China's Deflation Deepens, Economy Struggles with Demand

Deflation, contrasting with global inflation, stems from excess capacity, weak consumer spending, and a property crisis that erased an estimated $18 trillion of household wealth, according to a Barclays report. Personal accounts, such as Zhou Fujin's plummeting apartment value and Lu Wanyong's struggling picture framing business, concretely illustrate the economic strain.

Falling prices reduce corporate profits, risking a "deflationary spiral" of layoffs, further decreasing household incomes and consumption, potentially leading to recession or depression, as warned by Fitch Ratings. Additionally, President Donald Trump's new 20% tariffs on Chinese exports are expected to shave up to 1.1 percentage points off China's GDP growth this year in a severe scenario, states Erica Tay, director of macro research at Maybank Investment Banking Group.

China's leaders have implemented measures like interest rate cuts, reduced mortgage down-payments, and programs for local governments to acquire unsold apartments. However, they avoid directly addressing "deflation" publicly to prevent consumer panic.

Economists Michael Pettis of Peking University, Sun Lijian of Fudan University, and Louis Kuijs of S&P Global Ratings advocate for fundamental structural reforms, including boosting consumer purchasing power through vouchers and revamping healthcare, pensions, and education systems, to address chronic issues like excess industrial production and inefficient state industries.