Deflation Exposes Structural Economic Fault Lines

In June 2025, China’s producer price index (PPI) fell sharply by –3.6% year-over-year, marking the steepest drop since July 2023. This was the 33rd consecutive month of factory-gate deflation, underscoring deep-rooted challenges in pricing power. Meanwhile, the consumer price index (CPI) showed a modest +0.1% YoY increase, technically ending a four-month streak of negative readings. However, when excluding precious metals, even the CPI remains in deflation.

Against this backdrop, a fundamental question resurfaces: Is China still overly dependent on exports, or has domestic consumption become the new growth engine?

Export-to-GDP Ratio: Declining, But Still Dominant

Back in 2006, exports accounted for nearly 36% of China’s GDP. Over the past two decades, Beijing has promoted a structural shift toward consumer-driven growth, and by 2023, exports made up just around 20% of the national economy.

Despite this statistical shift, recent quarterly data paints a more complex picture. In Q4 2024, net exports contributed nearly 30% to GDP growth—the highest level since the late 1990s. By contrast, domestic consumption accounted for 44.5% to 60% of GDP growth in early 2025, with wide seasonal and policy-driven variation.

The Fragility of Chinese Consumer Spending

While the Chinese government has consistently emphasized the need to boost internal demand, household consumption remains subdued. Current estimates suggest that household spending represents 53%–55% of GDP, which is relatively low compared to Western economies like the U.S. (~68%) or the EU (~60%).

One of the underlying causes is a high household savings rate, driven by structural weaknesses in healthcare, pensions, and job security. With little trust in long-term social infrastructure, the average Chinese citizen remains financially cautious. Additionally, the real estate sector’s prolonged instability has further eroded consumer confidence and spending capacity.

Short-Term Trend: Exports Regaining Momentum

In June 2025, China reported a surprise 5.8% increase in exports, defying expectations amid geopolitical tensions and tariff threats. Analysts attribute this growth to a temporary ceasefire in the U.S.-China trade dispute and exporters rushing to ship goods before new tariffs kick in.

In contrast, imports grew by just 1.1%, indicating domestic demand remains weak despite government stimulus efforts. This disparity underscores the continuing reliance on external markets to drive economic momentum, especially in industrial zones and manufacturing hubs.

Deflation and the Overcapacity Conundrum

The persistent deflation in China’s industrial sector is a result of weak demand, excess capacity, and relentless price competition. Falling prices pressure corporate profit margins, reduce innovation budgets, and intensify financial stress across production chains.

Crucially, a reliance on export-led strategies during deflationary periods can backfire. To remain competitive, exporters slash prices further, compounding deflation. Meanwhile, sluggish internal consumption means the economy lacks a self-sustaining recovery mechanism.

Conclusion: Structural Transition Still Incomplete

While China’s economy has reduced its statistical dependence on exports, it remains functionally tethered to external demand. Domestic consumption has grown in size but not in resilience. The structural reforms needed to shift toward a consumption-driven model—such as pension reform, labor protections, and healthcare investment—are still lagging.

With consumer sentiment weak, household savings high, and private sector confidence fragile, Beijing may struggle to decouple growth from foreign demand. For now, exports remain China’s economic anchor, and deflation only amplifies the urgency for strategic rebalancing.

Unless substantial policy action transforms the social contract for the Chinese consumer, the dream of a domestic-led economy will remain a vision—not a reality.