China’s stubborn deflation really is a global economic problem

China is spiraling deeper into deflation, and it’s not just Beijing’s problem anymore—it’s everybody’s. Prices have been falling for six straight quarters. One more, and China ties the grim record from the Asian Financial Crisis in the 1990s.

But it’s not like Beijing is sitting around doing nothing. Policymakers are trying to fix it, but nothing seems to be sticking. And as Donald Trump preps his return to the White House with promises of crushing Chinese exports with a 60% tariff, things are about to get even worse.

What is deflation anyway, you ask? Well basically, it’s when prices across the board don’t just rise slowly or stagnate—they straight-up drop. This isn’t your standard “less inflation.” It’s a full-blown economic retreat where falling prices scare consumers into hoarding cash instead of spending.

Why China’s deflation feels unstoppable

Unlike in the U.S., where people rushed to spend after COVID-19 restrictions lifted, Chinese consumers stayed cautious. There’s a reason for that. The real estate crash in China hasn’t just affected homebuyers—it rattled everyone.

Big-ticket purchases? Forget it. Consumers are holding on to their money, waiting for prices to drop even more. But that’s not the only thing dragging China into deflation. The government clamped down on high-paying industries like tech and finance.

Layoffs and pay cuts followed, and people stopped spending. On top of that, China pushed for more manufacturing and advanced tech, flooding the market with goods no one wanted to buy. Businesses had no choice but to slash prices.

Here’s the thing: falling prices don’t help the economy. When people think prices will keep dropping, they stop buying. And when they stop buying, businesses make less money, which leads to layoffs and even deeper price cuts.

Bloomberg economists call this “debt deflation,” where rising inflation-adjusted interest rates make paying off debt even harder. It’s a vicious cycle that’s impossible to escape without aggressive intervention.

Beijing knows this but has been unusually cautious. After the pandemic, China didn’t go back to its old playbook of massive infrastructure projects and housing booms.

President Xi Jinping is all about advanced technology and sustainable growth now. While that sounds good in theory, it means there’s no big money injection to save the day.

Does Beijing have a plan?

The People’s Bank of China has tried cutting interest rates multiple times over the past two years, hoping to get people spending again. It’s not working. Real estate restrictions were loosened, down payments were slashed, and mortgage rates were cut to revive the housing market. But none of this has stopped the spiral.

Banks have been told to lend more to developers so they can finish stalled projects. Local governments have even been asked to buy unsold apartments and turn them into public housing. Meanwhile, the central government launched a $1.4 trillion program to help local governments manage their debt.

On top of that, China has tried handing out subsidies for cars and home appliances. Low-income families and students got some aid too. Still, economists aren’t convinced this is enough. The housing market is still a mess, and consumer confidence is dead in the water.

What about the numbers? China uses three major indicators to measure deflation. First, the consumer price index (CPI), which tracks household spending, hit a five-month low in November. Then there’s the producer price index (PPI), which measures industrial prices—it’s been shrinking for over two years.

Finally, there’s the GDP deflator, which looks at price changes across the entire economy. And it’s not looking good either.

The products dragging prices down

Transportation is one of the biggest drags on consumer prices right now. Car prices are falling, and even gas prices are down. Carmakers like BYD are in full panic mode, asking suppliers to cut costs to stay competitive. The result? A full-blown price war in China’s auto market.

Real estate is another major problem. The housing market is bloated with unsold apartments, and there’s no quick fix for it. Manufacturing is just as bad. China’s push for more production created a glut of goods no one is buying. It’s basic supply and demand—except here, supply is winning, and it’s crushing the economy.

Then there’s the highly-expected trade war with America. Trump has threatened to add another 10% tariff on all Chinese imports as soon as he takes office next month. If these tariffs go through, China’s export growth—one of its few bright spots—will take a massive hit.

Anyone holding Chinese equities is feeling the pain as corporate earnings drop. Luxury carmakers and high-end brands that rely on China’s wealthy consumers? Their sales are tanking.

On the flip side, China’s bond market is doing great. Low-risk government bonds are attracting investors who expect even more rate cuts from the People’s Bank of China. But this is hardly good news. The broader economic picture is bleak, and the bond market boom is just a symptom of the larger problem.

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