cross-posted from: https://lemmy.sdf.org/post/45401479
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Deflation signals a lopsided economy where supply dwarfs demand. That hurts companies, which in turn hurts workers. As consumption weakens, businesses spend less, economic activity slows, debt burdens rise, which then causes more deflation. The downward loop, known in economics as a deflationary spiral, feeds on itself once entrenched.
The trend also carries global implications: cheap Chinese exports can depress prices abroad, strain relations with trading partners, and create knock-on effects for multinational companies. Global institutions are sounding the alarm, with the International Monetary Fund projecting that consumer inflation in China will average zero this year — the second-lowest of nearly 200 economies it tracks. The Bank of Korea warned in July that China could export deflation to its trading partners.
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And the problem could be even worse than they realize. China’s official CPI figure — which offers limited item-level detail and is shaped by a complex methodology that isn’t transparent — has hovered around zero since early 2023, occasionally posting modest gains. Bloomberg News analyzed prices for dozens of products in 36 major cities as well as both official and private data across China to get a sense of how much cheaper things have become on the ground. We looked at items in categories like food, groceries, consumer goods and services, as well as housing costs and price changes for specific car brands.
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Across the market, company results show the same pressures: the share of “zombie” firms — those whose profits can’t cover interest payments on their debt — rose from 19% to 34% over the past five years; capital and R&D spending fell for most companies, a first in a decade; and more than a third of companies across industries cut jobs in 2024.
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Last year, salaries at private companies — which employ over 80% of China’s urban workforce — grew at the slowest pace on record. In industries like manufacturing and IT, wages fell for the first time in official statistics for private firms. A private survey on salaries, before being discontinued last year, showed average pay offers in 38 cities dropped 5% between 2022 and 2024. Even in China’s prized “new economy” sectors like AI and new energy, entry-level salaries are down 7% from their 2022 peak.
Meanwhile, households have boosted their savings to the equivalent of around 110% of China’s gross domestic product last year, the highest ever, indicating consumers are expecting lower prices in the future and heightened economic uncertainty.
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There is no suggestion that the situation in China will be reversed. Despite slight seasonal upticks on holiday spending, persistent weakness across both the industrial and consumer sectors indicates China’s prices are on track for a third consecutive year of deflation in 2025. And that matters: the longer prices sag, the greater the risk that growth in the world’s second-largest economy could slow for years — even decades.
Prolonged deflation would also be virtually unprecedented for a major economy since World War II, with the lone exception of Japan, which just this year escaped its own painful battle of over a decade of weak prices and deflation. It’ll also become harder for China to climb into high-income status sustainably, or to surpass the US in economic size. Years of rising incomes and property gains had fueled dreams of upward mobility, but now deflation is quietly hollowing out the confidence of China’s once-aspiring middle class.
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For Zhu, the economics professor at CEIBS, there is little time to waste for China to get itself out of this deflationary spiral. The government must pour more money into encouraging consumption — to the tune of half a trillion dollars — via unlimited vouchers for households to drive spending. If not, China’s economy is in dangerous trouble, he said.
“Historically, deflation is extremely rare,” said Zhu. “If prices are down for three years and inflation doesn’t come back, then people will believe it won’t come back. And that’s when China becomes Japan.”
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