HONG KONG – China’s economy is facing an intensifying battle against deflation, as consumer prices fell to their lowest level in more than a year, signaling deep-rooted challenges in demand and consumption within the world’s second-largest economy.
According to data released by the National Bureau of Statistics (NBS) on Sunday, the Consumer Price Index (CPI), a key indicator of inflation, declined by 0.7% in February compared to the same period last year. This sharper-than-expected drop reversed the modest 0.5% increase recorded in January and marked the first contraction since early 2024, raising concerns about China’s economic trajectory. A Reuters poll of analysts had anticipated a milder decline, but the actual figures underscored persistent deflationary pressure.
Deflation, often seen as a troubling economic phenomenon, discourages immediate consumer spending, as people anticipate further price drops in the future. This reluctance to spend weakens overall demand, dampening business revenues and, in turn, slowing economic growth. Given that consumption plays a crucial role in China’s economic expansion, the latest figures indicate an alarming slowdown in domestic activity.
One of the primary factors influencing February’s price decline was the timing of the Lunar New Year holiday. This year, the celebration, which traditionally sees a surge in tourism, travel, and spending, fell entirely in January, contrasting with 2023, when the holiday extended into February. As a result, the year-on-year comparison was skewed by a higher base effect from the previous year’s spending surge. The NBS noted that without the impact of this seasonal variation, consumer prices would have actually recorded a slight increase of 0.1%.
Additionally, China’s core CPI, which strips out volatile components such as food and fuel, posted a 0.1% decline, the first contraction in more than three years since January 2021. This dip in core prices suggests that weak demand is extending beyond just seasonal distortions, reflecting deeper structural challenges within the economy.
The deflationary trend was also evident in the industrial sector. The Producer Price Index (PPI), which measures wholesale prices, recorded a 2.2% decline in February from the previous year. This marks the 29th consecutive month of falling factory-gate prices since October 2022, pointing to prolonged difficulties for manufacturers. Weak global demand and subdued domestic consumption have compounded these struggles, leaving Chinese producers with diminishing pricing power.
Economists at Goldman Sachs highlighted the worrying trend in a research note on Sunday, stating, “Temporary seasonal distortions aside, both CPI and PPI inflation have been too low over the past two years, underscoring the persistent imbalance between supply and demand in China’s economy.”
Beyond the statistical indicators, China continues to grapple with broader economic headwinds, including sluggish consumer spending, an uncertain job market, and an ongoing real estate crisis. The property sector, long a pillar of China’s economic growth, remains mired in difficulties, with major developers facing liquidity challenges and weak buyer confidence.
Externally, geopolitical tensions and trade disputes are adding further pressure. As the United States ramps up economic measures against China, including increased tariffs and restrictions on technology exports, Beijing finds itself in a delicate position. Trade, historically a key driver of China’s rapid growth, is now being squeezed, exacerbating domestic economic challenges.
Acknowledging these difficulties, Zheng Shanjie, head of the National Development and Reform Commission, China’s top economic planning agency, addressed the nation’s growing economic uncertainty during a press conference last week. “The uncertainty of the external environment is increasing, while we also face issues such as insufficient domestic demand and operational difficulties for some industries,” he stated, reinforcing concerns about the overall economic outlook.
In response to these mounting challenges, Beijing has set an ambitious economic growth target of 5% for 2025, mirroring last year’s goal. However, in a clear recognition of ongoing deflationary risks, the government has revised its inflation target downward from 3% to 2% for the year, signaling a cautious approach toward price stability.
Despite these concerns, China’s leadership has so far refrained from announcing large-scale stimulus measures. During the highly anticipated opening of the National People’s Congress last week, policymakers reiterated their commitment to boosting consumption but fell short of unveiling aggressive intervention strategies to counteract the economic slowdown.
At a press conference on Sunday, Wang Xiaoping, China’s minister of human resources and social security, acknowledged the daunting task ahead. “The challenge of stabilizing and expanding employment this year remains arduous and under pressure,” he noted, indicating that labor market struggles could further dampen economic recovery.
Meanwhile, the government is taking targeted steps to address one of its most pressing concerns: the real estate sector. Ni Hong, China’s minister of housing and urban-rural development, emphasized efforts to restore confidence in the struggling housing market. He pointed to the 4.4 trillion yuan ($608 billion) special bond quota allocated to local governments this year, a portion of which will be directed toward acquiring completed but unsold commercial housing. These housing units will then be repurposed into affordable housing and worker dormitories, a move aimed at reducing property market oversupply while addressing housing affordability concerns.
As China navigates these complex economic challenges, the road ahead remains uncertain. With deflationary pressures persisting, demand struggling to recover, and external risks mounting, the government faces increasing pressure to implement decisive policy measures. Whether Beijing opts for more aggressive fiscal stimulus or remains committed to its measured approach will be closely watched by global investors and economists alike.
