HONG KONG – China’s economy is facing a deepening deflationary crisis, with consumer prices hitting their lowest point in over a year, further highlighting the ongoing difficulties in stimulating growth. The latest figures released by the National Bureau of Statistics (NBS) reveal a concerning picture of economic stagnation as the country continues to battle weak domestic demand, a downturn in the property sector, and external challenges from a volatile global trade environment.
On Sunday, the NBS reported that China’s Consumer Price Index (CPI), which measures the rate of change in prices of goods and services purchased by households, fell by 0.7% in February compared to the same period in 2024. This marked the first contraction since January of the previous year and came as a significant reversal after January’s modest 0.5% increase. The unexpected drop in February’s CPI has raised alarms among economists, as it underscores the persistent weakness in the domestic economy. Analysts had predicted a more modest decline, but the actual results show that deflationary pressures are stronger and more widespread than previously anticipated.
The impact of deflation is far-reaching, affecting consumer behavior and overall economic activity. As prices fall, consumers often postpone spending in the hope that prices will decrease further. This reluctance to spend diminishes demand, leading to slower economic growth and potentially creating a cycle of declining prices and weak demand. In China, where consumer spending has been a key driver of economic expansion in recent years, the combination of low inflation and weak demand raises serious concerns about the country’s ability to maintain its growth trajectory.
One of the primary reasons for the February decline was the timing of the Lunar New Year, which fell entirely in January this year, compared to 2023, when the holiday extended into February. The shift in timing meant that the usual boost in tourism, retail, and travel spending during the holiday was concentrated in January, leaving February with a weaker comparison base. The NBS noted that excluding the effects of this timing shift, consumer prices would have increased slightly by 0.1%. Nonetheless, the underlying weakness in the economy remains evident, suggesting that the impact of seasonal factors cannot fully explain the decline in prices.
Core inflation, which excludes volatile items such as food and energy, also posted a decline in February, falling by 0.1%. This marks the first time in over three years that core inflation has shown a negative reading. The drop in core prices suggests that the effects of deflation are spreading beyond just the most volatile components of the economy, affecting broader sectors such as housing and services.
Wholesale prices, as measured by the Producer Price Index (PPI), also showed weakness, with a 2.2% year-on-year decline in February. This marks the 29th consecutive month of falling factory-gate prices, indicating that the industrial sector continues to face significant challenges. Chinese manufacturers are struggling to pass on higher costs to consumers, and with global demand remaining weak, factory prices continue to slide. This persistent decline in the PPI suggests that the deflationary pressures affecting the consumer sector are also deeply rooted in the industrial supply chain.
Goldman Sachs economists pointed to the persistent nature of these deflationary forces, noting that the ongoing low levels of both CPI and PPI highlight an imbalance between supply and demand in China’s economy. With businesses facing weak pricing power and consumer demand failing to recover, the outlook for the country’s economic recovery remains uncertain.
Beyond these price indicators, China’s economy continues to be weighed down by broader structural issues. The property sector remains in crisis, with large developers facing mounting debt and declining property prices. Despite efforts by the government to stabilize the sector, confidence remains low, and the downturn in housing is contributing to lower consumer confidence and reduced wealth for many households.
On the external front, China is grappling with trade tensions that threaten to further disrupt its already struggling economy. The United States, in particular, has ramped up its economic measures against China, including tariffs and export restrictions. As China’s export sector continues to face growing obstacles, its reliance on trade as a key growth engine is becoming increasingly difficult to sustain.
Despite these challenges, Beijing has set an ambitious economic growth target of 5% for 2025. However, the government’s decision to lower its inflation target from 3% to 2% this year indicates an acknowledgment of the ongoing deflationary risks that persist within the economy. The lack of large-scale fiscal stimulus measures at the National People’s Congress suggests that Beijing is opting for a more cautious approach to managing the crisis, with targeted interventions aimed at specific sectors, such as employment and real estate.
As China continues to navigate these turbulent economic waters, it remains to be seen whether the government’s efforts will be enough to lift the economy out of its deflationary slump or if deeper challenges will force Beijing to take more drastic measures in the months ahead.
