China’s consumer price index (CPI) continued to decrease for the second consecutive month in March, while factory gate prices saw a sharper decline. This trend is attributed to the intensified trade war between the Chinese Communist Party and the United States, which has heightened concerns about the large backlog of unsold Chinese export goods potentially leading to further domestic price drops.
On Thursday (April 10), China’s National Bureau of Statistics released data showing that the country’s consumer price index (CPI) fell by 0.1% compared to the previous month. Although the rate of decline was lower than the 0.7% reported in February, a Reuters poll had predicted prices would remain stable.
According to a report by Reuters, Julian Evans-Pritchard, China economist at Capital Economics, stated that deflationary pressures persisted last month and are likely to intensify in the coming quarters due to the increased difficulty for Chinese companies to export excess production capacity.
In March, China’s consumer price index fell by 0.4% month-on-month, slightly higher than the expected 0.3%. The producer price index (PPI) declined by 2.5% year-on-year, marking the lowest level in four months, with a faster rate of decline compared to February’s 2.2% and the anticipated 2.3%.
Evans-Pritchard from Capital Economics mentioned that with recent commodity price declines and the impending impact of US tariffs on exports, the PPI is expected to further decrease, prompting some manufacturers to lower prices.
March saw a slight 0.5% year-on-year increase in the core inflation rate, which excludes volatile food and fuel prices, reversing the 0.1% decline reported in June of the previous year.
The escalating monetary tightening is exacerbating Beijing’s long-standing economic challenges, as subdued domestic demand and industrial overcapacity have led to fierce price wars among businesses competing for orders.
China’s release of weak data comes amidst global economic turbulence. President Trump suspended the implementation of equivalent tariffs by other countries on Wednesday, but raised tariffs on Chinese goods to 125%, further impacting China’s exports. Additionally, the Trump administration doubled the previously announced tariffs on small Chinese packages below $800, raising it to 90%.
Xu Tianchen, senior Chinese economist at The Economist Intelligence Unit, told the South China Morning Post that the high US tariffs on China essentially equate to a trade embargo, forcing Chinese exporters to compete in a smaller market.
He believes that the industrial sector in China will feel the most significant downward price pressure, especially if global demand remains weak, leading to substantial declines in commodity prices and exacerbating the downward pressure on Chinese goods.
With decreasing demand in the US market, Chinese producers will face a surplus of unsold inventory. They will try to redirect their export products to other countries, which do not have the same vast purchasing power as the US, likely imposing heavier taxes and anti-dumping measures on China to protect their own industries, leading to further intensified competition and price reductions within China.
Gary Ng, senior economist at French foreign trade bank, highlighted that losing overseas markets will squeeze profit margins for Chinese enterprises and intensify domestic competition.
As Beijing retaliates against US tariffs, it is expected that net exports will shift from contributing to economic growth to becoming a negative factor, impacting China’s GDP growth.
Citigroup has lowered its 2025 GDP growth forecast for China from 4.7% to 4.2% due to increased external risks. Following the recent escalation of trade tensions, Citigroup believes the likelihood of a US-China agreement is slim.
Goldman Sachs released a report on Tuesday, stating that due to the ongoing escalation of the US-China trade war, there is a downward risk to their forecast of 4.5% GDP growth for China this year.
Evans-Pritchard from Capital Economics remarked that although policymakers have expressed willingness to take more measures to support domestic demand, a significant portion of fiscal spending is still focused on expanding the supply-side of the economy, suggesting that consumer support may not be sufficient to fully offset the impact of weak exports.
Gary Ng told the South China Morning Post that the risk of monetary tightening may persist for another one to two years.