China Faces Deflation Risks as U.S.-Bound Exports Flood Domestic Market

As the United States imposes the highest tariffs in a century, Chinese exporters are being urged to redirect shipments back to the domestic market — a strategy that may push the world's second-largest economy deeper into deflation.

Major platforms like JD.com, Tencent, and Douyin have stepped in to promote discounted goods originally meant for U.S. consumers. JD.com alone pledged 200 billion yuan to support exporters, offering up to 55% discounts. But this move is sparking fierce price wars, reducing company margins and threatening employment across key sectors.

“The side effect is a ferocious price war,” warned Barclays’ senior China economist, Yingke Zhou.

China’s consumer price index has slipped into negative territory, while the producer price index dropped for the 29th consecutive month. Economists at Goldman Sachs now forecast 0% CPI growth for 2025 and a 1.6% fall in wholesale prices.

The trade standoff has already triggered factory shutdowns and job losses, with Goldman estimating that 16 million workers are tied to U.S.-bound goods. Ending the “de minimis” rule in the U.S. has further hurt Chinese e-commerce giants like Shein and Temu.

Despite growing calls for economic stimulus, Beijing is holding back. Authorities argue low prices can cushion households, but analysts warn prolonged deflation could worsen overcapacity and stall recovery.

“The economy faces dual drags — collapsing exports and a weak property sector,” said Nomura’s chief China economist Ting Lu.