China's factory-gate deflation hits 2-year low amid global trade war

Business Standard

09-07-2025

The producer price index fell 3.6 per cent in June from a year earlier, worse than a 3.3 per cent decline in May and the largest drop since July 2023
Reuters
China's producer deflation deepened to its worst level in almost two years in June as the economy grappled with uncertainty over a global trade war and subdued demand at home, piling pressure on policymakers to roll out more support measures.'
While consumer prices rose for the first time in five months, the uptick was marginal as a prolonged housing market downturn in the world's second-biggest economy added to headwinds from US President Donald Trump's tariffs on trading partners.
The producer price index fell 3.6 per cent in June from a year earlier, worse than a 3.3 per cent decline in May and the largest drop since July 2023. That compared with forecast of a 3.2 per cent slide in a Reuters poll.
"The uncertainty in the global trade environment has affected the export expectations of enterprises," Dong said.
China's factory activity shrank for a third month in a row in June, albeit at a slower pace, with employment and new export orders still languishing.
"We expect demand to weaken later this year, as exports slow and the boost from fiscal support diminishes," said Zichun Huang, China economist at Capital Economics.
Market reaction to the data was cautious as Trump ramps up his trade war. China's Shanghai Composite Index was up 0.3 per cent by the midday break, while Hong Kong’s benchmark Hang Seng traded down 0.7 per cent.
As subdued domestic demand remains a drag on China's economy, companies have resorted to price discounts to boost sales, prompting the authorities to urge an end to the auto industry's bruising price wars.
Highlighting the tepid consumer market, Chinese e-commerce giants Alibaba and JD.com have pledged heavy subsidies over recent months to expand aggressively into fast deliveries.
A diverging trend in consumer prices likely indicates "the effects of the consumer goods trade-in scheme," Huang said, but added that "with this boost likely to fade soon, we expect underlying inflation to decline again later this year." The consumer price index edged up 0.1 per cent last month from a year earlier, reversing a 0.1 per cent drop in May and above a Reuters poll prediction of an unchanged outcome.
The consumer price uptick was "mainly due to a rebound in industrial consumer goods prices," NBS's Dong said.
On a monthly basis, the CPI was down 0.1 per cent versus a 0.2 per cent decline in May, and in line with economist forecasts of a 0.1 per cent drop.
Core inflation, excluding volatile food and fuel prices, spiked to 0.7 per cent in June from a year earlier, the highest in 14 months.
Lynn Song, ING's chief economist for China, said the recent relative strength of the yuan and persistently soft inflation will give the People’s Bank of China room to cut rates further later in the year.
"With activity data softening slightly in recent months, but not signalling a sense of immediate urgency, we currently expect the next rate cut to come in the fourth quarter." (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)