Deflationary forces have tightened their hold on China’s economy, as factory‑gate prices continue to slide and corporate earnings shrink. In the first half of 2025, producer prices fell by nearly 3 percent year‑on‑year, extending a record streak of factory‑price declines that now spans more than a year. Industrial profits plunged by double digits in May, while stubbornly weak consumer demand drags on household spending. At a late‑June State Council meeting, Premier Li Qiang unveiled a two‑pronged strategy—tighter price regulation in overheated sectors and a broad consumption stimulus package—to loosen deflation’s chokehold and reinvigorate growth.
Deflation’s Deepening Squeeze
China’s prolonged slide in producer‐price inflation has morphed into a squeeze on factory margins and a drag on corporate investment. Overcapacity in key industries—ranging from steel and solar panels to electric vehicles—has sparked vicious price wars, driving selling prices below production costs in some cases. In May, official data showed industrial profits down 9.1 percent year‑on‑year, while the producer price index (PPI) dropped 2.8 percent in the first half of the year, marking one of the longest continuous runs of deflation in decades.
Such pressure has rippled through the broader economy. Manufacturers, squeezed by low selling prices, have cut back on capital spending and wage increases. Job openings in export‑oriented provinces have stagnated, curbing household incomes and further suppressing consumption. Consumer prices have barely budged: the inflation rate lingered near zero in the first half of 2025, reflecting weak demand for everything from autos to home appliances. Even as headline GDP growth hit 5.2 percent in the second quarter—thanks to robust public investment—the risk of a growth slowdown intensified as private‑sector activity faltered.
“The real problem isn’t simply low prices, it’s the expectation of further declines,” said an economist at a leading Chinese bank. “When businesses and consumers believe prices will keep falling, they postpone purchases and investments, creating a self‑reinforcing deflationary spiral.”
Premier’s Prescription: Price Oversight in Key Sectors
In response to these deflationary dynamics, Premier Li Qiang singled out sectors plagued by ruinous price competition—most notably electric vehicles—as test cases for a new regulatory playbook. At the June 26 State Council meeting, Li urged industry ministries and local governments to step up “cost oversight” and “price monitoring,” warning that unchecked undercutting threatens both business viability and supply‑chain security.
Li instructed the Ministry of Industry and Information Technology (MIIT) to work with sector regulators on a two‑tiered approach:
Enhanced Price Surveillance: Regulators will publish market‑rate guidelines for critical inputs—such as battery cells, photovoltaic materials, and specialty chemicals—and require firms to report planned price cuts in advance. Any reductions that deviate sharply from cost trends will trigger formal reviews and, if necessary, administrative measures to halt predatory pricing. Industry‑Led Codes of Conduct: Major trade associations have been tasked with drafting voluntary pricing codes, committing members to share cost data transparently and refrain from below‑cost offers. Firms that breach these voluntary pledges could face reputational sanctions, de‑listing from government procurement programs, or restrictions on preferential financing.
“The aim is not to legislate every price point,” Li clarified. “Rather, we want enterprises to exercise self‑discipline, align pricing with genuine cost reductions, and compete on quality and innovation instead of destabilizing the market through cut‑throat tactics.”
Officials point to early signs of progress. In the solar‑panel industry, concerted industry‑government dialogues have led a handful of large manufacturers to stabilize module prices after months of steep declines. In the cement sector, provincial regulators recently brokered a voluntary output‑cut agreement among leading producers, helping to lift local PPI readings for the first time since late 2022.
However, experts caution that such measures must be carefully calibrated. Large‑scale production cuts could undermine growth and threaten employment if implemented too abruptly. “We need to temper deflationary pressures without strangling the supply base,” said Neo Wang, a senior economist at Evercore ISI. “The challenge for Beijing is to manage capacity in a way that preserves jobs and avoids a hard landing.”
