This allowed for a resumption of negotiations toward a broader agreement.
“Eventually China needs to rely on domestic demand to fight the deflation.”
—Zhiwei Zhang, Pinpoint Asset Management
However, tensions have resurfaced, with both sides accusing each other of violating the terms of the Geneva agreement. Washington has criticized Beijing’s slow approval of additional critical mineral exports, while China has protested new U.S. restrictions on Chinese student visas and further export controls on chips.
Looking Ahead
China’s Ministry of Commerce stated it will continue reviewing and approving applications for rare earth exports, citing growing demand from the robotics and new energy vehicle sectors. Market observers are now focused on whether Beijing will introduce further monetary easing measures to bolster the economy. State-run media recently suggested the People’s Bank of China (PBOC) may further reduce the reserve requirement ratio later this year and potentially resume government bond trading.
The annual Lujiazui Forum in Shanghai later this month, featuring speeches from key financial regulators including PBOC Governor **Pan Gongsheng**, is expected to reveal further policy initiatives. China is also scheduled to release its trade data for May on Monday, with forecasts predicting a 5% year-on-year increase in exports and a 0.9% decline in imports.
