China's economy is entering precarious territory as soaring U.S. tariffs and collapsing export orders force Chinese manufacturers to dump billions of dollars worth of goods into the domestic market, triggering a brutal price war and intensifying deflationary pressures.
After the Trump administration raised tariffs on Chinese goods to 145%-the highest level in over a century-Beijing responded with a retaliatory 125% levy. U.S. orders for Chinese goods plummeted. Exporters are now flooding Chinese e-commerce platforms such as JD.com, Tencent, and Douyin with steeply discounted products originally bound for American consumers.
"Prices will need to fall for domestic and other foreign buyers to help absorb the excess supply left behind by U.S. importers," said Shan Hui, chief China economist at Goldman Sachs. Goldman projects China's CPI to fall to 0% this year, with the PPI down 1.6% after a 2.2% drop in 2024.
Consumer prices in China have declined for two straight months, while producer prices have fallen for 29 consecutive months. Barclays Bank economist Yingke Zhou warned of "a ferocious price war among Chinese firms," with JD.com slashing prices up to 55% and pledging 200 billion yuan ($28 billion) to aid distressed exporters.
"For exporters that were able to charge higher prices from American consumers, selling in China's domestic market is merely a way to clear unsold inventory and ease short-term cash-flow pressure," said Shen Meng, director at boutique investment bank Chanson & Co. "There is little room for profits."
The sharp contraction is straining labor markets. Goldman Sachs estimates over 16 million jobs-more than 2% of China's workforce-are tied to production for U.S.-bound goods. Eurasia Group's China director Wang Dan projected urban unemployment to rise to an average 5.7% in 2025, above the government's official target.
The crisis is reshaping China's global trade geography. In Yiwu, Zhejiang province-home to the world's largest wholesale market-exporters are pivoting from the U.S. to emerging markets. Hu Tianqiang, owner of Zhongxiang Toys, said the U.S. once accounted for up to one-third of his business. "We don't care about sales to the United States," he stated. "The entire toy industry could go under. We might be on the verge of a complete supply chain collapse."
Hu has shifted his focus to Latin America and the Middle East, a strategy echoed across Yiwu's $34 billion toy export sector. "Now our biggest customers are South America and the Middle East. We're not poor; in terms of money we are rich," he said.
Yiwu manufactures 90% of the Christmas decorations found in American homes, and its entrepreneurs are aggressively adapting to the shift. The local government has launched free language programs and global trade initiatives to help firms expand into non-U.S. markets.
"The removal of the de minimis rule and declining cashflow are pushing many small and medium-sized enterprises toward insolvency," said Wang Dan. The Biden administration ended the exemption that allowed Chinese e-commerce giants like Shein and Temu to ship low-value goods into the U.S. without paying duties.
While calls for stronger stimulus grow louder, Beijing has held back. "Authorities do not view deflation as a crisis," Wang added, saying they frame lower prices as support for households during a transitional phase.
Justin Yifu Lin, professor at Peking University, said on April 21 that "the challenge the U.S. faces is larger than China's." He added that reshoring U.S. manufacturing will take at least one to two years, and in the meantime, American consumers will bear the cost of higher prices.
CNBC and DMR contributed to this report.
