Chinese Economy Facing Quadruple Threat Despite Spending Boom

China’s economy remains in dire straits despite an uptick in holiday consumer spending.

China’s Consumer Price Index (CPI) rose 0.5 percent in January compared to the same month last year, according to the country’s National Bureau of Statistics, up from 0.1 percent a month prior and marking the fastest growth rate since August.

January’s household spending was lifted by an earlier-than-usual Lunar New Year holiday, and came as a much-needed boon for Beijing’s economy. However, the country’s deflationary crisis persists, and when compounded by sluggish domestic consumption, an out-of-character production slump, and the recent imposition of tariffs from the United States, creates a fourfold challenge for the economic giant.

Why It Matters

As the world’s leading industrial manufacturer and top exporter of goods, the health of the Chinese economy has profound knock-on effects for global supply chains and markets.

If China remains trapped in its deflationary spiral, an influx of cut-price Chinese goods into global markets could create intense competitive pressures for global manufacturers. As the world’s second-largest importer, a weakened Chinese economy could slash demand for foreign products and deprive exporters of a critical marketplace.

What To Know

According to the National Bureau of Statistics data, food prices rose by 0.4 percent year-over-year in January, recovering from a 0.5 percent decline in December, while nonfood prices saw a faster rise of 0.5 percent, up from 0.2 percent the previous month. Core CPI—excluding the more volatile food and energy sectors—climbed to a 0.6 percent annual increase, accelerating from December’s 0.4 percent gain.

In contrast to most of the world’s other economies, inflation serves as a welcome relief for China, struggling to free itself from a deflationary spiral exacerbated by and contributing to the country’s other economic challenges.

What Threats Are Facing the Chinese Economy?

Consumption

Since the COVID-19 pandemic, China has grappled with weak domestic consumption, as households tightened their belts in anticipation of further economic challenges.

China’s domestic consumption as a share of gross domestic product (GDP) lags well behind the world average, according to World Bank data.

The consumption slump, worsened by weak consumer and business confidence and the near collapse of the property sector, has prompted Beijing to loosen its monetary policy and pursue various forms of stimulus, including pay increases in for civil servants and tax incentives for property purchases.

Production

As the backbone of its economy and the driving force behind its transformation into a global economic powerhouse, any slowdown in industrial production is a significant cause for concern in China.

In 2024, earnings at Chinese industrial firms fell 3.3 percent, Reuters reported in January, citing official government data. This marked the third consecutive year of falling profits for manufacturers despite an 11-percent year-over-year rise in December.

Manufacturing activity has also slowed, with the most recent Purchasing Manager’s Index sinking to 49.1 in January, under the 50-point mark separating growth from contraction. This was below consensus forecasts and marked the weakest reading since August 2024.

Tariffs

The most notable threat facing China’s economy is arguably U.S. President Donald Trump‘s tariffs, which came into effect for China last week, despite postponements for Canada and Mexico.

Though the anticipated impact of the new tariffs drove a surprising uptick in export activity in December, Trump’s policies promise to expose Beijing’s historic reliance on exports, which, combined with weak domestic consumption, add to tough times ahead for the country’s economy.

These matters were made worse by Trump’s recent announcement of a 25 percent tariff on all steel and aluminum imports, which directly impacts China, the world’s largest producer of both metals.

What People Are Saying

Goldman Sachs analyst Xinquan Chen wrote in a note on Sunday, per AFP: The January price increases were “mainly due to higher food prices and tourism-related services prices on an earlier-than-usual Lunar New Year holiday.” He added that this boost “is likely to become a drag in February as seasonal demand fades.”

Steve Tsang, director of the SOAS China Institute of the University of London, told Newsweek in May: China must “substantially increase domestic consumption, which means raising household disposable income as well as long-term assured investments in social spending, so that households, particularly of the lower to middle-income levels, can feel safe to spend.”

What Happens Next

Beijing has consistently pledged to stimulate domestic consumer spending through various measures. National television broadcaster CCTV reported on Monday that officials at a recent cabinet meeting vowed to “vigorously support increases in residents’ income, promote reasonable growth in wage income, broaden channels for property income, and enhance consumption capacity.”

China has also launched its own set of retaliatory tariffs against the U.S. Beginning Monday, these will target American imports of coal, liquefied natural gas (LNG), oil, agricultural machinery, and automobiles.

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