1 Beijing’s policies inadvertently worsen deflationary pressures in China
China’s May CPI and PPI data
June 9
The PRC National Bureau of Statistics released consumer and producer price data for May.
CPI
- In May 2025, China’s national consumer price index fell 0.1 percent from a year ago.
- In the January-May 2025 period, the average CPI was down 0.1 percent from the previous year.
- China’s CPI was in negative territory for four of the first five months of 2025; January, which was boosted by traditionally higher consumption during the Chinese New Year period, was the only month that saw increased consumer prices.
PPI
- In May 2025, China’s producer price index fell 3.3 percent year-on-year and 0.4 percent month-on-month. Meanwhile, purchasing prices for industrial producers (PPIRM) dropped 3.6 percent year-on-year and 0.6 percent month-on-month.
- In the January-May 2025 period, both the PPI and PPIRM declined by 2.6 percent from a year ago.
- China’s PPI has been stuck in a downward trend since October 2022, with May 2025 marking the lowest point in the past year for both the PPI and PPIRM.
Backdrop
Sino-U.S. trade tensions ratcheted up in April 2025 after President Donald Trump announced his “Liberation Day” tariffs. Both sides are in an uneasy trade truce at the time of writing.
Our take
China’s economy continues to grapple with persistent deflation, with price indices reaching historic lows for extended periods and trends pointing to further deterioration. Beyond global demand contraction and escalating U.S.-China trade tensions, the CCP’s various policies are exacerbating deflationary pressures.
1. The CCP authorities have targeted the issuance of 14 trillion yuan in bonds in 2025 to stimulate the economy. However, the bulk of the funds raised are being allocated to infrastructure and production, with only 2 percent directed towards driving actual consumption.
About a third of Beijing’s total bond issuance (around 4 trillion yuan) is earmarked for servicing interest on central and local government debt (totaling 86 trillion yuan), as well as recapitalizing the banks (around 500 billion yuan). The prioritization of debt management over consumer stimulus limits demand-side growth, perpetuating deflation.
Meanwhile, around 4.5 trillion yuan of total bond issuance has been earmarked for infrastructure projects, including railways, airports, farmland, and security enhancements. Such investments may offer immediate boosts to the GDP through job creation and increased economic activity, but their returns are increasingly marginal and could become fiscal burdens later. Also, local governments and industry elites tend to be the main beneficiaries of infrastructure investment, while private enterprises and citizens often face losses due to delayed payments from government and state-owned enterprises. In particular, contractors could face payment delays for years (they are frequently required to front project costs) and are at risk of being targeted by local governments for “debt criminalization.” The strain on small- and medium-sized enterprises could lead to wage arrears, curtailed investment, and reduced consumer spending, all of which intensify deflation. Beijing is likely aware of the problems and has attempted to mitigate some of them, such as with the State Council’s June 1 regulation mandating local governments to settle outstanding SME payments for projects and services within 60 days.
Of Beijing’s 14 trillion yuan in bond issuance, about 2 trillion yuan will go towards developing enterprises that adopt artificial intelligence and advanced equipment. While this initiative is aimed at raising productivity and addressing future labor shortages amid China’s declining demographic, it could in the interim come at the cost of existing jobs, intensifying price competition and industry overcapacity. The resulting surplus of goods, coupled with declining household incomes, discourages consumption and fertility, slows money velocity, and deepens deflationary pressures.
Finally, 2 percent of bond issuance (300 billion yuan) is allocated to a consumer goods “trade-in” subsidy program. But rather than generating new demand, this initiative merely shifts future durable goods purchases forward while exhausting household spending power. Once the subsidies are depleted, consumption of those goods is likely to revert to prior levels. The limited impact of the initiative is starting to surface, with several local governments recently suspending their local program after having exhausted their respective subsidies fund.
Beijing has no good solution to reversing deflation. The CCP authorities can technically issue welfare payments or consumer subsidies, but likely have not done so due to concerns that the Chinese people would use those payments or subsidies to pay off existing debts first rather than spend, which mutes the economic impact of the move. Worsening economic conditions and Beijing’s lack of solutions suggest that deflationary trends in China are set to stay and worsen.
2. To bolster fiscal revenue, the CCP has escalated its “overseas wealth tax” enforcement by lowering thresholds and broadening its scope. Bloomberg News reported on June 5 that the CCP authorities are presently scrutinizing a broad range of offshore income, including investment returns, dividends, and employee stock options, citing people familiar with the matter. The people said that investment gains can be taxed as much as 20 percent. A source said that the tax authorities are focusing on Chinese residents with offshore investments, especially in Hong Kong and U.S. stocks. Further, Bloomberg reported that tax service providers have seen an increase in inquiries in recent months from clients with less than $1 million in assets, a noteworthy shift from a crackdown in 2024 that was mainly aimed at individuals with at least $10 million.
