In response to soaring tariffs that have drastically reduced U.S. orders for Chinese products, authorities in China are striving to pivot sales toward the domestic market. This strategy, however, poses the risk of pushing the nation further into the grips of deflation.
Local governments and major enterprises in China are rallying to assist exporters affected by these tariffs to find new opportunities within the domestic arena. E-commerce giants such as JD.com, Tencent, and Douyin, the Chinese counterpart to TikTok, are among those promoting the sale of these goods to local consumers.
Sheng Qiuping, the vice commerce minister, stated in a recent address that China’s substantial domestic market serves as a vital lifeline for exporters navigating external challenges. He called on local authorities to collaborate in stabilizing exports and enhancing consumer spending.
According to Yingke Zhou, a senior economist at Barclays Bank, this shift to domestic sales is triggering a fierce price war among Chinese companies.
JD.com has made a significant commitment of 200 billion yuan (approximately $28 billion) to support exporters. The platform has established a specialized section for goods that were originally intended for U.S. markets, offering discounts of up to 55%.
However, flooding the market with discounted products aimed at U.S. consumers could reduce profit margins, potentially influencing employment rates negatively, Zhou noted. Ongoing uncertainties regarding job stability are already dampening consumer demand.
The consumer price index, after remaining just above zero in the previous years, dipped into the negative range, recording two months of decline in February and March. Meanwhile, a continued drop in the producer price index marked its 29th month of decline by March, falling by 2.5% year-over-year, the steepest decrease in four months.
Economists from Morgan Stanley project that China’s deflation in wholesale prices will worsen to 2.8% in April, up from 2.5% in March, signaling that the impact of trade tariffs is expected to be most acutely felt this quarter, with numerous exporters halting production and shipments to the U.S.
Shan Hui, chief China economist at Goldman Sachs, anticipates that China’s consumer price index will stagnate at 0% for the entire year, a drop from the 0.2% growth experienced in 2024, with the producer price index expected to decrease by 1.6% from a 2.2% decline the previous year.
“For domestic and other international buyers to absorb the surplus supply left by U.S. importers, prices will need to decrease,” Shan explained, warning that the manufacturing sector may struggle to adapt quickly to unanticipated tariff hikes, further exacerbating overcapacity issues across various industries.
Goldman Sachs projects only a 4.0% growth for China’s real gross domestic product this year, whereas Chinese authorities have set a growth target of around 5% for 2025.
Survival game
This year, U.S. President Donald Trump has significantly raised tariffs on imported Chinese goods to a historic 145%, provoking Beijing to retaliate with additional tariffs of 125%. The resulting trade barriers have adversely impacted exchanges between the two nations.
While Beijing’s initiatives to assist exporters in unloading surplus goods impacted by U.S. tariffs are notable, Shen Meng, the director at boutique investment bank Chanson & Co., suggests they may merely serve as a temporary fix.
The absence of access to the U.S. market has exacerbated challenges for Chinese exporters, compounding weak domestic demand, intensifying price wars, diminishing margins, payment delays, and elevated return rates.
According to Shen, for exporters accustomed to higher pricing in the U.S., selling in China’s domestic market has become a strategy primarily aimed at clearing unsold inventory and alleviating immediate cash flow constraints, leaving little opportunity for profitability.
This pressure on margins could lead to closures among some exporting firms, while others may choose to operate at a loss to avoid idle production facilities, Shen warned.
As more businesses face closure or cut back their operations, the impact is expected to permeate through the labor market. Shan has estimated that approximately 16 million jobs, over 2% of China’s labor force, are tied to the production of goods destined for the U.S.
Recently, the Trump administration ended the so-called “de minimis” exemptions that previously allowed Chinese e-commerce businesses, such as Shein and Temu, to ship low-value items to the U.S. without incurring tariffs.
Wang Dan, director for China at political risk consultancy Eurasia Group, has warned that the elimination of the de minimis rule and declining cash flows are driving many small- and medium-sized enterprises toward insolvency, resulting in increasing job losses in regions dependent on exports.
She anticipates that the urban unemployment rate could average 5.7% this year, surpassing the government’s 5.5% target.
Beijing holds stimulus firepower
In recent years, rising exports have assisted China in offsetting the impacts of a downturn in the property sector—a situation that has adversely affected investment, consumer spending, and strained both governmental finances and the banking sector.
According to Ting Lu, chief China economist at Nomura, the combination of property market troubles and stringent U.S. tariffs could lead to significant economic slowdowns, heightening risks of a “demand shock” greater than anticipated.
Despite growing calls for stronger stimulus measures, many economists believe that Beijing may hesitate to act until clear signs of further economic decline emerge.
“Authorities do not perceive deflation as a crisis; rather, they view low prices as a means to bolster household savings during this transitional economic period,” Wang from Eurasia Group stated.
Regarding the impact of increasing competition within China’s market, Peking University professor Justin Yifu Lin suggested that the government can implement fiscal, monetary, and other strategic policies to enhance purchasing power.
Lin remarked, “The challenge the U.S. faces is larger than China’s,” during a recent press conference. He believes the current tariff situation will resolve soon but did not provide a specific timeline. With China’s production capabilities still intact, Lin projected it could take one to two years for the U.S. to reshore manufacturing, during which American consumers may experience elevated prices.
— Finance Newso’s Evelyn Cheng contributed to this story.
