China, the world's second largest economy, has been in a deflationary trap for the third consecutive year. This phenomenon, where prices are not only stagnant but falling, results from overproduction and weak domestic demand.
Chinese enterprises produce far more goods than the domestic market can absorb. This issue affects most sectors—from steel and concrete to electric vehicles, food products, and pet supplies. More than a quarter of public Chinese companies are currently unprofitable—the highest proportion in 25 years.
Local governments, competing to fulfill Beijing's economic goals, have massively backed the growth of new businesses, aggravating the overproduction crisis. As a result, China now manufactures over 30% of the world's industrial goods but cannot consume them internally.
The problem is especially acute in the electric vehicle sector, where excess capacity has reached up to 10 million units per year. Due to fierce competition and weak demand, car prices have been falling for years, with some dealers selling below cost.
Similar dynamics are seen in other sectors, from pet goods to food delivery. Price dumping and survival battles lead to price drops of up to 30%.
The Chinese government is attempting to address the situation by stimulating consumption. Programs offering discounts for exchanging old cars or appliances for new ones have been rolled out. However, there's a risk the country could face a prolonged stagnation period, similar to Japan's "lost decades" when people, expecting ever-lower prices, delayed purchases.
The situation is further complicated by high youth unemployment (17%) and uneven income distribution. If the trend continues, social and economic challenges will deepen.
Beijing recognizes the need to boost household consumption and is reforming economic policy in an effort to avoid a long-term downturn.