A Growth Engine Stalls, and Global Reverberations Follow
China’s economy, which served for decades as a linchpin of global growth, is now mired in a persistent deflationary spiral, raising red flags among policymakers and investors worldwide. Fresh statistical data underscores that the negative momentum is not a temporary disturbance, but rather the product of deep-rooted structural challenges, casting doubt on the viability of China’s economic model.

Deflationary Trends and Sectoral Weakness
In May 2025, China’s consumer price index (CPI) fell by 0.1% year-on-year, marking the fourth consecutive month of annual price declines. The deflationary trend intensified after the CPI first slipped into negative territory in February, with a 0.7% drop, and has continued unabated since then, exposing fundamental weaknesses in domestic demand. Meanwhile, the producer price index (PPI) plunged by 3.3% year-on-year in May—the steepest drop since July 2023—with wholesale prices locked in a downward trend since October 2022.

Drivers of the Crisis: Structural Weakness and Ruthless Competition
This crisis stems from chronic internal demand weakness, as Chinese consumers remain hesitant to spend. The fierce price war—especially within the automotive sector—intensifies downward pressure on prices. The automotive market, particularly electric vehicles, is grappling with significant overcapacity, fueling a race to the bottom on pricing. The real estate sector, accounting for approximately 25% of China’s GDP, is also in a protracted slump, with falling property values undermining consumer confidence and weighing on household spending.

The U.S.-China Trade War: External Pressures Mount
Geopolitical factors play a central role. The ongoing U.S.-China trade dispute, reignited during President Trump’s second term, saw punitive tariffs soar to 145% on Chinese goods and triggered tit-for-tat export controls. A temporary agreement in May 2025 provided some relief (with U.S. tariffs lowered to 51.1% and Chinese import duties to 32.6%), but uncertainty persists as renewed trade negotiations take place in London. The latest export data reveal a 34% year-on-year decline in Chinese exports to the U.S. in May 2025, the lowest level in five years—a severe blow to an economy heavily reliant on external demand.

Broad Impact: Global Market Fallout and Deflation Export
China’s crisis is not contained within its borders. With nearly 18% of global GDP tied to China, the country’s slowdown is acutely felt across global supply chains, commodity demand, and financial markets. Lower Chinese prices may benefit consumers abroad, but they create existential challenges for manufacturers worldwide, as “deflation export” proliferates via international trade. This dynamic presents policymakers around the globe with complex challenges in fiscal, currency, and trade policy.

Conclusion: Is China Ready for a Strategic Pivot?
China’s deflationary spiral cannot be resolved through short-term stimulus alone. What is required are sweeping structural reforms—strengthening social safety nets to boost domestic consumption, rebalancing away from export dependency, and reducing excessive state intervention. The pivotal question remains whether Beijing is willing to acknowledge the obsolescence of its old growth paradigm and commit to bold changes.
One thing is certain: with China representing nearly a fifth of the world’s GDP, delays in addressing the deflation crisis will have far-reaching consequences—not only for 1.4 billion Chinese citizens, but for the global economy as a whole.

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