In June, China’s Producer Price Index (PPI) fell by 3.6% year-on-year, marking the largest decline since July 2023 and highlighting intensified domestic deflationary pressures.
The Consumer Price Index (CPI) for the same period only rose by 0.1%, temporarily halting a four-month consecutive decline but still reflecting weak domestic demand and insufficient confidence. Analysts believe that China’s economy is facing the dual challenges of slowing exports and sluggish domestic demand, with short-term subsidies unlikely to reverse the overall downward trend.
China’s PPI in June dropped by 3.6% year-on-year, marking the 33rd consecutive month of negative growth and surpassing market expectations, according to Bloomberg. This result was worse than anticipated by any economist, with the continuous decline in producer prices intensifying pressure on business profits and price competition, creating a vicious cycle. Authorities are facing increasing pressure on how to ramp up stimuli to boost consumption.
Larry Hu, Chief China Economist at Macquarie Group Ltd., warned that without strong policy stimuli, China’s economy may struggle to break free from deflationary pressures.
The CPI in June in China saw a marginal 0.1% year-on-year increase, ending the four-month decline, but the rebound was limited. Excluding volatile food and energy prices, the core CPI rose by 0.7% year-on-year in June, the highest in 14 months.
The National Bureau of Statistics attributed the increase in CPI to a rebound in industrial consumer goods prices. However, monthly data showed that the CPI still decreased by 0.1% compared to May, consistent with economists’ expectations.
Analysts noted that the significant year-on-year rise in consumer prices was largely driven by temporary boosts from “trade-in” subsidies for household appliances, electronics, and electric vehicles, but these effects may fade quickly.
Zichun Huang, an analyst at Capital Economics, predicted further weakening demand later this year as the boost from slowing exports and fiscal support diminishes. She forecasted a potential fall in core inflation rates later this year.
In addition to weak domestic demand, China’s export industry also faces pressure, especially due to the impact of US President Trump’s tariff policies on China’s manufacturing sector reliant on global markets. CNBC highlighted that in June, price declines in export-oriented industries such as electronics and automobiles accelerated.
Although China’s overall exports grew by 4.8% and 8.1% in May and April, thanks to surges in exports to Southeast Asian countries which partly offset the decline in US exports, analysts believe this growth is unlikely sustainable.
With continuous weak consumer demand, various industries in China are engaging in increasingly fierce price wars, with companies resorting to price reductions to stimulate sales. Bloomberg warned that this price war is exacerbating the decline in corporate profits, forming a vicious cycle that is intensifying, prompting authorities to intervene.
CNBC noted that the phenomenon of companies consuming themselves in cutthroat competition has spread to consumer goods, automotive, and electronics industries in China.
The term “internal consumption” is often used in China to describe the relentless self-consumption and price-cutting competitions that companies face in rigorous competition. Several media reports have highlighted that last week, senior Chinese officials criticized the “internal consumption” behavior, stating that while these actions aim to attract consumers and clear inventory, they have not effectively stimulated consumption, but rather eroded business profits.
Amidst the dual pressures of slowing exports and weak domestic demand, many companies are still dragged into price wars to maintain market share, with official appeals yet to efficiently reverse this trend.
Zhiwei Zhang, President and Chief Economist at Pinpoint Asset Management, stated that it is still too early to determine whether deflation has ended, as the real estate industry remains sluggish and the anti-internal friction actions have just begun.
Bloomberg pointed out that the further exacerbation of deflation is also due to excess production capacity in various industries. Although high-ranking authorities have pledged to reduce some industry capacities, local governments tend to retain unprofitable factories to maintain employment, prolonging the period of price competition.
Bloomberg cautioned that low bond yields, deflationary pressures, and a struggling real estate market may lead China into a situation reminiscent of Japan’s “Asset-Liability Deflation” and the “Lost Decade” of the 1990s.