Deflation delays consumption in a pretty straightforward way: If you think it’s going to cost less tomorrow, you won’t buy it today unless you absolutely have to.

That can become self-fulfilling. If you’re a business, you need to sell your products and services now not next month because you have payroll to make and vendors to pay and so on. In order to get customers in the door, you start discounting. Your competitors see that, and they don’t want to lose market share, so they start discounting too. Consumers see a race to the bottom, and that only gives them another reason to delay purchases, compelling more discounting and around we go.

China’s grappling with mild deflation. Consumer price growth was negative a fourth month in May and wholesale prices fell a 32nd month. Consumer sentiment’s very subdued and that’s trouble at a time when the trade war threatens to undermine exports, shifting more of the overall growth burden to domestic consumption. What to do?

Well, if deflation delays consumption, you need to figure a way to pull spending forward. One way is to revive households’ joie de vivre — to stoke consumers’ “animal spirits.” But that’s difficult when you’re determined that everyone should live under the yoke of a totalitarian dictatorship. From a messaging perspective, “Get happy or we’ll kill you” tends to be counterproductive.

Another way to bring forward consumption is for the federal government to step in as a “spender of last resort.” But that’s another term for kitchen sink-style fiscal stimulus, and Beijing’s wary of that for a laundry list of reasons, some of them entirely legitimate others not at all.

So far, China’s approach to countering deflation is an eclectic mix of piecemeal measures including a giant cash-for-clunkers program encompassing everything from refrigerators to cell phones. In the beginning, the initiative sounded promising (sort of), but it took a cartoonish turn when the Party expanded it to include items like rice cookers and microwaves. It was easy to caricature: Chinese lined up down the street and around the corner holding irons, old lamps and VCRs waiting to get rebate vouchers.

Suffice to say the program proved wholly insufficient to address the domestic demand problem in a comprehensive way, but it wasn’t a total failure, and it’s still showing up in the data. On Monday, Xi Jinping’s statisticians said retail sales rose 6.4% from a year earlier in May, the largest YoY jump since December of 2023, when the Chinese economy was lapping an easy two-month comp (the November-December 2022 period was marked by street protests against virus protocols).

The retail sales print beat every estimate and as the figure above shows, May was the first month in 17 during which the annual rate of retail sales growth outstripped the YoY pace for industrial output.

That’s good news, but it may not be sustainable. In addition to a seasonal quirk (a shopping holiday occurred earlier this year), the retail sales figures were flattered by a record jump in purchases of electronics, which rose more than 50% from May of last year. Cell phone-buying was up by a third. Those products are covered by the cash-for-clunkers subsidies.

“Looking at the breakdown of retail sales, it is not surprising to see that home appliances and mobile phones, the key items covered by the government’s subsidy program, remained in the driver’s seat,” SocGen’s Michelle Lam and Wei Yao remarked, adding that over the first five months of the year, the program “supported CNY1.1 trillion in consumer spending.”

Lam went on the caution that the subsidy program “has been halted in some cities recently due to funding delays,” and while those will likely be “resolved with more support [from] the central government later this year,” any nascent revival in consumer spending will be challenged by “the diminishing impact of the subsidy program and the still fragile stabilization in house prices.”

Speaking of the housing market, new home prices in China fell by the most since October in May, dropping 0.22% MoM, and by the most since September for resale properties.

Meanwhile, the credit impulse remains moribund, to put it politely. New yuan loans were just CNY620 billion in May, a poor result, particularly coming off April’s CNY285 billion.

As the figure shows, growth in the outstanding loan stock decelerated back to a record low of just 7.1%.

In a testament to the idea that China’s experiencing a balance sheet recession, new loans to households were just CNY54 billion in May. So far in 2025, Chinese households have taken out less than CNY575 billion of new loans, the fewest for the January-May period on record.

Not to put too fine a point on it, but it’s a good thing for Xi that Donald Trump doesn’t have the patience, discipline nor the domestic political support to sustain maximum tariffs on China. Because notwithstanding Monday’s optically buoyant retail sales readout, the world’s second-largest economy remains mired in a deflationary quagmire, and thereby very vulnerable to an external economic pressure campaign.