Amid the global economic slowdown, the latest inflation data from China has once again caught the attention of market watchers. In June, the country’s Producer Price Index (PPI) plummeted by 3.6% year-on-year, marking the largest drop in nearly two years. This decline not only exceeded market expectations of a 3.2% fall but also signified a continuation of the deflationary trend that has persisted since September 2022. With industrial profits continuing to shrink and consumer demand sluggish, discussions about whether China has fallen into a “deflation trap” are intensifying.
In contrast, the Consumer Price Index (CPI) showed a slight uptick. June’s CPI rose by 0.1% compared to the previous year, halting a four-month decline. More notably, the core CPI, which excludes food and energy prices, increased by 0.7%, marking the largest gain in 14 months. This could indicate some resilience in certain sectors of domestic consumption, though the overall picture remains one of imbalances.
This “ice and fire” inflation dynamic within China presents a deeper economic misalignment: while upstream manufacturing is caught in intense price wars due to oversupply, the downstream consumer market’s recovery is lagging. This situation bears a resemblance to Italy’s post-European debt crisis era, where companies, in the face of stagnant demand, resorted to price wars to secure market share—ultimately damaging long-term brand equity.
In Beijing, a high-level economic meeting chaired by President Xi Jinping raised concerns about "disorderly competition" among domestic companies. The government acknowledged that excessive price cuts have not effectively stimulated consumer spending but have instead further squeezed profit margins, leading to a sharp 9.1% drop in industrial profits in May compared to the previous year—marking the steepest decline since October.
This cutthroat competition is most evident in consumer goods sectors. From home appliances to smartphones and electric vehicles, companies have been resorting to aggressive “buy one, get one free” or even “loss-leader” promotions. A parallel can be drawn to the experience of German brand Bosch, which, while facing stiff competition from Asian rivals in Europe, relied on heavy discounting to maintain its market share, only to find that consumers were not as price-sensitive as anticipated, tarnishing the brand's image in the process.
In policy terms, Beijing has now pledged to tighten regulation on price-cutting tactics while encouraging businesses to improve product quality and phase out outdated production capacity. This shift in policy direction underscores China’s urgent need to transition from “quantity-based growth” to “quality-based development.”
In the short term, one key factor contributing to the slight rebound in CPI is a government-backed scheme to encourage the replacement of old consumer goods with subsidies for household appliances, electronics, and electric vehicles. While these initiatives have provided a temporary boost, Capital Economics’ China economist, Zichun Huang, points out that this effect will likely fade in the second half of the year, particularly if the oversupply issue persists. In other words, while the policy has temporarily masked deeper structural imbalances, it hasn’t solved the core issue of persistent overcapacity.
Looking beyond China, the question of whether more aggressive policy action is necessary has become a focal point. Larry Hu, chief China economist at Macquarie, argues that without strong fiscal or monetary stimulus, China will struggle to break out of its “deflation-recovery-deflation” cycle. Despite some resilience in export growth, which has partly alleviated pressure on policymakers to stimulate domestic consumption, Hu suggests that China’s leadership will likely hold off on major stimulus until export growth falls significantly.
Indeed, China’s export growth in May and April was resilient, with an increase of 4.8% and 8.1% respectively, thanks to a surge in shipments to Southeast Asia that helped offset shrinking exports to the U.S. However, this regionally driven export growth remains fragile, especially amid the ongoing global trade tensions and the volatility caused by U.S. tariff policies.
In the West, consumers are also adjusting to changing inflationary pressures. Take Sophie Williams, a middle-class housewife in Brooklyn, New York, as an example. She has noticed a significant decrease in prices for some Asian brand household electronics and beauty products in recent months. “I’ve found that some of the products I usually buy are now much cheaper, but I’m starting to worry—are these products still of the same quality?” Her comment reflects the changing perceptions of consumers in global markets—price-cutting strategies alone are no longer sufficient to win over customers.
For Chinese companies, this is a crucial signal. To truly stimulate consumer confidence, they cannot rely solely on price reductions. They must focus on adding real value to their products and building lasting brand trust. This is a message not only for Chinese policymakers but also for businesses in other parts of the world, especially those that are competing globally. Brands like Bosch, which initially believed that price alone could keep them competitive, eventually had to invest in innovation and quality to regain their foothold in the market.
In sum, China’s deflationary situation is not a traditional “broad-based” price decline but rather a “structural deflation.” On the one hand, the industrial sector is plagued by oversupply, leading to fierce price competition; on the other hand, consumer demand is tepid, supported only by temporary policy measures. This reflects an inevitable growing pain in China’s economic restructuring.
The coming months will likely be decisive. The key question will be whether policymakers are willing to move away from the “export-first” mentality and focus more on stimulating domestic consumption as a driver of growth. Only by giving consumers the confidence to “spend more and buy better” can businesses find room to raise prices and improve quality, and only then will China’s economy have a chance to transition from a “race to the bottom” to a “race to the top.”