Revving the Engines of Consumption
Complementing price regulation, Premier Li announced an ambitious consumption stimulus package to boost household spending and counteract deflationary expectations. Key elements of the plan include:
Expanded Trade‑In Subsidies: The central government will increase subsidies for consumers trading in older vehicles, electronics, and home appliances, accelerating the replacement cycle and driving retail sales. Local governments have been urged to simplify approval procedures and raise subsidy caps, particularly in smaller cities where replacement rates lag.
Removal of Non‑Tariff Barriers: Li directed ministries to identify “unreasonable restrictions” hampering household purchases—such as opaque safety standards or complex registration protocols—and streamline regulations for sectors like used cars, cross‑provincial e‑commerce, and home renovations. Targeted Vouchers for Services: In pilot regions, local authorities will issue digital vouchers redeemable at restaurants, cinemas, gyms, and tourism operators, incentivizing out‑of‑home spending. The ministry of culture and tourism will partner with online platforms to ensure broad acceptance and monitor redemption rates in real time. Urban Infrastructure Drives: With financing from a ¥1.5 trillion municipal bond program, cities will fast‑track community‑level infrastructure—public transit upgrades, smart‑grid installations, and green‑space enhancements—aimed at improving living conditions and spurring consumption in local economies.
Analysts view these measures as a necessary counterweight to deflationary drags on demand. “By lowering transaction costs and injecting direct spending power, the government seeks to reshape consumer expectations,” said a retail strategist in Shanghai. “If people believe purchases today won’t be cheaper tomorrow, they’re more likely to buy now.”
Beyond Monetary Policy and Fiscal Stimulus
While China’s central bank has cut benchmark lending rates three times since late 2024 and whittled down reserve‑requirement ratios for banks, standard monetary tools have struggled to lift prices amid structural imbalances. On the fiscal front, a landmark debt‑swap plan for local governments—worth over \$1 trillion in bond exchanges—has eased funding pressures for infrastructure projects but has yet to translate into a durable rebound in consumer confidence.
Against this backdrop, Premier Li’s emphasis on targeted sector interventions and consumption reforms signals a shift toward “precision stimulus.” Rather than broad‑brush stimulus that risks fueling debt and overcapacity, Beijing is pivoting to measures designed to stabilize vulnerable markets and directly empower households. Officials have also highlighted the need for supply‑side reform—phasing out obsolete factories, consolidating fragmented industries, and advancing high‑value manufacturing.
Still, observers warn that entrenched deflationary mindsets are hard to dispel. “Even with robust policy support, it will take time for businesses and consumers to feel secure about prices,” noted Alicia Garcia‑Herrero, chief Asia economist at Natixis. “The key test will be whether Premier Li’s mixed arsenal can break the cycle of expectation and behavior.”
A Critical Juncture for China’s Growth Model
China’s struggle with deflation comes at a sensitive moment: the global economy is buffeted by rising interest rates, trade frictions, and uneven post‑pandemic recoveries. For Beijing, maintaining growth near its 5 percent target while transitioning to a consumer‑led model is a delicate balancing act.
Premier Li Qiang’s dual approach—rein in destructive price wars and turbocharge domestic spending—reflects an acknowledgment that neither side of the economy can be neglected. Policymakers recognize that unchecked deflation could sap investment, depress wages, and provoke social strains, just as overzealous stimulus could revive the specter of wasted capacity and local‑government debt.
As deflationary pressures persist, China’s experience may hold lessons for other economies facing similar challenges. If Premier Li’s targeted interventions succeed in stabilizing prices and reigniting consumption, they could chart a pragmatic path between austerity and expansive stimulus. But the road ahead remains fraught: turning policy pledges into tangible market confidence will require rigorous enforcement, nimble course corrections, and close coordination across central and local authorities.
