China's consumer price index (CPI) has recorded a decline for two consecutive months, raising concerns about deflation (a drop in prices amid economic recession). China is engaged in a tariff war with the United States, which can only act to further decrease its prices. As China needs to stabilize prices to gain time in this trade war, attention is drawn to whether it will introduce large-scale economic stimulus measures.
China's National Bureau of Statistics announced on the 10th that the CPI in March dropped by 0.1% compared to the same period last year. Although it was an improvement from the previous month's decline (-0.7%), it fell short of the market forecast (0.0%) compiled by Reuters. The monthly CPI increase rate (compared to the same month last year) has shown a continuous decline from August (0.6%) to December (0.1%) last year, but it rapidly rebounded to 0.5% in January this year, buoyed by the effects of the Lunar New Year holiday and the government's domestic stimulus policies. However, just a month later in February, it recorded a decline for the first time in 13 months and has struggled to bounce back through March.
The producer price index (PPI) is also struggling. The March PPI fell by 2.5% compared to the same period last year. The decline expanded compared to the previous month (-2.2%) and fell short of the market forecast (-2.3%). PPI indicates the wholesale prices at which producers sell their goods, and since consumer prices are determined based on this, it is also considered a leading indicator for the CPI. The March PPI has failed to exit the negative territory, marking a continuous decline for 30 months.
China asserts that this price indicator is significantly influenced by seasonal factors and is not indicative of structural deflation. Dong Lijun, chief statistician at China's National Bureau of Statistics, noted, "As the weather warms, fresh produce has been supplied in large quantities, and the number of travelers has decreased due to the off-season, causing travel prices to fall." He added, "The decline in international oil prices has also had an impact." He then mentioned, "The effects of policies aimed at stimulating consumer demand are gradually becoming apparent," stating that the decline in the CPI compared to the previous year has decreased by 0.6 percentage points from the previous month and that the PPI is positively changing due to the effects of policies promoting the development of advanced industries, stimulating consumption, and upgrading facilities.
However, externally, the sluggish Chinese prices are being linked to the trade war with the United States. China's industrial sector significantly increased production capacity during the economic boom, but now cannot absorb its own output due to economic sluggishness. It has traditionally resolved this through overseas exports, but this method does not work in the context of the trade war. Ultimately, to resolve inventory issues, corporations are left with no choice but to engage in price competition within the domestic market, which deepens deflation. Gary Ng, chief economist at French investment bank Natixis, told the Hong Kong South China Morning Post (SCMP), "Losing overseas markets puts pressure on Chinese corporations' profit margins and may stimulate domestic competition."
Concerns about China's deflation are likely to worsen for the time being. Since February, the United States has imposed a total of 125% additional tariffs on imports from China. This effectively means a refusal to use Chinese products. Additionally, the U.S. will abolish the "de minimis exemption system," which exempted small-value goods from tariffs, starting on the 2nd of next month. As a result, all goods valued at $800 or less will be subject to a tariff of 90% of the product price or $75 each (or $150 starting June 1). Chinese e-commerce corporations, severely impacted by these measures, are striving for overseas market diversification but must also engage in aggressive discounts domestically. Bloomberg reported that "government officials from both countries informally state that there is little expectation of easing tensions in the short term."
However, given that China is prepared for a prolonged trade war, it may also take large-scale economic stimulus measures. Stabilizing prices is crucial for gaining time. Li Qiang, Premier of China State Council, held a panel discussion with economic experts and entrepreneurs the previous day and stated, "We must clearly recognize that external shocks are exerting a certain pressure on the stable operation of our economy," adding that "it is necessary to implement more proactive macroeconomic policies effectively, ensure that existing policies are implemented promptly and yield effects, and, depending on the situation, timely introduce new additional policies to respond robustly and effectively to the uncertainties of the external environment." U.S. CNBC reported that "Chinese policymakers are gradually recognizing the need to respond to deflationary pressures."