China is currently facing a situation of monetary tightening, with prices of goods and services in its economy having declined for two consecutive years. If prices continue to fall in 2025, it will be the longest period of monetary tightening since the Great Leap Forward era of the 1960s.
The current situation, as indicated by data, is not optimistic. The Consumer Price Index in January and February of 2025 saw negative growth for the first time in four years. The core inflation rate in February (excluding volatile items such as food and energy) decreased by 0.1%, marking the second contraction in 15 years.
Unlike the scenario in the United States and other major economies where post-COVID-19 pandemic has led to a rebound in suppressed consumer demand and shortages of goods causing prices to soar, the same situation has not occurred in China.
In recent years, the Beijing authorities have intervened in the market economy through policy measures, cracking down on several industries including technology, real estate, education, electronic games, and the financial sector, leading to many private enterprises facing operational crises.
Issues such as the real estate market bubble burst, low prices undermining consumer confidence, worsening job market leading to layoffs and pay cuts, as well as sudden population decline due to the pandemic, have collectively weakened consumer purchasing power.
The approach of the Chinese Communist Party is to develop “new quality production forces” such as manufacturing and high-tech products in an attempt to drive related industries. However, despite increasing production volumes of high-tech products, market demand remains weak, forcing the high-tech industry to lower prices and exacerbating the monetary tightening.
Currently, investors have a pessimistic view of China’s economic prospects, with a large amount of funds flowing into the bond market. Earlier this year, the yield of 10-year government bonds reached historically low levels, followed by a slight rebound.
Initially, cheap prices may seem attractive, but that doesn’t necessarily translate to increased purchases. In fact, consumers may postpone buying expensive items in hopes of further price declines.
Delaying consumption will further inhibit economic activity, erode business profits, reduce employment and investment, leading to income declines, causing expenditure to fall again, and further exacerbating price declines, creating a vicious cycle.
Monetary tightening could also increase real interest rates, making it more challenging for businesses to invest and for people to repay loans, further dampening demand and triggering more severe monetary tightening.
Since being re-elected in January 2025, President Trump has imposed two additional 10% tariffs on Chinese goods in February and March due to the inflow of fentanyl drugs into the United States, increasing the tariff rates to 20%. In response, China has retaliated with targeted tariff measures.
According to Bloomberg, other countries may follow the US in imposing similar measures. South Korea and Vietnam stated in February that they would impose tariffs on steel imports from China, while Mexico discussed similar measures with Washington.
These factors have dimmed China’s export growth prospects in 2025. Currently, Chinese commodity exports are under pressure, with the export price index remaining below 100 since May 2023, indicating a year-on-year price decline, the longest continuous decline in history.
With weakened international demand, Chinese manufacturers will have to rely on domestic buyers, making it even more difficult to raise domestic prices; this may also increase pressure on monetary tightening.
Reportedly, Chinese people are now engaging in a trend called “extreme frugal consumption.” Some individuals have stated that it’s not just about downgrading consumption but about extreme frugality, simply living within one’s means. Online users have jokingly said, “Previously it was about who was wealthier, now it’s about who can save more.” Some have shared strategies like reusing instant noodle seasoning packets multiple times to save money.
An insider from Shandong mentioned that saving money has become a consensus among the general public. More people are scavenging for discounted products, even those close to expiry, at supermarkets.
In the food and beverage sector, Starbucks and Pizza Hut, which used to target high-end customers, have engaged in price wars. Nayuki Tea reported net losses ranging from 880 million to 970 million yuan in 2024. Xicha, a bubble tea brand, announced a suspension of franchise applications starting in 2025 due to severe internal competition and store oversaturation.
In the transportation industry, according to the China Automobile Dealers Association, a record high of 2,540 4S stores (car dealerships) closed nationwide in 2023, and nearly 2,000 more closed in the first half of 2024. From 2021 to 2024, over 8,000 4S stores disappeared from the market.
The entertainment industry is also facing a downturn. Reports indicate that the number of KTV establishments across China was less than 50,000 in 2024. From 2015 to 2024, there was a decrease of 70,000 such establishments.
From the actual circumstances, it’s evident that Chinese consumers are tightening their wallets to weather the difficulties. China’s economy faces significant challenges in overcoming the cycle of monetary tightening.