Back in 2015, when China faced deflation, the authorities relied on large-scale financial stimulus and reducing excess capacity. About 900 billion dollars were allocated to housing programs, which successfully revived the economy and rescued it from a deflationary spiral.
Now, although the situation appears similar, China is refraining from mass stimulus. Instead, focus is on curbing overproduction and ensuring controlled economic development. These measures force companies to produce according to demand, but consumer appetite is weak, and China’s debt burden has surpassed 300% of GDP. Lowering lending rates brings little effect as key rates are already near historic lows.
China struggles to repeat past policies due to changes in economic structure and the emergence of overproduction in new sectors like electric vehicles and renewable energy, mostly dominated by private enterprises that are harder and costlier to regulate compared to state-owned firms.
The government seeks to boost domestic demand via proposals to raise pensions, reduce medical contributions, and grant more support to families, but these remain mostly under discussion. Real estate stabilization attempts also have limited impact due to declining demand and an aging population.
Major infrastructure projects are considered another way out but have lost their previous efficacy, and the results are stretched over years. The existence of non-productive enterprises, surviving on subsidies and cheap loans without contributing innovation, also drags growth down.
Analysts concur: without clear reforms to grant households and businesses more economic freedom, China risks a prolonged stagnation. The upcoming autumn plenum of the Communist Party may define the next strategic steps for the country.
Thus, China’s current crisis requires fresh approaches to boosting demand and enacting structural reforms to avoid lasting deflation and restore sustainable growth.
