China’s factory-gate deflation deepened in May, reflecting the pressure on the world’s second-largest economy from both domestic and external headwinds.
Data released by the General Administration of Customs of China on June 9 showed that the country’s exports grew by 4.8% year-on-year in May, slowing from an 8.1% increase in April and falling short of the 5% growth forecast by economists in a Reuters poll. This deceleration occurred despite a trade truce between the US and China, which involved a 90-day tariff reprieve.
China’s exports to the US fell by 34.5% in May compared to the previous year, marking the steepest decline since February 2020, when the Covid-19 pandemic disrupted global trade.
ING’s Chief Economist for China, Lynn Song, commented to Reuters that May’s figures likely faced residual pressure from the peak tariff period. She also attributed the decline to Chinese businesses rushing shipments to pre-empt tariff risks and their efforts to diversify exports away from the US market.
Prior to the Geneva truce, the US imposed tariffs of 145% on Chinese goods, while China retaliated with 125% tariffs on US imports. Following the agreement, both countries reduced tariffs to 10%, but the US maintained an additional 20% tariff on Chinese goods related to fentanyl concerns.
According to the June 9 data, China’s imports fell by 3.4% year-on-year in May, a sharper decline than the 0.2% dip in April and more than the 0.9% drop predicted in the Reuters poll.
China had recorded robust export growth of 12.4% and 8.1% in March and April, respectively, as factories rushed shipments to the US ahead of anticipated new tariffs. The significant slowdown in May, despite the tariff truce, highlights the ongoing tensions between Beijing and Washington, with the effective US tariff rate of approximately 40% remaining a significant barrier.
China’s imports from the US continued to fall sharply in May, decreasing by 18.1%, a steeper drop than the 13.8% decline in April.
Zichung Huang, an economist at Capital Economics, predicted that the downward trend in China’s export growth would “partly unwind in June” as the tariff truce’s positive effects would become more apparent. However, she cautioned that exports could slow further in the coming months due to the remaining high tariff rates.
China’s exports of rare earth minerals surged in May, despite Beijing’s restrictions on exports of certain rare earth products, which forced some automakers to shut down factories globally. The latest data does not provide specific figures for the 17 rare earth elements and related products, including those not subject to Chinese restrictions. More detailed data will be released on June 20.
Despite the export slowdown, China’s trade surplus widened to $103.22 billion in May, up from $96.18 billion in April.
On the same day, June 9, the National Bureau of Statistics of China (NBS) released inflation data for May, including the Consumer Price Index (CPI) and the Producer Price Index (PPI).
The PPI fell by 3.3% year-on-year in May, a sharper decline than the 2.7% drop in April and the steepest fall in 22 months. Meanwhile, the CPI decreased by 0.1% over the same period last year.
These data points indicate that China is facing weak domestic and external demand. The country’s two main growth drivers are facing challenges, with the real estate sector mired in crisis and exports hampered by the trade war. The Chinese government has been striving to stimulate domestic consumption to boost economic growth but has not seen significant results.
The core CPI, which excludes volatile food and energy prices, rose by 0.6% in May year-on-year, up from a 0.5% increase in April. However, Huang cautioned that this improvement was “fragile,” and predicted that “persistent overcapacity would keep China in deflation this year and next.”
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