China’s latest inflation data point to continued domestic weakness, with both consumer and producer prices remaining in negative territory. Dr Yingrui Wang, China Economist at AXA Investment Managers, warns that downside risks to inflation are mounting amid slowing global growth and rising geopolitical uncertainty.
The recent surge in US-China trade tensions — intensified by former President Trump’s latest tariff hikes — has led to a significant downgrade in China’s growth forecasts. With Chinese goods now facing tariffs as high as 125% when entering the US, and no signs of renewed dialogue, the outlook for China’s economy in 2025 and beyond remains increasingly uncertain. Dr Wang shares her latest analysis as follows:
Price levels continue the decline
The increasing trade barriers are adding to the challenges already faced by Chinese producers and may be intensifying the oversupply problem in a still fragile domestic market. Producer prices, which had been narrowing their decline since October 2024, fell more sharply in March. PPI dropped by -2.5% year-on-year (yoy), compared to -2.2% in February. The fall was led by upstream sectors such as coal mining (-14.9%), ferrous metals (-10.9%), and smelting (-10%).
On the consumer side, CPI fell for the second month in a row in March, registering -0.1% yoy, though this marked an improvement from -0.7% in February. The narrower decline was largely due to stabilising food prices and a rebound in tourism-related services, as strong seasonal distortions faded. Core CPI rose by 0.5% yoy (from -0.1%), services inflation picked up to +0.3% (from -0.4%), and the decline in consumer goods prices moderated to -0.4% (from -0.9%).
According to our seasonal adjustment, CPI inflation remained flat on the month in March and 3-month-on-3-month (3m/3m) inflation momentum edged up slightly to -0.1% from -0.2% in February. While these numbers suggest a very gradual reflation may be underway, the renewed trade tensions add fresh downside risks. If left unresolved, the tariff shock could derail this fragile momentum. In response, we trimmed our CPI inflation forecast to 0.4% in 2025 and 0.8% in 2026.
A stand-off between two giants
The “explosive” tariff announcement last week from the White House Rose Garden landed poorly in Beijing. After several rounds of tit-for-tat retaliation over the past week, US tariffs on Chinese goods have climbed to 125% following the latest announcement yesterday evening. China has raised its average tariff on US goods to 106.6%, based on calculations from the Peterson Institute.
These harsher-than-expected reciprocal tariffs led us to downgrade our GDP forecast to 4.3% for 2025 and 4.0% for 2026. The updated forecast still assumes stronger support for the domestic economy from Beijing, including additional fiscal stimulus and an earlier execution of monetary easing. We think the April Politburo meeting at the end of the month is the most likely venue to announce such stimulus. Moreover, a weaker Renminbi may also help cushion the blow from higher tariffs.
However, Trump’s latest decision to reduce the reciprocal tariffs to 10% for 90 days on other countries — leaves China in a less favourable position. With neighbouring countries now facing significantly lower levies, Chinese goods have lost relative competitiveness. Still, this could play both ways: until a better deal is struck with the US, China’s strategy of trade re-routing may start to work again. Although both sides have signalled a willingness to de-escalate, so far no one seems interested in initiating more constructive talks. Meanwhile, US trade deals with other partners could have a knock-on impact on China’s exports. A larger tariff differential between China and other export-oriented economies will weigh on China’s share in the global market. Conversely, China could mitigate some of the damage if it successfully achieves new trade agreements with other major markets such as the EU.
