China’s economic landscape is facing mounting challenges as exports to the United States plummet and consumer prices decline, sparking fears of deflation.
The latest trade data reveals that Chinese exports to the U.S. fell by 34.5% in May 2025, marking the sharpest drop in over five years. This decline comes despite a temporary trade truce that paused most tariffs for 90 days.
China’s consumer prices have continued their downward trend, raising concerns about deflation and its long-term impact on the economy.
The sharp fall in exports is largely attributed to high U.S. tariffs and weakening demand. While China’s overall exports grew by 4.8%, shipments to the U.S. suffered significantly, reflecting the ongoing trade tensions between the two economic giants.
Imports from the U.S. also dropped by 18%, further shrinking China’s trade surplus with America. In response, Chinese exporters are shifting their focus to other markets, particularly Southeast Asia and Europe, where demand remains relatively strong.
China’s CPI reading
At the same time, China’s consumer price index (CPI) fell by 0.1% in May 2025, deepening concerns about deflation. Deflation, the opposite of inflation, can lead to lower corporate profits, wage cuts, and job losses, creating a vicious cycle of economic stagnation.
The decline in consumer prices is largely driven by weak domestic demand, exacerbated by the ongoing real estate crisis. Many Chinese consumers are hesitant to spend, fearing further declines in property values and economic uncertainty.
China’s rare earth materials olive branch
China appears to have offered U.S. and European auto manufacturers a reprieve after industry groups warned of increasing production threats over a rare earth shortage.
China’s Ministry of Commerce on Saturday 7th June 2025 reportedly said it was willing to establish a so-called ‘green channel’ for eligible export licence applications to expedite the approval process to European Union firms.