^{Source: South China Morning Post}

China's economic landscape is exhibiting concerning signs as the Consumer Price Index (CPI) declined by 0.1% year-on-year in March 2025, marking the second consecutive month of deflation. This follows a 0.7% decrease in February, according to the National Bureau of Statistics. Concurrently, the Producer Price Index (PPI) experienced its 29th straight month of decline, dropping 2.5% from the previous year .

Persistent Deflationary Pressures

The sustained deflation in both consumer and producer prices underscores the challenges facing China's economy. The PPI's prolonged decline reflects ongoing issues in the manufacturing sector, with notable decreases in mining (-4.6%), raw materials (-2.2%), and processing (-2.7%) industries . These figures highlight the difficulties Chinese exporters face amid escalating trade tensions with the United States.

Government's Proactive Measures

In response to these economic headwinds, Chinese Premier Li Qiang, in his March government work report, emphasized boosting domestic consumption as a top priority for the year. The government has set an ambitious growth target of around 5%, signaling a commitment to overcoming current challenges .

To stimulate spending, Beijing has announced plans to raise the basic pension for retirees and increase financial subsidies for urban and rural residents' medical insurance. Additionally, the government intends to expand support for consumer goods trade-ins and proactively boost effective investment .

Escalating Trade Tensions with the U.S.

The backdrop to these domestic challenges includes heightened trade tensions with the United States. President Donald Trump recently increased tariffs on Chinese imports to 125%, prompting concerns about further economic strain. Goldman Sachs has revised China's GDP growth forecasts downward, projecting 4% growth in 2025 and 3.5% in 2026, citing the significant impact of these tariffs on China's economy and labor market .

Outlook and Implications

While the Chinese government is implementing measures to bolster domestic consumption and mitigate external pressures, analysts remain cautious. Julian Evans-Pritchard, head of China Economics at Capital Economics, noted that while policymakers are willing to support domestic demand, much fiscal spending is still directed toward expanding the supply side of the economy. He expressed skepticism about the sufficiency of consumption support to fully offset weaker exports, suggesting that overcapacity may worsen, exacerbating downward pressure on prices.

As China navigates these complex economic challenges, the effectiveness of its policy measures in stimulating domestic consumption and countering external pressures will be critical in determining the trajectory of its economic recovery.

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