Beijing’s increased scrutiny of wealthy Chinese is likely to accelerate the emigration of affluent individuals, reduce domestic investment and consumption, and worsen deflationary pressures.
3. After the 2025 Two Sessions, Beijing launched a nationwide campaign to reinforce adherence to the central Eight-point Regulations and deployed central guidance groups to oversee compliance. This campaign, which is aimed at tightening Party discipline and curbing corruption, appears to have had an inadvertent effect of depressing consumption as local officials become overly cautious (“prefer left rather than right”) and take the campaign to extremes. For instance, some local leading officials have explicitly prohibited gatherings of more than three public sector employees for meals, a move that is impacting the already struggling catering industry.
Yet the campaign to forge a more disciplined and austere cadre presses on. On May 28, the Central Commission for Discipline Inspection reported 6,483 cases of irregular dining violations investigated nationwide in 2025. On June 11, the commission’s website published a lead article on the persistent problem of “improper dining and drinking” highlighting ongoing issues and emerging covert practices, before urging innovative oversight and identification to resolve those issues.
We believe that the CCP authorities will not be able to stamp out the “irregular dining and drinking” problem among the rank and file in the officialdom, much less those in entrenched elite networks. But the campaign’s unintended consequence — a contraction in the dining and hospitality sectors — could exacerbate deflation by curbing consumer spending in an already weakened economy.
4. The CCP authorities’ various policies are amplifying China’s economic risks and deepening deflation. This is especially so when Beijing’s policies are being pursued by local officials who are more interested in boosting their performance metrics by being especially “politically correct” in policy implementation.
China’s deflationary spiral will persist and worsen barring a fundamental shift from the Xi leadership, including relaxing the Party’s tightening grip over everything, unleashing private sector vitality, redirecting investment from production to consumption, and significantly increasing public welfare subsidies.
2 Who came out ahead in US-China trade talks in London
‘Framework’ to restore trade truce agreed in London talks
June 9 – June 10
The U.S. and the PRC held trade talks in London. Leading the U.S. team was Treasury Secretary Scott Bessent, Commerce Secretary Howard Lutnick, and U.S. Trade Representative Jamieson Greer. The PRC contingent was led by vice premier He Lifeng, commerce minister Wang Wentao, and the commerce ministry’s chief trade negotiator Li Chenggang.
After two days of talks, the two sides said that a “framework” to resume a 90-day trade truce was agreed and subject to approval by President Donald Trump and Chinese leader Xi Jinping. However, neither side released details about what had been agreed upon.
June 11
1. In a post on Truth Social, Trump said, “our deal with China is done,” subject to his and Xi’s approval. He added, “full magnets, and any necessary rare earths, will be supplied, up front, by China,” and that the U.S. will provide to China “what was agreed to, including Chinese students using our colleges and universities.” Trump also wrote that U.S. tariffs on China are at 55 percent while PRC tariffs on the U.S. are 10 percent, and that the bilateral relationship is “excellent.”
In another post, Trump said that he and Xi are going to “work closely together to open up China to American Trade.”
2. PRC state mouthpiece Xinhua reported He Lifeng as saying that the two sides had reached a “principled agreement” on implementing the “important consensus reached by the two heads of state during their phone call on June 5 and the framework of measures to consolidate the outcomes of the economic and trade talks in Geneva.” He then rehashed the CCP’s usual rhetoric on Sino-U.S. trade relations (“mutual benefit and win-win cooperation,” “no winners in a trade war,” etc.), but offered no details about the London “framework” and other things that were agreed upon.
China lifts rare earth export limits?
June 11
1. In an interview with CNBC, Secretary Lutnick said that the PRC side is “going to approve all applications for magnets from United States companies right away,” and the U.S. will remove its countermeasures.
2. The Wall Street Journal reported that China placed a six-month limit on rare earth export licenses for U.S. automakers and manufacturers, citing people familiar with the matter. The people added that in exchange for the PRC relaxing rare earth curbs, U.S. negotiators agreed to relax some recent restrictions on the sale to China of products such as jet engines and related parts, as well as ethane.
The people also said that the details of the “framework” to uphold the Geneva agreement are “still being worked out.” Also, people who consult with PRC officials say that Beijing wants to retain its chokehold on critical minerals to “give it valuable ammunition for future negotiations.”
