The price tags keep shrinking in China, but nobody’s celebrating the bargains. Prices across the world’s second-largest economy have been falling faster than official statistics suggest, and the damage is piling up. More than 25% of publicly traded Chinese firms are now losing money — the highest share in at least a quarter century — and the deflationary spiral economists once brushed off as unlikely has become Beijing’s most urgent economic threat.

The slow creep: China is now stuck in a loop where falling prices squeeze companies, shrinking payrolls weaken household spending, and softer demand drags prices down even more. The International Monetary Fund expects consumer inflation to average zero this year — one of the lowest readings among nearly 200 economies — and the Bank of Korea has already warned that China’s slowdown could spread deflation into neighboring markets. The longer prices sag, the greater the risk that growth could stall for years or even decades, mirroring Japan’s painful battle with deflation that lasted over a decade.

• The share of zombie firms — those unable to cover interest — jumped from 19% to 34% in five years, and more than a third of companies cut staff in 2024.
• Of 67 items Bloomberg tracks, 51 saw price declines over two years, including a 27% drop in major-city home prices, a 27% slide in BYD cars, and a 14% fall in beef shanks.

Deflation Vortex

Beijing officials call the dynamic “involution,” a pattern where too many producers chase too little demand and end up cutting prices in ways that weaken the entire system. As competition intensifies, companies see thinner margins, scale back plans, and trim their workforce, while households respond by saving aggressively — pushing the savings rate to roughly 110% of GDP as they prepare for tougher conditions.

• Industrial output is projected to grow only 5.5% in October, exports just saw their first drop in eight months, and fixed asset investment fell 1.7% year-over-year — the worst reading since 2020.
• Global firms are feeling the squeeze, with AppleAAPL
  seeing repeated sales declines in China and VolkswagenVWAGY
  selling over 30% fewer cars in 2024 than before the pandemic.

The ticking clock: Rhodium Group’s Logan Wright warns that “the deflationary problem is systemic” and cannot be fixed with short-term stimulus. Economics professor Zhu Tian says China may need roughly half a trillion dollars in consumption vouchers to break the cycle, adding that three years of falling prices could lock in expectations that deflation is here to stay. Yet top authorities may not feel the same urgency, since their full-year growth goal of ~5% for 2025 still looks achievable, with economists projecting GDP growth of 4.9%.