Prices for consumers remain steady according to China's recent report for July.
China's economy is currently experiencing a significant slowdown across production, consumption, and investment sectors, pointing to emerging deflationary pressures. The ongoing trade tensions, particularly the trade war with the United States, are eroding China's previous immunity, causing factory activity to decline sharply along with retail sales [1][3].
The Consumer Price Index (CPI), a key measure of inflation in China, is under pressure. The slowdown and subdued consumer demand are likely contributing to subdued or falling consumer prices, indicating deflationary risks. This is consistent with the general cooling of inflation in the global economy partly due to U.S. tariffs [2].
The disappointing retail sales and broader economic deceleration suggest weakening consumer confidence. As consumers become more cautious amid uncertainties created by the trade war and slowing factory output, they are less likely to make purchases [1][3].
Factory activity has declined sharply, which often correlates with reduced factory gate prices (prices received by manufacturers). This reflects weaker demand for goods domestically and internationally, further contributing to deflationary trends [1][3].
However, there have been some positive signs. The CPI remained unchanged year-on-year in July, marking a rebound after four consecutive months of decline. Prices rebounded in June as well [4]. Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, stated that it is unclear if this is the end of deflation in China [5].
China recorded a rebound in its foreign trade in July compared to the previous year [6]. The property sector in China has not stabilized yet [7]. Authorities in China are trying to curb the price war to mitigate the deflationary pressures [8].
The economy is currently more supported by external demand than domestic consumption [9]. The downward trend of car and phone prices improved, contributing to the rise of core CPI [10]. The survey of economists by Bloomberg forecasted a 0.1% fall in the CPI, but the actual reading was better than expected [11].
Despite these positive signs, the tariff truce between Beijing and Washington is due to end on Tuesday, potentially causing U.S. tariffs to return to higher levels. This could further exacerbate the deflationary pressures [12].
In summary, China's economy in mid-2025 shows signs of deflation exacerbated by trade tensions, with key indicators such as CPI, consumer sentiment, and factory gate prices all under downward pressure as the trade war undermines economic momentum [1][2][3]. Deflation in China, while beneficial for consumers, poses a threat to the broader economy as households may postpone purchases.
Sources: [1] Reuters [2] The Wall Street Journal [3] CNBC [4] South China Morning Post [5] Bloomberg [6] China Daily [7] Nikkei Asian Review [8] Xinhua Net [9] Bloomberg [10] Caixin Global [11] Bloomberg [12] Financial Times
Finance ministers need to consider the impact of US tariffs on China's business sector, as the ongoing trade tensions are fueling deflationary pressures in the Chinese economy. With weaker consumer demand and reduced factory gate prices, it is crucial for authorities to take measures to mitigate the deflationary trends to avoid further economic contraction.
