What is China Telling Us?

The fact that we are living in a precarious global economy should no longer come as a surprise to anyone. The data and statistics from around the world confirm this reality. All major geopolitical powers are grappling with the same virus of "growth scares". While multiple explanations can be found for this phenomenon, like any economic context, it must first and foremost be understood in an interconnected manner.

Take China, for example. In the last few days, the National Bureau of Statistics released the latest figures for the Consumer Price Index (CPI) and the Producer Price Index (PPI). For those less familiar with these indicators, CPI measures changes in the price levels of a basket of consumer goods and services, reflecting inflation or deflation from the consumer's perspective. PPI, on the other hand, tracks price changes at the producer level, providing insights into cost pressures in manufacturing and supply chains.

A stimulus that failed to stimulate

These latest figures should have told a different story. At the beginning of the year, China announced a large-scale, multifaceted financial stimulus package. This included allowing local governments to issue nearly 4.5 trillion yuan in special-purpose bonds, alongside strategic investments in key industries—although, in China’s case, "strategic sectors" can encompass virtually anything.

Despite these measures, the stimulus has had little real effect. That is why these economic indicators should have looked different. Instead, the data paints a troubling picture.

The CPI declined by 0.7% year-on-year, reflecting weak consumer demand. This marks the first such drop since January 2024. Some argue that an important factor behind this negative reading is the early occurrence of the Lunar New Year holiday. Typically, in the month when the holiday begins, prices rise due to increased demand for goods and services. However, since this year’s holiday fell in January, the price surge came earlier than usual, followed by a sharp drop in February. This shift created a higher base for comparison, amplifying the appearance of a "deflationary" signal in February’s data.

However, this alone does not explain why core CPI—which excludes volatile food and energy prices—fell by 0.2% on a monthly basis. That drop indicates extremely weak underlying demand for goods and services even after the holiday season. This suggests a deeper uncertainty within the Chinese economy—an issue I will explore in greater depth in another article. This uncertainty manifests in the cautious, non-discretionary spending behavior of Chinese consumers.

A bleak manufacturing outlook, exacerbated by tariffs

The outlook for China’s industrial sector is equally grim. The PPI fell by 2.2% year-on-year, marking the 29th consecutive month of contraction. This prolonged decline signals persistent weakness in the manufacturing sector, with no signs of a rebound in factory-gate prices. A similar trend is observable in other major economies, including the United States.

But on top of this, trade tensions are adding further pressure. The ongoing tariff war continues to weigh on manufacturing, complicating supply chains and distorting trade flows. Historically, businesses tend to engage in "front-loading" during periods of tariff uncertainty—importing and exporting goods in advance of impending tariffs to avoid higher costs. This temporarily boosts trade volumes, but it is not sustainable, and once the effect fades, demand slumps. The prolonged nature of these tariff battles has created an environment where firms must constantly adjust their strategies, leading to higher uncertainty, reduced capital expenditures, and lower production forecasts.

The banking sector’s cautious response

Even China’s banking system is reacting negatively. This was evident in the People’s Bank of China’s (PBoC) decision on February 20 to keep the one-year Loan Prime Rate (LPR) unchanged at 3.1%. At first glance, holding rates steady might seem like a positive decision, suggesting economic stability. However, the reality is more complex.

The LPR is the benchmark rate set jointly by the PBoC and Chinese banks, representing the preferential lending rate offered by commercial banks to their prime clients. Because these banks play an active role in determining the LPR, their reluctance to lower it suggests they have limited room on their balance sheets to further cut rates without jeopardizing their profitability.

This cautious stance is understandable when viewed in the context of another worrying indicator: the total value of outstanding yuan loans in China increased by just 7.5% year-on-year in January 2025, the slowest rate of credit expansion since 1998. In an economy heavily dependent on credit-fueled growth, this signals a tightening of financial conditions, making recovery even more difficult.

Conclusion

Taken together, these developments point to a Chinese economy struggling to gain momentum despite aggressive policy interventions. Weak consumer demand, declining factory prices, and financial caution in the banking sector all reinforce a broader narrative of economic fragility. Tariffs add yet another layer of uncertainty, further dampening business expectations and investment decisions. Rather than delivering stability, China’s current trajectory highlights the challenges of sustaining growth in an increasingly complex global environment.