China's Economy Struggles with US Tariffs and Deflation

China is diverting exports to the domestic market due to tariffs imposed by the US, risking deeper deflation in an economy already struggling with weak consumption and excess capacity. Economists expect China's retail inflation to fall to 0% in 2025, and wholesale prices to decline by 1.6%. The move is likely to intensify price wars, erode companies' profitability, and weigh on employment. Goldman Sachs projects China's GDP to grow just 4.0% in 2025, below the government's target of "around 5%". Many economists believe Beijing will wait for signs of economic deterioration before implementing robust stimulus measures.

China's garment factories, particularly those in Guangzhou, are facing a significant crisis due to new tariffs imposed by the US, including a tax on cheap imports. Factory owners, who previously sold clothing on platforms like Amazon, Shein, and Temu, are struggling to maintain profitability as the tariffs have cut their revenue in half. Many have reported declining orders, suspended production lines, and are considering relocating to provinces with lower labor costs or countries like Vietnam. The tariffs have compounded existing challenges, including decreased domestic consumption in China due to the property market collapse. As a result, factories are being forced to adapt, with some shifting production to other regions or exploring alternative sales channels, while others are shutting down. The Chinese government is encouraging domestic e-commerce platforms to help small businesses sell to the home market, but with consumers being cautious about spending, it remains uncertain whether this will be enough to offset the losses.

China's garment industry, a significant contributor to the global clothing supply, is struggling due to the trade war and tariffs imposed by the US. Many small factories in Guangzhou, a major hub for the industry, have seen a decline in orders, with some reporting a 50% drop. Factories are operating with reduced staff and profit margins are thin, making it difficult for them to survive. Despite the challenges, industry workers remain optimistic, believing that global demand for clothing will continue, and are adapting by seeking new buyers in other regions or relocating to avoid tariffs.