China’s economy continues to send mixed signals. On the surface, exports remain strong, advanced manufacturing is expanding, and China maintains global leadership in areas corresponding to electric vehicles, robotics, and artificial intelligence. Underneath that growth, nonetheless, a troubling dynamic is unfolding. An excessive amount of production is colliding with fragile domestic demand, pushing prices lower, compressing corporate profits, and weakening wage growth.
Economists increasingly warn that China could also be sliding into a chronic deflationary cycle that would resemble Japan’s lost a long time, with serious consequences for global trade, commodity markets, multinational earnings, and geopolitical tensions.
The warning signs are visible not only in macro data, but on the bottom across China’s retail and manufacturing economy.
Returns Pile Up as Consumer Spending Stalls
At Shanghai’s massive Qipu Road Wholesale Clothing Market, business activity appears busy but misleading. Vendors ship large volumes of sweaters, dresses, and pants to retail stores nationwide under a consignment model. Retailers pay just for what sells and return what doesn’t.
Currently, vendors say little is selling.
Delivery employees often push carts stacked with returned clothing through the market’s narrow corridors. Merchants sort through unsold inventory, counting losses slightly than profits.
Wang Jingjing, a womenswear wholesaler, estimates her 2025 revenue fell roughly 50 percent from the previous 12 months. Before the pandemic she employed 4 employees. Today she has just one.
“Unusual people don’t have any money of their pockets, including us,” she said.
Her personal spending habits reflect the broader slowdown. Luxury purchases have disappeared, replaced by inexpensive takeout meals and strict budgeting.
This pattern is repeating across much of China’s consumer economy. Weak household spending combined with excess supply forces businesses to chop prices simply to maneuver inventory. Lower prices reduce margins. Shrinking margins lead firms to freeze hiring, limit wage increases, or lay off employees. That in turn suppresses consumer spending even further.
Economists describe this as a deflationary feedback loop.
Economic Growth Masks Underlying Weakness
China reported roughly 5 percent GDP growth last 12 months, driven primarily by export demand. Chinese factories proceed to dominate global manufacturing in areas starting from rare earth processing to shipbuilding and advanced electronics.
That export strength has helped offset weak domestic consumption, nevertheless it also creates imbalances. China’s GDP deflator, a broad measure of price changes across the economy, has remained negative since 2023. That signals insufficient demand contained in the country.
Corporate earnings reinforce the message. Profit margins amongst publicly traded Chinese firms are actually near their lowest levels since 2009, in keeping with FactSet data covering roughly 5,000 mainland firms. Industries experiencing margin pressure include steel, cement, electric vehicles, robotics, consumer staples, and cosmetics.
Fixed asset investment also contracted in 2025 for the primary time on record. That category includes spending on factories, infrastructure, and real estate, traditionally key drivers of China’s growth model.
The chance is that deflation becomes entrenched in expectations. Once businesses and consumers begin assuming prices will keep falling, spending decisions get delayed, worsening the slowdown.
Export Surpluses Are Creating Political Friction
Deflation at house is pushing manufacturers to hunt growth abroad. China posted a record trade surplus of roughly $1.2 trillion in 2025, in keeping with customs data. That surge has fueled rising political tensions as governments in the USA, Europe, and parts of Asia accuse China of flooding markets with artificially low cost goods.
The U.S. has already imposed higher tariffs on electric vehicles, batteries, solar equipment, and choose industrial components. The European Union has launched anti-subsidy investigations into Chinese EV exports. Emerging markets worry their domestic manufacturers cannot compete with China’s pricing power.
For investors, this raises the chance of escalating trade barriers, retaliatory tariffs, and provide chain disruptions that would impact multinational earnings and inflation dynamics globally.
Beijing Prioritizes Production Over Consumption
Chinese policymakers publicly acknowledge the necessity to boost domestic demand and curb excessive competition, often referred to locally as “involution.” Officials have pledged to deal with price wars and overcapacity heading into 2026.
At the identical time, China’s industrial strategy stays focused on technological self-sufficiency and manufacturing dominance. That emphasis reflects President Xi Jinping’s long-standing skepticism toward Western-style consumer-driven growth, which he has previously characterised as wasteful.
Draft guidance for China’s next five-year economic plan continues to prioritize advanced manufacturing, automation, and strategic industries. Consumer stimulus measures remain comparatively modest.
“Old habits die hard,” said Robin Xing, Morgan Stanley’s chief China economist, who expects deflationary pressures to persist through not less than this 12 months.
High Savings Rates Limit Consumer Spending
China’s household sector stays structurally cautious. Many families maintain limited medical insurance coverage and small pensions, encouraging precautionary saving. Social safety net spending stays well below levels seen in developed economies.
On average, Chinese households save roughly one-third of their income. In contrast, U.S. households typically save lower than 5 percent. Household consumption accounted for less than about 40 percent of China’s GDP in 2024, compared with a world average near 55 percent and roughly 68 percent in the USA, in keeping with World Bank data.
Song Tianying, a 20-year-old cellphone saleswoman in Beijing, earns around $1,000 per thirty days and saves roughly $400. After her father fell ailing and later passed away, her family took on medical debt. She now helps support her mother and brother while saving for a future home down payment.
“I would like to save lots of as much as I can,” Song said.
Such stories highlight why consumer confidence stays fragile.
