Deflation in China is becoming increasingly persistent, threatening to repeat the record period of falling prices seen during the Asian financial crisis of the late 1990s. According to the publication Bloomberg, prices have been falling for six quarters in a row. Against the background of the economic slowdown, the Chinese authorities are increasingly promising measures to stimulate growth, but their effectiveness remains in question. Meanwhile, Donald Trump’s return to the White House and his promise to impose a 60 percent tax on Chinese goods threaten to heighten global trade tensions. How will China, the world’s second largest economy, influence global processes in 2025, and what does this mean for other countries, in particular Ukraine?
Deflation is the opposite of inflation. This is an economic situation when the general level of prices for goods and services decreases during a certain period. While lower prices may seem like a positive for consumers, prolonged deflation can harm the economy.
Where does deflation come from? First of all, it appears as a result of a decrease in demand. When consumers and businesses cut back on spending due to economic uncertainty, declining incomes, or fear of the future, demand for goods and services falls, leading to lower prices. Excess supply contributes to deflation. When producers produce more than the market needs, it creates a surplus of goods, forcing them to lower prices. It affects the growth of deflation and the reduction of production costs. For example, cheaper raw materials or energy resources can reduce the cost of goods, and this is often reflected in prices. High debts are another factor in the deflationary process.
When the population or companies have significant debts, they direct the income to repay them, not to consumption or investment. This reduces demand in the economy. Affects deflation and reduced lending. If banks restrict lending, this reduces consumer spending and investment, which can also cause deflation.
If we talk about China, then one of the most influential factors here was the collapse of the speculative market. The collapse in the real estate market reduced the level of wealth of the population and forced people to cut back on spending.
What is dangerous deflation?
First of all, the decrease in profits. Companies are taking in less revenue and cutting costs, including wages. Lower incomes of enterprises, in turn, lead to a reduction in jobs. For example, in Japan in the mid-1990s, when deflation dragged on for a decade, many companies cut wages or cut staff, which only worsened the economic situation. With deflation, the real value of debts increases, which increases the financial pressure on debtors. People delay purchases in anticipation of even lower prices, further reducing demand. A clear example is the economic situation in Europe during the financial crisis of 2008, when consumers, fearing the future, limited spending, which only deepened the crisis.
Deflation can have serious economic consequences for a country because it leads to a decrease in the general level of prices, but not in the sense that it may seem beneficial to consumers. It often becomes a manifestation of economic stagnation, and its consequences can be very dangerous.
How was it in China?
After the coronavirus pandemic, China expected a “consumer boom”, but it did not happen. Instead, consumers have curbed their spending due to low incomes, fear of economic uncertainty and rising youth unemployment. People continue to prefer saving over spending.
Infographic: IA “FACT”
Real estate in China has long been a key sector of the economy and a major source of investment for many households. After the bankruptcies of large developers such as Evergrande and the decline in housing prices, confidence in this market has fallen significantly.
Evergrande, one of the country’s biggest property developers, is on the brink of bankruptcy in 2021, sending shockwaves through the market. This became a signal for other developers who also faced financial difficulties. Country Garden, another large company, recently reported debt repayment problems, adding to the crisis. Millions of Chinese bought apartments during the construction phase, but many projects remained unfinished due to financing problems. This caused a wave of outrage and even a boycott of mortgage payments. In many Chinese cities, housing prices began to fall, which came as a shock to property owners. Falling asset values undermined confidence in the market, forcing people to refrain from new purchases. In some regions, more housing was built than could be sold, leading to the emergence of so-called “ghost towns” – areas with empty houses.
Consumers are no longer confident that developers will fulfill their obligations. This leads to reduced demand for real estate even at low prices.
The Chinese economy remains reoriented to production. In many sectors, supply far exceeds demand, forcing producers to lower prices.
China’s government, businesses and households are highly indebted. The debt burden is increasing in conditions of weak economic growth, which limits opportunities for spending and investment.
The demand for Chinese goods abroad is decreasing due to the slowdown of the global economy. This creates additional difficulties for China’s export-oriented economy.
Despite the government’s efforts to stimulate the economy through interest rate cuts and other measures, the population is in no rush to spend because they do not believe in long-term stability.
Why is Beijing failing to deal with deflation?
Fixing deflation in China is proving difficult for a number of reasons. After previous waves of deflation, the government implemented an aggressive monetary policy and large-scale fiscal stimulus. However, since the pandemic, China has taken a more cautious approach to stimulating the economy to avoid accumulating excessive debt.
Policymakers are reluctant to return to traditional methods, such as massive infrastructure construction and real estate development, as President Xi Jinping seeks to shift the economy onto new paths of development, focusing on innovative technologies. As a result, stimulus measures have been limited and investors remain pessimistic about the economic outlook. This is confirmed by the record low yield of 10-year government bonds.
The People’s Bank of China has cut interest rates several times over the past two years in an effort to stimulate demand. The government has also taken measures to improve the real estate market, including easing restrictions on home purchases, lowering down payment requirements and lowering mortgage rates.
Banks were advised to provide more loans to developers so that they could complete unfinished projects. Local authorities called for buying unsold apartments and turning them into public housing. Although there were no direct cash payments to consumers, the government subsidized the purchase of cars and household appliances, and increased aid to low-income families and students.
In late September, a sweeping stimulus plan was announced that included $1.4 trillion to help local governments manage their debt. These measures have helped to improve the economic situation in recent months, but economists believe they are not enough to reverse the overall downward trend in prices, as the housing market remains weak and public confidence faces major challenges.
As reported Reuters, rating agency Fitch on Monday cut its forecasts for China’s economic growth in 2025 and 2026. The economy is expected to grow by 4.3% in 2025 instead of the previously forecast 4.5%, and in 2026 growth will be only 4.0% instead of the previous 4.3%. The reason for such an adjustment was fears about possible additional trade barriers, in particular the increase in US tariffs on Chinese goods.
How will deflation in China affect the world economy?
China, as the second largest economy in the world and the largest exporter, has a huge influence on global economic processes. Deflation in the country causes concern among international experts, as it can cause serious consequences for various countries, including Ukraine.
Weak consumption in China means a decrease in imports of goods, including raw materials, oil, gas, metals and agricultural products. Exporters such as Australia, Brazil or the countries of the Middle East will have to look for new sales markets. This could affect global commodity prices.
As China cuts imports, so does global demand for raw materials, causing prices for commodities such as steel, copper, cement and energy to fall. For exporting countries, this means a decrease in income, which can affect their economic stability. Deflation in China could lead to “export deflation,” where Chinese companies cut prices of goods to remain competitive in global markets. Such a transfer can cause a decrease in prices in international trade, but at the same time it can create problems for companies from other countries that cannot compete with cheap Chinese goods.
If China’s economic growth continues to slow, it will increase the risks of a global recession, as China is an important driver of demand in many markets.
Ukraine, as an exporter of metals and grain, may feel the effects of deflation in China due to a decrease in world prices for these goods. We are talking about the negative impact on export revenue, which has already decreased due to the war. On the one hand, deflation in China may lead to a decrease in the price of Chinese goods that are exported to Ukraine, for example, household appliances, clothes or electronics. This can be beneficial for Ukrainian consumers. However, on the other hand, it will create additional pressure on Ukrainian manufacturers, who will not be able to compete with cheap Chinese imports. A slowdown in the Chinese economy may cause panic in financial markets, which will negatively affect investors in developing countries, including Ukraine. This may lead to an increase in the cost of borrowing for the Ukrainian government and business.
