China’s Economy Shows resilience but Faces Deflationary Headwinds and Weak Domestic Demand

Breaking News: China’s economy is demonstrating remarkable resilience, maintaining steady growth with robust momentum, according to a report by the national Bureau of Statistics. However, persistent deflationary pressures, notably a 0.1% decline in consumer prices in the first half of 2025, signal ongoing weakness in domestic demand-a significant long-term challenge for Beijing.

The report highlights that proactive and effective macro policies are contributing to the economic stability. Yet, the dip in consumer prices underscores a deeper issue: a flagging domestic market. This challenge is amplified by a declining and aging Chinese population,trends that have been exacerbated by the lingering effects of the COVID-19 pandemic. Further concerns are raised by falling property prices and a slowdown in retail sales, as noted by Lynne Song of ING economics.

Economists like Louise Loo of Oxford Economics point out that price cutting by chinese manufacturers, a strategy to boost competitiveness in overseas markets, is inadvertently fueling deflationary pressures.This ultimately erodes their own competitive edge.

Despite these internal pressures, Chinese leaders have set an ambitious growth target of 5% for the current year, matching last year’s performance. A critical factor that could impact this target is the potential resumption of U.S. tariffs, which could reach up to 245% if trade negotiations between Washington and Beijing fail to conclude with a new trade deal by the August 12 deadline. Such a progress could significantly derail the recovery of exports, a vital engine for China’s growth and employment.

Evergreen Insights:

The situation in China underscores a recurring theme in global economics: the delicate balance between export-driven growth and the cultivation of robust domestic demand. For any large economy, especially one as significant as China, a strong internal consumer base is crucial for sustainable and resilient growth. When domestic demand falters, economies often turn to export markets for a boost, but this can create its own vulnerabilities, as seen in the potential impact of trade disputes.

Deflation, while seemingly beneficial for consumers, can be a double-edged sword. Persistent price declines can discourage spending as consumers anticipate further drops, leading to a vicious cycle of decreased demand and production. It also increases the real burden of debt, potentially impacting businesses and households. For policymakers, combating deflation often requires a multi-pronged approach, including fiscal stimulus, monetary easing, and measures to boost consumer confidence.

The demographic shifts in China-an aging population and declining birth rates-present a fundamental, long-term challenge that transcends short-term economic policy. These demographic trends can impact labor supply, consumption patterns, and social welfare systems for decades to come, requiring strategic planning and adaptation across various sectors of the economy and society.

How do recent trade agreements like RCEP contribute to China’s economic resilience in the face of US tariffs?

China’s Economic Momentum: Trade Deal Signals Growth Amidst US Tariffs

Recent Trade Agreements Fueling expansion

Despite ongoing trade tensions with the united States, China’s economy is demonstrating remarkable resilience, bolstered by a series of recent trade agreements. These deals, notably with nations within the Regional Comprehensive Economic Partnership (RCEP) and increasingly, with countries in the Global South, are diversifying China’s export markets and mitigating the impact of US tariffs. The focus is shifting towards strengthening economic ties with ASEAN nations, Africa, and Latin America.

RCEP Impact: The RCEP agreement, encompassing 15 Asia-Pacific countries, has substantially reduced tariffs and streamlined trade procedures, creating a massive free trade zone. This has led to increased exports of Chinese manufactured goods and intermediate products within the region.

Belt and Road Initiative (BRI): Continued investment in the BRI is fostering trade relationships and infrastructure growth across Asia, Africa, and Europe, providing option trade routes and markets.

Bilateral Agreements: China is actively pursuing bilateral trade agreements with specific countries, tailoring deals to address unique economic needs and opportunities.

Electric Vehicles (EVs): China is the world’s largest EV market and a leading exporter of EVs. Government subsidies and a robust domestic supply chain are fueling rapid growth in this sector. Companies like BYD and Nio are becoming globally recognized brands.

Renewable Energy: China is a global leader in renewable energy production and technology. Investments in solar, wind, and hydro power are driving economic growth and reducing carbon emissions.

Digital Economy: E-commerce, fintech, and digital services are experiencing rapid expansion.Companies like Alibaba and Tencent continue to innovate and expand their global reach.

Advanced Manufacturing: China is investing heavily in advanced manufacturing technologies,including robotics,automation,and artificial intelligence,to upgrade its industrial base.

“China Plus One” Strategy: Many companies are adopting a “China Plus One” strategy,diversifying their manufacturing base to include other countries in Southeast Asia and India,while maintaining a presence in china.

* Nearshoring & reshoring: Geopolitical tensions and supply chain disruptions are driving a trend towards nearshoring (relocating production closer to home) and reshoring (bringing production back to the home country