Perspectives On Concerns About Deflation In China’s Economy – Analysis


By Wei Hongxu

China’s National Bureau of Statistics (NBS) recently released the country’s economic data for the first half of the year, showing that its economy grew by 5.5% during this period.

Although this growth rate is higher than the 4.5% recorded in the first quarter, it is mainly due to the low base effect from the previous year. In the second quarter, the economy grew at a rate of 6.3%, which is lower than the market’s general expectation of around 7%. Additionally, concerns have arisen about the potential onset of deflation as the domestic Consumer Price Index (CPI) achieved “zero growth” in June, leading to a pessimistic outlook on economic development. However, looking at the quarter-on-quarter figures, the second quarter still achieved a growth rate of 0.8%. Therefore, the previously feared “double-dip recession” and economic downturn caused by deflation did not materialize.

Since the second quarter, both economic and financial data have shown signs of weakness, leading to an overall slowdown in China’s economic growth, with the sustainability of growth being impacted by inadequate driving forces. Consequently, there have been continuous calls for further easing of macroeconomic policies, and deflation risk has become a compelling argument for demanding increased stimulus measures.

In recent times, economic officials have also addressed the issue of deflation. NBS spokesperson Fu Linghui stated that the core CPI in China has remained relatively stable. In the first half of the year, the core CPI, excluding food and energy, rose by 0.7% year-on-year, which was 0.1 percentage points lower than in the first quarter. Moreover, from a demand perspective, both households and businesses have been affected by the pandemic’s impact over the past three years, and the recovery of market demand will take some time. This asynchronous recovery between production and demand has to some extent led to the currently low CPI prices. Overall, China’s economy currently does not exhibit deflationary conditions, and neither is deflation expected to occur in the next phase. Although prices are currently at a low point in this phase, looking at indicators such as economic growth and monetary supply, China’s economy does not meet the criteria for deflation.

In addition, Liu Guoqiang, Deputy Governor of the People’s Bank of China (PBoC), pointed out that compared to the high inflation in external environments, the country’s prices remain relatively stable. Since 2023, the year-on-year growth rate of the CPI has shown a fluctuating decline and is likely to further decrease in July. However, Liu believes that “China’s macroeconomic steady recovery and the relatively rapid growth of broad money supply (M2) differ significantly from typical deflation in history. Therefore, there is currently no deflation, and there will be no deflation risk in the second half of the year”. He stated that “as the effects of policies continue to show, the supply-demand gap will further narrow, and after August, the CPI is expected to gradually rise. The overall trend of CPI for the whole year is expected to follow a U-shape, with price levels decreasing first and then increasing, with a possibility of approaching 1% by the year-end”.

As previously mentioned by researchers at ANBOUND, in the current situation where the Chinese economy is gradually recovering, the possibility of deflation is less probable, and it will not lead to the prospect of economic contraction. These concerns actually reflect a distortion between expectations and reality. Under the impact of the pandemic, China’s economy has shown characteristics of resilience but limited elasticity. This characteristic implies that economic recovery is a relatively lengthy process. During this ongoing recovery, while it may be slower than expected and sometimes undergo fluctuations, deflation or deflation-induced recession is not expected to occur.

According to ANBOUND’s researchers, the second-quarter economic performance in China did not show a sustained upward trend, indicating that there are certain problems in both the supply and demand aspects. The country’s economy not only faces insufficient demand but also numerous structural supply issues. Particularly, overcapacity in sectors like real estate remains prominent, and new growth drivers are still insufficient. This has resulted in various contradictions. The real estate dilemma not only hampers the growth of private investment but also affects consumer spending. This puts enormous pressure on risk prevention in the stock economy and makes it challenging for the economy to achieve comprehensive growth. Liu also mentioned recently that post-pandemic consumption and economic recovery will take time. Generally, it is believed that it will take about a year to return to normal. Additionally, resolving the real estate problem remains a long-term process; therefore, after relaxing the pandemic measures, the Chinese economy will require a considerably extended recovery period.

As previously pointed out by ANBOUND, it is essential to have a clear judgment and rational expectations about the economic situation. Neither the concerns about deflation nor the expectations of rapid recovery accurately reflect the current reality. China’s economy is currently in a stage where it needs time to recuperate; it requires policy care and support rather than stimulating it hastily. On the one hand, there is a need to handle the risks related to the stock of real estate, allowing time to digest these risks. On the other hand, structural policies should be employed to drive the formation of new economic growth drivers and fill the void left by the contraction of the real estate market. This means that the macroeconomic policies should focus on maintaining the continuity of economic recovery, providing fundamental support for the economy, rather than pushing for monetary stimulation to achieve “bubble-like” economic growth. In response to this, the market needs to adjust its policy expectations and economic growth prospects and be prepared for the long-term and sustained nature of economic recovery.

Final analysis conclusion:

The sluggishness in China’s second-quarter economic growth data has shattered some previous optimistic expectations and heightened concerns about deflation and a potential recession. However, these worries reflect a distortion between expectations and reality. As long as the economy continues to grow, China will not face substantial deflation risks. Nevertheless, this does indicate that the long-term and complex nature of the country’s economic recovery deserves attention and early preparation.

Wei Hongxu is a researcher at ANBOUND


Anbound Consulting (Anbound) is an independent Think Tank with the headquarter based in Beijing. Established in 1993, Anbound specializes in public policy research, and enjoys a professional reputation in the areas of strategic forecasting, policy solutions and risk analysis. Anbound's research findings are widely recognized and create a deep interest within public media, academics and experts who are also providing consulting service to the State Council of China.

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