China has been experiencing continuous deflation, with prices falling for six consecutive quarters. Traditionally, Beijing has responded to deflation with aggressive monetary easing and fiscal stimulus.
This decline in purchasing power is not a short-term phenomenon but a structural shift. Due to the depth of the problem, it has been difficult for the government to reverse the rapid shrinkage of the middle class through measures to stimulate the economy by adding leverage. Given that China’s real estate sector represents 70 percent of the nation’s household wealth. If the crisis persists, it could erode both consumer and business confidence.
China’s economy underperformed last year, and despite introducing official relief measures, the desired results have yet to materialize. The real estate crisis has intensified, local government debt remains high, consumer spending is weak, exports are underwhelming and there is a noticeable outflow of companies and capital from the country. While the central government has implemented various strategies to boost economic growth.
The real estate sector, which contributes around 20 percent to GDP, is no longer the driving force it once was; instead, it risks becoming a drag on economic progress. Meanwhile, infrastructure investment, accounting for approximately 24 percent of GDP, can no longer be pursued as freely as before due to local governments’ substantial debt burdens.
Recent economic data indicate that China’s economy is likely to remain trapped in a deflationary cycle for an additional two years. The weaker-than-expected Consumer Price Index and Industrial Producer Price Index highlight this ongoing deflationary trend, likely worsening already sluggish domestic demand. China’s deflation is creating a vicious cycle, resulting in higher unemployment and reduced consumer willingness to spend as people anticipate lower future prices. To effectively address the issue, deflation cannot be solved merely by printing more money; it requires a holistic strategy.
It is important to note that while China’s economy faces significant internal challenges and intense external pressures, it is not on the brink of collapse just yet. The country still has several advantages. During the first three quarters of 2024, the value added by industries above the designated scale grew by 5.8 percent compared to the previous year. Specifically, the value added from high-tech manufacturing and equipment manufacturing industries in this category saw annual increases of 9.1 percent and 7.5 percent, respectively. This demonstrates that critical sectors are thriving despite the broader challenges.
