#3 - China's Economy at a Crossroads: Export Slowdown, Rising Deflation, and Trade Tensions

China's Economy at a Crossroads: Export Slowdown, Rising Deflation, and Trade Tensions

June 9, 2025 — Beijing

China’s economy is displaying mixed signals, with recent data showing a slowing export sector, deepening deflation, and heightened diplomatic tensions with the U.S. over rare earths and tech trade. These developments come as government leaders aim for a 5% annual GDP growth despite mounting global and domestic pressures.

1. Export Growth Loses Steam

In May, China’s total exports rose 4.8% year-over-year, a sharp decline from April’s 8.1%. Exports to the U.S. tumbled 34.5% YoY, marking the steepest drop since February 2020 amid intensified tariff measures.

Source: Reuters

2. Deflationary Pressures Escalate

Producer prices (PPI) dropped 3.3% YoY in May—the largest decline in 22 months—while the Consumer Price Index (CPI) slid 0.1%, marking the fourth consecutive month of mild deflation. The People’s Bank of China (PBOC) has reduced key rates multiple times since late 2023, but domestic demand remains tepid.

Source: CNBC

3. High-Stakes Trade Talks in London

On June 9, U.S. and Chinese delegates met in London for renewed trade talks, focusing on rare earths and semiconductors. China agreed to issue export licenses for rare earths in exchange for potential easing of U.S. chip export restrictions. However, analysts remain skeptical about reaching a lasting agreement.

Source: Reuters Source: Financial Times

4. Policy Targets Under Pressure

China’s National People’s Congress set a GDP growth target of ~5% for 2025, with inflation capped at 2% and plans for 12 million urban jobs. Despite stimulus attempts, youth unemployment remains high and consumer spending sluggish. Structural risks in real estate and local government debt further complicate stimulus efforts.

Source: Nikkei Asia

5. Outlook & Implications

China’s mid-year outlook is a delicate balance. Export weakness and deflation challenge growth even as trade negotiations hint at opportunity. Whether through targeted domestic stimulus or strategic diplomacy, much depends on how Beijing navigates internal fragilities and rising global friction. Global markets remain on edge, watching for stabilization or potential escalation.

Written for CNY Trends. All information reflects sources as of June 2025.

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