A person with direct knowledge of the matter said that China agreed during the London talks to start approving rare earth license applications for U.S. companies within a week of Trump and Xi approving the trade “framework.” The temporary rare earth licenses that Beijing is expected to issue will mostly involve elements used in manufacturing electric vehicles, wind turbines, consumer electronics, and military equipment.
Also, contrary to speculation that the Trump administration only plans to use export controls as leverage to extract concessions from the PRC, people familiar with the matter said that the U.S. is not walking back measures that seek to prevent the PRC from accessing critical American technology that could advance the CCP regime’s ambitions in strategic sectors such as artificial intelligence and advanced chips. One of the people said, “Those are not on the table. But you know the Chinese will keep pushing.”
US to extend trade talk deadline?
June 11
1. President Trump told reporters before a performance at the Kennedy Center that he is willing to extend a July 8 deadline for concluding trade talks with countries before higher U.S. tariffs go into effect, but did not believe that the move would be necessary.
“We’re rocking in terms of deals. We’re dealing with quite a few countries and they all want to make a deal with us,” he said. Trump said that trade negotiations were continuing with 15 countries, including Japan, South Korea, and the European Union.
2. Secretary Bessent told the House Ways and Means Committee that the Trump administration could “roll the date forward” on the July trade deal deadline for countries negotiating in good faith. But “if someone is not negotiating, then we will not.”
Our take
1. The Sino-U.S. agreement of a “framework” to continue the trade truce that was brokered in Geneva affirms our previous analysis that both sides are playing for time. Washington needs time to wrap up favorable trade deals (including clauses aimed at countering the CCP) with other countries, manage market risks, relocate supply chains, and gradually wean the U.S. off its reliance on rare earths from China. Meanwhile, Beijing needs time to address its various economic problems, develop its so-called “new productive forces,” and “delay and wait for change” in the hopes that the domestic situation in the U.S. turns against President Trump on tariffs and other issues.
The lack of details from the London talks, however, suggests that both sides still have some ways to go before an interim deal can be reached. If so, then Trump’s appeal to Xi to work together and “open up China to American Trade” could be an effort by the former to leverage personal ties to push negotiations forward and faster.
We remain pessimistic about a longer-term U.S.-China trade deal and the easing of trade tensions. U.S. attitudes towards Communist China have noticeably hardened in recent years and the Trump administration has signaled that it is serious about confronting the CCP threat (but not going to war with China). Also, the CCP cannot give Trump what he wants because it is constrained by China’s economic realities, its adherence to ideological orthodoxy, and its overriding concerns about regime stability.
2. A popular argument in legacy media and among mainstream commentators is that China holds a “trump card” against the U.S. in trade talks with its monopoly over rare earth production (92 percent of global refined output) and export controls. However, the argument becomes less persuasive upon closer examination.
The PRC’s rare earths export regime is not as water-tight as appearances suggest. We earlier analyzed the serious problem of rare earth smuggling in China and how the PRC’s strategic mineral export controls are being undermined. Recent PRC official data hints at the persistence of the smuggling problem. Per customs data for May 2025, rare earth exports were up 22.6 percent from the previous month, but the average unit price fell by 29.7 percent. Falling prices instead of a surge suggest that there is either an ample supply of rare earths globally or there is significant smuggling of rare earths from China. Either way, Beijing has less control and leverage over rare earths than appearances suggest.
Meanwhile, the U.S. has more leverage over the PRC with its tariffs and various restrictions. China is much more dependent on exporting to the U.S. than vice versa. Also, the PRC’s reliance on U.S. ethane is significant; China imported at least 95 percent of its ethane from the U.S. in 2024, and ethane is integral to nearly all Chinese export goods. Additionally, the U.S. restricting Chinese students’ visas would significantly impact the children of CCP elites studying at institutions like Harvard, as well as the education of future high-level Chinese officials (albeit to a lesser degree), potentially eroding Xi Jinping’s political capital.
Finally, Beijing faces the risk of losing contracts from global manufacturers if it keeps playing the rare earth “trump card.” Global manufacturers could become more willing to shift contracts to India, Vietnam, and other countries if they believe that China cannot be depended upon for rare earths and other crucial components. Countries could also decide to diversify more quickly from China. On June 4, Stéphane Séjourné, the European commissioner for industrial strategy, said at a press conference, “We must reduce our dependencies on all countries, particularly on a number of countries like China on which we are more than 100 percent dependent. The export bans increase our will to diversify.”
