China struggles with persistent disinflationary pressures as tariffs bite
Summary
China’s consumer prices continued to decline in April, suggesting Beijing’s previous efforts to boost domestic consumption have yet to persuade cautious Chinese households to open their wallets.
China’s consumer prices continued to decline in April, suggesting Beijing’s previous efforts to boost domestic consumption haven’t been successful in persuading cautious Chinese households to open their wallets as steep U.S. tariffs cloud growth prospects.
The consumer-price index declined 0.1% from a year earlier in April, matching the fall seen the prior month and marking a third straight month of drops, the National Bureau of Statistics said Saturday. A Wall Street Journal poll of economists had predicted a 0.1% drop.
Meanwhile, China’s producer-price index dropped 2.7% from a year earlier in April, widening from March’s 2.5% fall and keeping the gauge in negative territory for more than two years. Surveyed economists had expected the PPI to decline 2.8% from a year earlier last month.
Economists have expected the steep duties slapped by President Trump on Chinese products to exacerbate China’s already-stubborn disinflationary pressures as they anticipate that exporters will be forced to redirect some of their products to domestic consumers as outbound shipments dwindle.
Potential rising unemployment and lower pay as tariffs hit Chinese manufacturers may also prompt China’s already-budget-conscious consumers to further tighten their purse strings, economists say.
While Chinese exports held up well last month with plunging U.S.-bound shipments offset by a surge in Chinese goods to emerging markets, analysts widely expect Trump’s tariffs to inflict more pain on the world’s second-largest economy in the coming months. An official gauge of new export orders nosedived in April to its lowest reading since 2022.
With China and the U.S. set to start icebreaker trade negotiations in Switzerland on Saturday, attention is on any signs of an agreement for reductions on the prohibitive tariffs the two sides have imposed on each other. Beijing imposed a 125% across-the-board tariff on U.S. goods in retaliation against the 145% U.S. levies on Chinese products.
Ahead of the talks, Trump said Friday in social-media posts that an 80% tariff on China “seems right." While that would represent de-escalation, analysts say such a level would still prohibit normal bilateral trade.
Signaling Beijing’s patience for a trade deal, People’s Daily, the ruling Communist Party’s flagship newspaper, said in an editorial printed Saturday that it is unrealistic to expect one or two rounds of negotiations to resolve the problem and China is clearly aware of the complexity of such talks.
With China’s official annual growth target of around 5% under threat, Beijing sprung into action on Wednesday with earlier-than-expected rate cuts and liquidity boosts. However, the Chinese leadership has refrained from announcing further fiscal expansion that economists say needs to take center stage in any stimulus plan as they face the double challenges of a property slump and pressured exports.
“To cope with these unprecedented challenges, we believe Beijing needs to take bolder moves to clean up the mess in the property sector, support consumption in a more sustainable way by reforming the pension system, fix the fiscal system to better protect business owners and improve its relationships with other economies," said Nomura economists when commenting on Beijing’s monetary easing this week.
For economists at UBS, the government needs to roll out additional broad fiscal stimulus of 1.5-2% of China’s gross domestic product later this year to cushion tariff impact as they expect it would take some time to reach a meaningful deal.
New fiscal stimulus may not come out immediately, but may land as early as the end of the second quarter after China accelerates its planned budget spending and Beijing assesses the actual impact of the tariff shock in the next few months, UBS economists said in a note this week.
Underscoring authorities’ renewed sense of urgency to combat disinflationary pressures, China’s central bank is urging joint efforts with departments across the government to boost consumer prices, adopting unusually strong language in a monetary policy report published Friday.
Weak domestic demand and excessive competition in some industries have contributed to low prices in China and a combination of fiscal, monetary, employment and social security policies is needed to bolster prices and balance supply and demand in the economy, the People’s Bank of China said.
“We must also shift from controlling high prices to controlling low prices, from supporting scale expansion to high-quality development, and from preventing monopoly to preventing disorderly competition," the PBOC said.
