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China Experiences Continued Deflation as Economic Conditions Shift
A shopper browses through vegetables at a supermarket in Mengzi City, located in the Yunnan Province of southwest China, on February 9, 2025.
Recent data indicates that consumer prices in China declined by 0.1% year-on-year in March, marking a continuation of the deflationary trend after a more significant drop of 0.7% in February. This shift comes as economists from Reuters had anticipated no change in year-over-year consumer prices during this period.
In addition to consumer prices, producer prices also experienced a notable decline, falling by 2.5% year-on-year in March. This reduction represents the steepest contraction since November 2024 and signifies the 29th consecutive month that producer prices have remained in the red. Prior expectations among analysts had forecasted a slightly less severe dip of 2.3%.
This economic data arrives amidst escalating trade tensions, particularly as U.S. President Donald Trump announced an increase in tariffs on imports from China to 125%, up from 104%. In response, China retaliated with an 84% tariff on U.S. goods.
The release of these economic figures prompted the onshore yuan to depreciate, trading at 7.35 against the U.S. dollar, while the CSI 300 index increased by 0.82%.
Earlier in March, Premier Li Qiang presented a government work report emphasizing the necessity of boosting domestic consumption, aiming for an ambitious growth target of “around 5%” for the current year. This is significant as it marks the first time in ten years that consumption has been prioritized in such a manner. Laura Wang, chief China equity strategist at Morgan Stanley, noted that the term “consumption” was cited 27 times in the report, the highest frequency in a decade.
Despite not following in the footsteps of the U.S. or other nations in providing direct financial support to consumers, Chinese policymakers are increasingly recognizing the urgent need to address domestic deflationary pressures. In an effort to stimulate this crucial component of the economy, the government announced a doubling of subsidies for a consumer trade-in program to 300 billion yuan (approximately $41.47 billion) for the upcoming year. This initiative aims to cover 15% to 20% of the purchase price for selected products, including mid-range smartphones and household appliances, expanding from last year’s 150 billion yuan program that focused on a narrower selection of items.
Shen Danyang, the head of the drafting group of the Government Work Report and director of the State Council Research Office, underscored the importance of prioritizing domestic demand in light of potential “new shocks” to external markets. Furthermore, Chinese officials have conveyed that meeting the established growth target will demand “very arduous work,” particularly given the increased trade tensions between Beijing and Washington.
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