^{Source: South China Morning Post}

Tariff Pressures and Domestic Market Saturation

China's economy is grappling with the repercussions of intensified U.S. tariffs, compelling exporters to pivot towards the domestic market. This shift, while aiming to mitigate external shocks, is inadvertently exacerbating deflationary trends and straining the nation's economic fabric.

Key Developments:

• U.S. Tariffs Surge: In 2025, the U.S. escalated tariffs on Chinese imports to an unprecedented 145%, prompting China to retaliate with 125% tariffs on U.S. goods .
• Exporters Redirect to Domestic Market: Facing diminished overseas demand, Chinese exporters are increasingly targeting the domestic market, leading to heightened competition and price reductions.
• Deflationary Pressures Intensify: The influx of goods into an already saturated market is contributing to a deflationary spiral, with consumer and producer prices declining.

Economic Indicators Reflect Mounting Deflation

Recent data underscores the deflationary trajectory:

• Consumer Price Index (CPI): After modest growth in 2024, China's CPI is projected to stagnate at 0% in 2025 .
• Producer Price Index (PPI): The PPI has been declining for 29 consecutive months, with a 2.5% year-on-year drop in March 2025.
• Retail Sales: Growth remains sluggish, reflecting weak consumer demand despite government incentives.

Government Initiatives and Corporate Responses

To counteract the economic downturn, both governmental bodies and corporations are implementing measures:

• E-commerce Platforms Mobilize: JD.com has committed ¥200 billion (approximately $28 billion) to support exporters, offering discounts up to 55% on goods originally destined for the U.S. market. Similarly, Tencent and Douyin are promoting domestic sales of these products.
• Policy Support: Vice Commerce Minister Sheng Qiuping emphasized leveraging China's vast domestic market to buffer against external shocks, urging coordinated efforts to stabilize exports and boost consumption.

Employment Concerns Amid Economic Strain

The redirection of exports and ensuing price wars are impacting employment:

• Job Losses: Goldman Sachs estimates that 16 million jobs, over 2% of China's labor force, are tied to U.S.-bound goods production, putting them at risk due to declining exports.
• Urban Unemployment: The urban unemployment rate is projected to average 5.7% in 2025, surpassing the official target of 5.5% .

Trade Diversion Tactics and International Implications

In response to U.S. tariffs, Chinese exporters are employing strategies to circumvent trade barriers:

• 'Origin Washing': Products are being rerouted through third countries like Malaysia and Vietnam to disguise their Chinese origin, raising concerns among U.S. trade partners and leading to increased scrutiny .
• Global Supply Chain Adjustments: Companies are relocating production to Southeast Asian nations to mitigate tariff impacts, reshaping global manufacturing dynamics.

Outlook: Navigating Economic Challenges

China's efforts to stabilize its economy amid escalating trade tensions and internal deflationary pressures are at a critical juncture. While the 'dual circulation' strategy aims to bolster domestic consumption and reduce reliance on exports, its effectiveness is being tested. The coming months will be pivotal in determining China's economic trajectory and its role in the global market.

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