Recent economic data released in China reveals a complex picture of the country’s economic situation, with significant deflation in the producer market continuing to overshadow limited positive trends in the consumer price index. In June 2025, China’s producer prices plummeted by 3.6% compared to the previous year, marking the largest decline in nearly two years, since July 2023. This figure, indicating deepening deflation, reflects an escalating price war within the Chinese economy, which is simultaneously grappling with sluggish consumer demand.

Data published by the National Bureau of Statistics (NBS) on Wednesday showed that the Consumer Price Index (CPI) rose by 0.1% in June year-on-year. This increase, though marginal, signaled a return to growth after four consecutive months of declines, surpassing economists’ forecasts for a flat reading. The core CPI, which excludes volatile food and energy prices, increased by 0.7% year-on-year, marking the largest rise in the past 14 months. Despite these upticks in consumer price indices, the producer price data casts a heavy shadow over forecasts for a stable economic recovery.

The Price War and Its Implications: An Analysis of the Current Situation

The 3.6% drop in producer prices exceeded economists’ earlier forecasts, which had predicted a 3.2% decline in a Reuters poll. This figure underscores the depth of the deflationary problem, which has persisted since September 2022. Deflation, often referred to in China as “Neijuan” or “price wars,” manifests as aggressive competition among companies that lower prices to entice consumers and reduce excess inventory. This phenomenon severely impacts business profitability, with profits of China’s industrial firms falling by 9.1% in May compared to a year earlier, marking the sharpest decline since last October.

Last week, during a senior economic policy meeting chaired by President Xi Jinping, Chinese policymakers sharply criticized the excessive price competition. This criticism came partly against the backdrop of the U.S. tariff offensive, which threatened the viability of sales to the world’s largest consumer market. Beijing has pledged to tighten regulations on such aggressive price cuts, which have failed to significantly influence consumer behavior while severely damaging business profitability. Chinese officials state that businesses should be guided to improve product quality and support an orderly, gradual cessation of outdated production capacity to address oversupply and its effects.

Policy and Future Forecasts: Looking Ahead

The recovery in consumer prices in June was partly attributed to a “trade-in” program for consumer goods, which offered subsidies for home appliances, electronics, and electric vehicles. However, economists warn that this increase is expected to moderate in the second half of the year, which will dampen underlying inflation if the oversupply problem persists. “With goods supply continuing to outstrip demand, persistent overcapacity means price wars among producers are likely to continue,” noted Zichun Huang, China economist at Capital Economics.

Other economists express skepticism about the Chinese economy’s ability to escape the ongoing deflationary spiral without strong policy stimuli. “Without strong policy stimulus, it is difficult to escape the persistent deflationary spiral,” said Larry Hu, chief China economist at Macquarie. He added that positive momentum in Chinese exports in recent months has partially curbed Beijing’s desire to significantly stimulate consumption, leading to a “wait-and-see” policy. China’s export growth has indeed shown some resilience recently, with an increase of 4.8% in May and 8.1% in April, primarily due to a surge in shipments to Southeast Asian countries, which largely offset the decline in goods destined for the U.S. However, the forecast is that policymakers will continue to wait until exports fall sharply before taking more aggressive action.

Summary

The decline in producer prices and the struggle with deflation point to deep structural challenges within the Chinese economy, requiring a comprehensive response beyond isolated solutions. The question of Beijing’s ability to manage the transition from an export-driven manufacturing economy to one based more on domestic consumption, while simultaneously grappling with fierce internal competition and overcapacity, will be critical for China’s economic future.