China Faces Deflation—Can It Weather the Storm?

What’s behind China’s growing economic woes? What impacts will China’s deflation have on other nations? What’s the outlook for China’s economy?

China’s economy, once a global growth powerhouse, now faces significant challenges. Globally, China’s economic troubles could disrupt trade, influence commodity prices, and have ripple effects on the international financial system, presenting both challenges and opportunities for other nations.

Keep reading for the two different views on China’s economic situation.

China’s Economy Is Struggling

Last month, China’s consumer and producer prices turned negative for the first time since November 2020, signaling the onset of China’s deflation. This slowdown of China’s already faltering economy—the second biggest globally at around 20% of total world output—has major implications at home and abroad. 

A Brief History of China’s Economy

For decades, China’s economic performance was remarkable. Between 1992 and 2022, the nation’s yearly economic production soared from under $500 billion to $18 trillion. The prolonged period of double-digit expansion drove China’s GDP per person from less than $400 annually to $13,000.

But the nation’s economic growth has decelerated in recent years. And recently, key inflation metrics dipped below zero, indicating the start of deflation.

The shift came as a shock to many. Economists had broadly predicted China’s economy to rebound strongly in 2022 following the easing of zero-COVID restrictions. But after a promising start, the country’s post-COVID comeback ground to a halt. The economy slumped in the second quarter, hampered by weak consumer spending, declining exports, record-high youth unemployment, and a deepening property market downturn. In July, reports showed China’s yearly GDP growth rate slowing and leveling off at around 4%.

View 1: China’s Economy Is in Peril 

Experts say there are many signs that China’s economic future is in peril, including:

• Weak consumer spending. Chinese consumers have been cautious. Household savings are on the rise and people appear to be putting money into easily accessible assets.
• Manufacturing contraction. China’s global manufacturing activity has declined.
• A real estate market in crisis. China’s property market, a significant contributor to its economy at 30% of GDP, has faced challenges due to years of government actions aimed at reducing excessive borrowing by property developers.
• Heavy debt. China’s debt-to-Gross Domestic Product (GDP) ratio reached a record high of nearly three times its GDP in 2022.
• Record high youth unemployment. The jobless rate for young people in China soared to more than 20% this year, reducing spending and worsening economic challenges.
• Failed stimulus measures. To date, Beijing’s attempts to invigorate the economy, such as cutting interest rates, have been ineffective.

Experts say that deflationary pressure will aggravate and prolong these problems—causing consumers to postpone spending and companies to cut back on production, making it harder for borrowers to repay loans and reinforcing the belief that deflation will persist. This will diminish the effectiveness of traditional economic stimulus measures, intensify the country’s economic decline, and have significant global consequences.

View 2: China Can Weather Its Economic Woes 

Other experts counter that China has weathered previous doom-and-gloom predictions. They say that several factors could lead the country to perform more positively than some forecasts anticipate, including:

• China’s thriving electric vehicle and renewable energy sectors.
• Ongoing tensions with the US, which could push the country to speed up development of artificial intelligence and semiconductors in pursuit of expansion. 
• Capacity the country retains to tap options that stimulate economic growth—for example, by increasing government spending.

Further, China’s economic troubles may have silver linings for other countries, including potentially:

• Making exported products less expensive. 
• Reducing inflationary pressures in the US—enabling the Federal Reserve to raise interest rates less aggressively as it battles inflation.

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