For now, businesses and consumers alike are watching closely. In city streets from Guangzhou to Harbin, retail foot traffic, car showrooms, and factory gates have become real‑time barometers of policy efficacy. Should prices stabilize and spending pick up in the coming months, the signal will be clear: China has found a viable way to tame deflation without sacrificing growth. If not, the economy may face a prolonged period of constrained demand and intensifying downward pressure—an outcome Beijing is determined to avoid.
(Source:www.cnbc.com)
Deflation’s Deepening Squeeze
China’s prolonged slide in producer‐price inflation has morphed into a squeeze on factory margins and a drag on corporate investment. Overcapacity in key industries—ranging from steel and solar panels to electric vehicles—has sparked vicious price wars, driving selling prices below production costs in some cases. In May, official data showed industrial profits down 9.1 percent year‑on‑year, while the producer price index (PPI) dropped 2.8 percent in the first half of the year, marking one of the longest continuous runs of deflation in decades.
Such pressure has rippled through the broader economy. Manufacturers, squeezed by low selling prices, have cut back on capital spending and wage increases. Job openings in export‑oriented provinces have stagnated, curbing household incomes and further suppressing consumption. Consumer prices have barely budged: the inflation rate lingered near zero in the first half of 2025, reflecting weak demand for everything from autos to home appliances. Even as headline GDP growth hit 5.2 percent in the second quarter—thanks to robust public investment—the risk of a growth slowdown intensified as private‑sector activity faltered.
“The real problem isn’t simply low prices, it’s the expectation of further declines,” said an economist at a leading Chinese bank. “When businesses and consumers believe prices will keep falling, they postpone purchases and investments, creating a self‑reinforcing deflationary spiral.”
Premier’s Prescription: Price Oversight in Key Sectors
In response to these deflationary dynamics, Premier Li Qiang singled out sectors plagued by ruinous price competition—most notably electric vehicles—as test cases for a new regulatory playbook. At the June 26 State Council meeting, Li urged industry ministries and local governments to step up “cost oversight” and “price monitoring,” warning that unchecked undercutting threatens both business viability and supply‑chain security.
Li instructed the Ministry of Industry and Information Technology (MIIT) to work with sector regulators on a two‑tiered approach:
Enhanced Price Surveillance: Regulators will publish market‑rate guidelines for critical inputs—such as battery cells, photovoltaic materials, and specialty chemicals—and require firms to report planned price cuts in advance. Any reductions that deviate sharply from cost trends will trigger formal reviews and, if necessary, administrative measures to halt predatory pricing. Industry‑Led Codes of Conduct: Major trade associations have been tasked with drafting voluntary pricing codes, committing members to share cost data transparently and refrain from below‑cost offers. Firms that breach these voluntary pledges could face reputational sanctions, de‑listing from government procurement programs, or restrictions on preferential financing.
“The aim is not to legislate every price point,” Li clarified. “Rather, we want enterprises to exercise self‑discipline, align pricing with genuine cost reductions, and compete on quality and innovation instead of destabilizing the market through cut‑throat tactics.”
Officials point to early signs of progress. In the solar‑panel industry, concerted industry‑government dialogues have led a handful of large manufacturers to stabilize module prices after months of steep declines. In the cement sector, provincial regulators recently brokered a voluntary output‑cut agreement among leading producers, helping to lift local PPI readings for the first time since late 2022.
However, experts caution that such measures must be carefully calibrated. Large‑scale production cuts could undermine growth and threaten employment if implemented too abruptly. “We need to temper deflationary pressures without strangling the supply base,” said Neo Wang, a senior economist at Evercore ISI. “The challenge for Beijing is to manage capacity in a way that preserves jobs and avoids a hard landing.”
Revving the Engines of Consumption
Complementing price regulation, Premier Li announced an ambitious consumption stimulus package to boost household spending and counteract deflationary expectations. Key elements of the plan include:
Expanded Trade‑In Subsidies: The central government will increase subsidies for consumers trading in older vehicles, electronics, and home appliances, accelerating the replacement cycle and driving retail sales. Local governments have been urged to simplify approval procedures and raise subsidy caps, particularly in smaller cities where replacement rates lag.
