China’s Factory-Gate Deflation Hits Two-Year Low as Trade War Weighs on Economy

Producer prices see steepest decline since 2023 amid export strain

Key takeaways

• China’s PPI fell 3.6% in June, the lowest drop since July 2023

• June CPI rose 0.1% y/y, reversing a 0.1% decline in May

• Export-focused industries face price pressure, says NBS

• Weak demand highlights the need for policy support

• Trump’s trade war and property crisis add to economic strain

China’s factory-gate prices fell at their lowest rate in nearly two years in June, indicating the continued strain on Asia’s largest economy from external trade war and sluggish domestic demand.

The Producer Price Index (PPI) declined 3.6% year-on-year, down from a 3.3% fall in May and marking the steepest drop since July 2023, according to data from the National Bureau of Statistics (NBS). The reading was weaker than the 3.2% decline forecasted in a Reuters poll.

“Some export-oriented industries are under price pressure,” said Dong Lijuan, an NBS statistician, attributing the weakness to “uncertainty in the global trade environment,” which she noted has impacted the expectations of exporting firms.

The huge deflation comes as China’s factory activity dropped for the third consecutive month in June, showing that demand is still weak. Despite slower declines in manufacturing output, employment and new export orders remain a concern.

Consumer Prices Edge Up, But Stimulus Effects May Fade

While producer prices fell sharply, consumer prices rose slightly for the first time in five months. The Consumer Price Index (CPI) increased 0.1% year-on-year, compared to a 0.1% drop in May, exceeding economists' expectations of no change.

The NBS attributed the rise primarily to a rebound in industrial consumer goods prices. However, on a monthly basis, CPI was down 0.1%, in line with forecasts.

Core inflation, which excludes volatile food and fuel prices, climbed to 0.7%, marking its highest point in 14 months.

“The effects of the consumer goods trade-in scheme are likely behind this trend,” said Zichun Huang, China economist at Capital Economics, but cautioned that “with this boost likely to fade soon, we expect underlying inflation to decline again later this year.”

Trade War and Property Crisis Reveal the Urgent Need for Policy Support

China continues to feel the economic weight of its prolonged real estate slump and an escalating trade war led by U.S. President,  Donald Trump. The latter’s recent tariff expansion has renewed concerns among Chinese exporters, prompting caution across equity markets.

The Shanghai Composite Index rose 0.3% by mid-session, while Hong Kong’s Hang Seng dropped by 0.7%, these show mixed investor sentiment. This also suggests that markets remain uncertain about China’s economic outlook and the effectiveness of potential policy support.

Companies across sectors have turned to aggressive price discounting to attract consumers. E-commerce giants like Alibaba and JD.com are offering major discounts and subsidies to drive sales, a clear sign that household demand remains weak. 

China’s leadership remains under growing pressure to roll out fresh economic support as falling prices continue and exports lose steam.

“We expect demand to weaken later this year, as exports slow and the boost from fiscal support diminishes,” Huang added.