In 2020, Zhou Fujin purchased an apartment in northeast Beijing, close to a reputable high school, expecting the rent would substantially cover his mortgage. However, over the past years, the value of the property and rental income have sharply decreased, placing a financial strain on his family. This personal struggle unfolds within a broader economic context, as China grapples with deflation—a decrease in price levels, contrasting with rising inflation experienced in many parts of the world. While lower prices might seem beneficial, deflation indicates weaker demand and stunted economic growth.
This economic scenario sets the stage for China’s annual parliamentary session commencing on Wednesday. Although it’s uncertain how the ruling Communist Party will address deflation, some economists anticipate increased government expenditure. Observers are keen to see any adjustments to China’s annual economic growth goal, which has lingered around 5% over the last two years. The broader challenges include declining housing prices that have dampened consumer spending despite continued industrial production.
The deflationary trend is the most prolonged since the 1960s, with the gross domestic product deflator, an extensive measure of price changes in the economy, dropping to -0.8% in the last quarter of 2024, escalating from -0.5% in the previous quarter. These statistics reflect more than just numbers for Zhou; his apartment, initially costing 2 million yuan ($275,000), is now valued at approximately 1.4 million yuan ($193,000). Concurrently, the rental income has fallen from 2,300 yuan ($316) monthly to 1,700 yuan ($234), while mortgage payments exceed 3,000 yuan ($413).
Concurrently with Zhou’s property purchase, the government targeted excess borrowing by real estate developers, plunging the sector into crisis and causing numerous property companies to default. As a result, Zhou’s real estate brokerage faced financial losses, prompting him to diversify into home decoration services to break even. Reflecting on these challenges, Zhou noted the impact on his income and spending priorities, emphasizing banking mortgages and education over other expenditures.
Lu Wanyong, who runs a picture framing business in Beijing, reports drastically reduced customer numbers, with many opting to repair old frames rather than purchase new ones. Struggling with dwindling savings, he is concerned about affording the shop’s 6,000 yuan ($825) rent. Contemplating a career shift, he hesitates due to unfamiliarity with other industries and market difficulties.
Experts assert that deflation is more challenging for governments to manage than inflation because it requires addressing foundational issues. China’s deflation results from a combined excess manufacturing capacity and consumer hesitance to spend amid economic concerns. Additionally, a housing crisis has significantly eroded household wealth, with an estimated $18 trillion loss. Economist He-Ling Shi notes that a thriving real estate market engenders consumer spending confidence, now diminished by plummeting housing prices.
This deflationary environment reduces companies’ profits, potentially triggering a severe “deflationary spiral.” Such spirals can result in job cuts, further diminishing household income and leading to reduced consumption, risking recession or depression. Fitch Ratings recently cautioned that deflation is becoming entrenched in China, urging the leadership to stimulate demand.
Meanwhile, U.S. tariffs imposed by President Donald Trump could reduce China’s GDP growth by up to 1.1 percentage points in scenarios where exports to the U.S. are significantly curtailed. Deflation also poses a sensitive political issue for China, leading to policy measures like reduced interest rates and mortgage down-payments, alongside initiatives to boost loan availability and public housing projects.
Public discussions, however, largely avoid directly addressing deflation in favor of highlighting governmental achievements. The reluctance to discuss deflation stems from fears of exacerbating consumer trepidation, further stifling consumption. Economists like Michael Pettis advocate rebalancing the economy to increase consumer purchasing power, aligning with proposals for economic growth linked to rising personal incomes and government-issued vouchers as interim solutions. Long-term strategies include resolving industrial inefficiencies and bolstering healthcare, pension, and education systems.
Addressing these structural challenges, reaffirmation of government roles in education, healthcare, and social security is deemed crucial for any sustainable economic recovery. Properly implemented, such initiatives could offer stability and bolster consumer confidence in China’s economic landscape.
