Beijing’s deflation dilemma: Falling prices signal bigger troubles ahead for China’s economy

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BEIJING (AP) – When he bought an apartment near a good secondary school in northeastern Beijing in 2020, Zhou Fujin expected to rent it that would cover most of his mortgage. But the value of the apartment and the rent he gets decreased in the past two years, attracting finances for his family.

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China is witnessing a shrinkage talisman, or low prices, which contradicts the prevailing inflationary pressures in other places of the world. The cheapest prices can be a blessing for some, but contraction is one of the symptoms of relatively weak demand and economic growth.

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Such challenges are the background of the annual session of the Chinese parliament, which begins on Wednesday. It is not clear what the ruling Communist Party might do to address the problem, although some economists expect Beijing to announce more government spending. Observers will also monitor changes to the annual economic growth goal, which is hovering near 5 % over the past two years.

These are wide and long -term problems. Low housing prices have left many families hesitant in spending, while factories continue to remove goods.

At the economy level, prices fell in 2023 and 2024, which is the longest seizure of shrinkage since the 1960s. Total signs of a local product deviation -the broadest scale of price changes in the economy -decreased to -0.8 % in the past three months of 2024, compared to -0.5 % before, which means that contraction may intensify.

Stretch wallet strands

The contraction is an abstract economic concept, but it reflects very tangible in the Personal Budget of ZHou, as is the case for millions of others. Zhu's apartment, in the Mayon area of ​​Beijing, was cost two million yuan ($ 275,000) when it was bought in 2020, and funded it with a bank loan of 800,000 yuan ($ 110,000). The rental of the fees fell from 2300 yuan ($ 316) per month to 1700 yuan ($ 234). He says the monthly mortgage payment is more than 3000 yuan ($ 413), and the apartment is now worth about 1.4 million yuan ($ 193,000), he says.

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Soon that Chu bought his apartment, the government began to eliminate excess borrowing by real estate developers, pushing the industry into a crisis and many real estate companies to fail to pay. The father of two real estate brokerage company, which has been suffering from bleeding money over the past four years. He has expanded since then to become home decoration services, which helped him break.

“Given that I am working in the real estate sector, my income has been greatly affected,” Zhou told Associated Press. “My greatest agreement on bank mortgages, cars and children's education. I have cut off other expenses like travel. Even my children realized that money is not easy to earn, and they are ready for less spending.”

Lu Wanyong, who has a photo framing workshop in Beijing, says he gets only one or two clients per day, a decrease from more than ten before the epidemic. Many now prefer to fix broken photo frames instead of buying new tires. Few new homeowners come to search for decorating their apartments.

The Lu family was burned from its savings and is afraid that it will soon pay the rent of its store of 6000 yuan ($ 825).

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“I am thinking of turning into other industries, but the problem is that I am not aware of any of them. In fact, what industry is easy to work at the present time?” Think.

The “shrinkage” can indicate a greater problem in the future

Experts say that contraction may be difficult for governments to address inflation, as this requires reforming the basic issues behind this.

In the case of China, it is a mixture of excessive capabilities – manufactured goods that are produced in quantities, the market cannot absorb them – consumers' reluctance to spend and companies to invest, due to concerns about the slow economy. Also, the housing crisis has wiped an estimated $ 18 trillion of family wealth, according to the Barclays report, as well as job losses due to the Covid-19s.

“When the real estate market flourishes, people think they are very rich,” said He-Ling SHI, associate professor of economics at the University of Monash, Australia. “If people think they are rich, they tend to spend their income on consumption. But with the low housing price in most parts of China, people believe that they are no longer rich as before, so … they want to increase their savings and reduce their consumption.”

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When prices drop, corporate profits also get a blow. This can stimulate the so -called “shrinkage cycle” of layoffs that reduce family income, which leads to less consumption and possibly stagnation or depression. Fitch's rankings warned in November that the contraction had become firmly in China and urged its leaders to adopt policies that could enhance demand.

Meanwhile, US President Donald Trump imposed a 20 % new tariff on Chinese exports, which is expected to fly up to 1.1 percentage of GDP growth in China this year in a “severe scenario” where Chinese exports to the United States decrease by half.

A sensitive issue for the Communist Party

The contraction is a deceptive issue for Chinese leaders, who have begun to reduce interest rates and require mortgage payments last fall. They have launched programs to obtain local governments to purchase unpaid apartments to rent affordable housing and encourage banks to lend to more money.

But senior leaders tend to focus their general comments on the achievements of the ruling party and avoid referring directly to the shrinkage, which is a thorny problem without rapid reforms.

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Xi said: “They are trying to do their best to avoid the word” shrinkage “because they believe this will make consumers more panic.” “If they become more panic, they will reduce their consumption and thus increase the situation.”

Some economists, including Michael Betis, a professor of finance at the Guangua College of Management at Beijing University, said that the economy can only be balanced if consumers obtained purchasing power. This requires reducing the share of wealth in non -productive investments.

The government has sought to encourage more spending by issuing vouchers, while moving away from the most important economic reforms.

“The economic recovery should be linked with an increase in people's income,” said Sun Legian, a professor at the Faculty of Economics at the University of Fodan. “The government must provide vouchers to help people buy what they need; this has proven that it is an effective way.”

China needs to address long -term chronic problems including excess industrial production and ineffective government industries. Renewing health care, pensions and education systems would make people “more comfortable in their financial position.”

“In the short term, simply anything that increases the family income will help on the aspect of consumption,” Kwaizz said, “But most importantly is the element of structural reform … and this requires strengthening the role of the government in health, education and social security.”

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The Associated Press Press Press contributed to this story.

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