Property Slump Continues to Weigh on Wealth
China’s multi-year real estate downturn stays one other drag on household spending. Home prices in lots of cities have fallen between 20 percent and 40 percent from peak levels in 2021. Government efforts to stabilize the sector have to date produced only limited results.
Zou Zhimin, a jewellery wholesaler in Shanghai, purchased a two-bedroom apartment near the market peak. Since then, the worth of his home has declined significantly.
“It seems like my total net value has shrunk by 20%,” Zou said.
To take care of sales, he has been forced to discount jewelry by as much as 60 percent. Declining home values reduce household wealth, further discouraging discretionary spending.
Electric Vehicle Industry Shows Signs of Saturation
China’s electric vehicle sector illustrates the broader overcapacity problem. Greater than 100 EV manufacturers currently compete within the domestic market, many supported by local government subsidies and preferential financing.
Local governments remain reluctant to permit company failures because factories provide employment and tax revenue.
“The issue now could be that the speed of closures is just too slow,” said David Zhang, an independent auto analyst. “It isn’t a purely market-driven competition.”
Vehicle prices have declined for roughly three consecutive years. In response to the China Automobile Dealers Association, only about 30 percent of automobile dealers were profitable in the primary half of 2025. Nearly three-quarters sold not less than some vehicles below cost.
Some dealers are shifting aggressively toward exports. At AVIC Lantian in Shanghai, management downsized imported vehicle operations while expanding export sales teams targeting the Middle East, Central Asia, and Africa.
General manager Zhang Leibin said vehicle prices were roughly 30 percent lower in 2025 than in 2024, while profits declined about 50 percent.
Latest Industries Risk Repeating Old Mistakes
Even emerging sectors are showing signs of excessive investment. China’s humanoid robotics industry now includes greater than 150 firms. Last 12 months, the country’s top economic planning agency warned about bubble risks.
Non-tech industries face similar struggles. China’s paper manufacturing sector continues to battle chronic overcapacity. In the primary eleven months of 2025, profits amongst large paper producers declined roughly 11 percent 12 months over 12 months, in keeping with government data.
Shandong Chenming Paper, one in every of the country’s largest producers, has collected greater than $500 million in overdue debt and was forced to shut down production lines, in keeping with company filings.
Pet products, food condiments, and consumer goods manufacturers are also battling margin compression as competitors slash prices to achieve volume.
Food delivery platforms including Meituan, Alibaba, and JD.com have intensified discount wars to stimulate demand. Meituan recently reported a quarterly loss of roughly $2.6 billion, its first loss since 2022. Alibaba and JD.com saw profits decline sharply attributable to subsidy spending.
Chinese media dubbed the period the “summer of free lunch.”
Employees Face Longer Hours and Stagnant Wages
With profits under pressure, firms increasingly stretch existing staff slightly than hiring. Wage growth has stalled, and surveys from the People’s Bank of China show elevated anxiety about job security.
Youth unemployment stays elevated, with the jobless rate for employees aged 16 to 24 hovering near 17 percent.
Tian Yi, a 24-year-old graphic designer in Beijing, now handles livestream sales along with design work as her employer struggles financially.
“I’m doing two jobs,” she said, while earning roughly $1,100 per thirty days. “I’m so drained.”
Even higher-income professionals report rising caution. Lu You, an worker at a semiconductor firm in Shanghai, says peers discussing pay cuts create pressure to save lots of aggressively even when personal income stays stable.
Government Stimulus Has Limited Impact
China introduced consumer trade-in subsidies in 2024 to encourage purchases of vehicles and appliances. While this system temporarily boosted retail activity, momentum has faded as eligible consumers already accomplished purchases.
Retail sales growth recently slipped to the slowest pace in several years.
Authorities have also launched an “anti-involution” campaign aimed toward curbing destructive price cutting war. Guidelines encourage firms to avoid selling below cost and reduce redundant capability. Critics argue these measures treat symptoms slightly than root causes.
“It can cure the symptom but not the underlying disease,” said Fred Neumann, HSBC’s chief Asia economist. “The relentless pursuit and incentivization of investment ultimately creates a deflationary trap.”
Global Implications for Investors
China’s deflation problem matters far beyond its borders. Persistent price weakness can suppress global inflation, impact commodity demand, pressure multinational earnings, and intensify trade disputes.
For equity investors, margin pressure across Chinese industries raises risks for exporters, suppliers, and global manufacturers exposed to China’s pricing competition. Commodity investors should monitor how slowing domestic demand affects metals, energy, and shipping volumes.
Currency markets may feel pressure if deflation encourages further monetary easing by the People’s Bank of China.
Perhaps most significantly, geopolitical tensions around trade protectionism could escalate as governments try to shield domestic industries from Chinese overcapacity.
A Mood of Caution on the Ground
Small business owners proceed to face difficult selections. Huang Hai, who runs a toy shop in Shanghai, sells collectible blind boxes at steep discounts simply to generate money flow. Online competitors undercut his pricing further.
If business conditions deteriorate further, Huang says he may return to his hometown.
“If he can’t make a living there either, he said, ‘I’ll just should live off my parents.’”
Wang Jingjing, the clothing wholesaler, reflects on how dramatically conditions have modified.
“I still quite long for that feeling from before,” she said. “Now there’s just a sense of bleakness.”
Unless China finds a sustainable option to rebalance toward household consumption and market-driven capability discipline, the deflation cycle may proceed to tighten its grip on the world’s second-largest economy.
For investors globally, the implications will extend well beyond China’s borders.