Removal of Non‑Tariff Barriers: Li directed ministries to identify “unreasonable restrictions” hampering household purchases—such as opaque safety standards or complex registration protocols—and streamline regulations for sectors like used cars, cross‑provincial e‑commerce, and home renovations. Targeted Vouchers for Services: In pilot regions, local authorities will issue digital vouchers redeemable at restaurants, cinemas, gyms, and tourism operators, incentivizing out‑of‑home spending. The ministry of culture and tourism will partner with online platforms to ensure broad acceptance and monitor redemption rates in real time. Urban Infrastructure Drives: With financing from a ¥1.5 trillion municipal bond program, cities will fast‑track community‑level infrastructure—public transit upgrades, smart‑grid installations, and green‑space enhancements—aimed at improving living conditions and spurring consumption in local economies.
Analysts view these measures as a necessary counterweight to deflationary drags on demand. “By lowering transaction costs and injecting direct spending power, the government seeks to reshape consumer expectations,” said a retail strategist in Shanghai. “If people believe purchases today won’t be cheaper tomorrow, they’re more likely to buy now.”
Beyond Monetary Policy and Fiscal Stimulus
While China’s central bank has cut benchmark lending rates three times since late 2024 and whittled down reserve‑requirement ratios for banks, standard monetary tools have struggled to lift prices amid structural imbalances. On the fiscal front, a landmark debt‑swap plan for local governments—worth over \$1 trillion in bond exchanges—has eased funding pressures for infrastructure projects but has yet to translate into a durable rebound in consumer confidence.
Against this backdrop, Premier Li’s emphasis on targeted sector interventions and consumption reforms signals a shift toward “precision stimulus.” Rather than broad‑brush stimulus that risks fueling debt and overcapacity, Beijing is pivoting to measures designed to stabilize vulnerable markets and directly empower households. Officials have also highlighted the need for supply‑side reform—phasing out obsolete factories, consolidating fragmented industries, and advancing high‑value manufacturing.
Still, observers warn that entrenched deflationary mindsets are hard to dispel. “Even with robust policy support, it will take time for businesses and consumers to feel secure about prices,” noted Alicia Garcia‑Herrero, chief Asia economist at Natixis. “The key test will be whether Premier Li’s mixed arsenal can break the cycle of expectation and behavior.”
A Critical Juncture for China’s Growth Model
China’s struggle with deflation comes at a sensitive moment: the global economy is buffeted by rising interest rates, trade frictions, and uneven post‑pandemic recoveries. For Beijing, maintaining growth near its 5 percent target while transitioning to a consumer‑led model is a delicate balancing act.
Premier Li Qiang’s dual approach—rein in destructive price wars and turbocharge domestic spending—reflects an acknowledgment that neither side of the economy can be neglected. Policymakers recognize that unchecked deflation could sap investment, depress wages, and provoke social strains, just as overzealous stimulus could revive the specter of wasted capacity and local‑government debt.
As deflationary pressures persist, China’s experience may hold lessons for other economies facing similar challenges. If Premier Li’s targeted interventions succeed in stabilizing prices and reigniting consumption, they could chart a pragmatic path between austerity and expansive stimulus. But the road ahead remains fraught: turning policy pledges into tangible market confidence will require rigorous enforcement, nimble course corrections, and close coordination across central and local authorities.
For now, businesses and consumers alike are watching closely. In city streets from Guangzhou to Harbin, retail foot traffic, car showrooms, and factory gates have become real‑time barometers of policy efficacy. Should prices stabilize and spending pick up in the coming months, the signal will be clear: China has found a viable way to tame deflation without sacrificing growth. If not, the economy may face a prolonged period of constrained demand and intensifying downward pressure—an outcome Beijing is determined to avoid.
(Source:www.cnbc.com)