Introduction to China’s Economic Situation
China’s consumer inflation accelerated in December to the fastest pace in nearly three years as spending picked up ahead of the New Year holiday, while factory-gate deflation remained entrenched, signaling that underlying demand stayed weak. Consumer prices rose 0.8% from a year earlier, their highest level since February 2023, according to data from the National Bureau of Statistics on Friday.
Causes of the Rebound in Consumer Prices
The rebound in consumer prices was largely driven by fresh vegetables, which rose 18.2% from a year earlier due to supply shortages during the cold winter. Among other food items, pork prices fell 14.6%. Core inflation, which excludes volatile prices of food and energy, was up 1.2% year on year in December, unchanged from the growth in the prior month.
Monthly Consumer Price Growth
On a monthly basis, consumer prices grew 0.2%, above the expected 0.1% gain in a Reuters poll. Still, for 2025 as a whole, the inflation gauge was flat, missing the official target of "around 2%," signaling that Beijing’s stimulus measures implemented so far, including a consumer goods trade-in program, have done little to boost demand.
Producer Prices and Deflation
Producer prices dipped 1.9% in December from a year earlier, better than the forecast 2% decline, extending the deflationary streak beyond three years. The drop moderated from a 2.2% fall in November, partly due to higher prices for non-ferrous metal materials. Prices for durable consumer goods dropped 3.5% from a year earlier.
Longest Deflationary Streak
While China is on track to achieve its growth target of about 5% last year, the economy has continued to face deflationary pressure. Consumers have remained reluctant to spend amid an uncertain employment outlook and a prolonged property crisis that has eroded household wealth. Larry Hu, chief China economist at Macquarie, expects China’s annual consumer inflation to remain flat in 2025, while producer price deflation is forecast at 2.7%, which would mark the longest deflationary streak on record.
Property Crisis Persists
A recent article published by the Communist Party’s flagship magazine Qiushi Journal called for the "implementation of a stronger, comprehensive package of measures to stabilize the real estate sector, rather than through piecemeal-style approach." The government may roll out more easing measures in the near term, including cutting mortgage rates and easing home purchase restrictions, said Macquarie’s Hu. However, these measures may not be "forceful enough to reverse the trend," Hu warned, estimating new home sales in floor space to fall by 7% in 2026 after an 8% decline in 2025.
Impact on Businesses
Chinese policymakers have also stepped up efforts to curb intense price wars that have hurt businesses’ profitability and ordered a production cut in some sectors to rein in oversupply. Still, industrial firms saw their profits drop 13.1% year-on-year in November, their steepest drop in over a year. Carmakers in the country have rolled out a new round of price cuts and perks at the start of this year as demands remained sluggish and the government withdrew part of a tax incentive for eligible electric vehicles.
Conclusion
In conclusion, China’s economic situation is complex, with both consumer inflation and producer price deflation presenting challenges. The government’s stimulus measures have had limited impact, and the property crisis continues to persist. As the country looks to the future, it is clear that more comprehensive measures will be needed to stabilize the economy and boost demand. With the longest deflationary streak on record forecasted, China’s economic situation will be closely watched in the coming year.
