Deflation: A Fundamental Sign of China’s Economic Decline and a Contributor to It

Deflationary pressures persist in China, signaling serious economic imbalances, and if deflation persists, it will exacerbate these problems as well.

Motorists ride past a screen showing the gross domestic product (GDP) in the Jing'an district of Shanghai, China, on April 9, 2025. Hector Retamal/AFP via Getty Images

Commentary

Deflationary forces seem to be gaining momentum in China.

Factories, excessively built up by Beijing’s planners, continue to churn out more products than either Chinese consumers or foreign buyers want. Managements—whether in private firms or state-owned enterprises—continue to cut prices to unload their bloated inventories. Their profits have suffered accordingly.

These pressures have persisted for so long now that people have come to expect price cutting. Such a psychology, once embedded, will have adverse economic consequences of its own.

No matter how one parses the statistics, they look bad. Consumer prices have not fallen, largely because of increases in services, but even then, the upward movement is all but imperceptible. The last report from Beijing’s Ministry of Statistics shows that in February, consumer prices were about flat with year-ago levels.

Meanwhile, goods at the producer level—what the ministry refers to as the “factory door”—were in March 2.5 percent below their year-ago level. They have been in decline since October 2022. China’s gross domestic product (GDP) deflator, the broadest price gauge in the economy, has declined for six consecutive quarters.

This problem has at least three roots. Top of the list is the dramatic slowdown in the growth of exports over the past couple of years. Much has been made about the tariffs that President Donald Trump is putting in place, and they will become a significant contributor to this economic malaise. Still, they are only part of a larger picture.

The Biden administration, for instance, though it criticized the 2018 and 2019 Trump tariffs going into the 2020 presidential election campaign, nonetheless kept them in place once in office and added a 100 percent tariff on Chinese-made electric vehicles (EVs), parts, and batteries.

The European Union has also placed tariffs on Chinese-made EVs. Nor is the export shortfall purely a result of actions by Western governments. Because Beijing’s zero-COVID policies interfered with production and deliveries for years after the pandemic ended, foreign buyers have for some time actively sought to diversify supply chains away from China.

To be sure, China of late has seen a sharp rise in export demand. Several media outlets have made much of this jump, claiming that perhaps it is a sign of recovery. This is a false signal. Foreign buyers, anticipating a rise in the cost of Chinese goods due to the Trump tariffs, have stepped up immediate purchases in an effort to build a less expensive inventory for sale after the tariffs take effect. Aside from such immediate effects, the imposition of tariffs promises to accelerate the diversification of sourcing away from China and impede Chinese export growth still more than in the past.

While the slow growth of exports has contributed to deflationary pressures, so also has a paucity of domestic demand. China’s long-running property crisis lies behind this sad reality. Not only has the financial failures of several property developers retarded advances in China’s important construction sector, but the crisis has spread to the Chinese consumer by depressing real estate values and hence the net worth of millions of Chinese households. While Chinese people at just about every income level save to rebuild their household wealth, they remain highly reluctant to spend, leaving the steady output of China’s factories to pile up on retail shelves.

If this were not enough, Beijing in 2023 set off on misguided policies that have exacerbated the situation. To make up for the insufficient export growth, the authorities decided to increase demand at home by pouring public funds into an expansion of production capacities in select industries. They chose what they saw as industries of the future—technology, EVs, biomedical, and the like—but all this did was raise the output of products that in the present neither domestic nor foreign buyers wanted. And since much of this additional productive capacity is still coming on line, coming quarters will likely see more deflationary pressure as managers try to sell off the excess inventory.

A fundamental danger also lies in this deflationary situation. Should foreign and domestic buyers come to see wholesale price deflation as normal, they will delay purchasing on the expectation that tomorrow’s prices will be more attractive than today’s. These delays will then contribute to the demand shortfall and put additional downward pressure on product prices, creating something of a self-fulfilling prophecy.

This is what happened in Japan in the 1990s and the first two decades of this century. It made the recovery of a forward economic momentum that much more difficult than it otherwise would have been. Beijing already faces enough trouble getting its economy back on track. It does not need this, but deflation has become a sad reality.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.