China enters a prolonged deflationary phase amid disruptive price competition

China's economy is showing increasingly worrying signs of prolonged deflation, spanning key sectors from the consumer market to industrial production. A massive influx of companies into promising industries, aggressive price cuts, and chronic capacity overload have become defining features of the current economic cycle.

At first glance, Chinese enterprises are seeking large-scale market coverage. However, this external success hides an unstable financial base. According to analysts, production and sales volumes continue to grow, but margins and revenue are falling sharply. This is due to devastating price wars and a drop in consumer activity.

In the first half of 2025, consumer prices in China declined by 0.1% compared to the same period last year, while the producer price index fell by 2.8%. Only seven of the 48 subcategories of production prices showed an increase, reflecting the depth of the downturn. Similar phenomena have previously been observed in the Chinese economy, but the current situation differs in scale and structural features.

In China, the term "involution" has taken on a steady meaning and is used to describe unproductive competition, in which companies struggle to survive through lower prices rather than innovation or quality. The problem has acquired political significance and has been recorded in official documents. The country's leaders call for a systematic fight against this phenomenon, including regulatory measures aimed at eliminating destructive competition and dumping.

The electric vehicle sector was the most prominent example. The largest Chinese manufacturer BYD in 2025 offered discounts of up to 30% on its models. At the same time, Xiaomi's debut in the automotive industry was accompanied by aggressive pricing — the new SUV model was introduced to the market at a price lower than the Tesla Model Y. The situation is similar in the coffee industry: Starbucks maintains an average price of 30 yuan per cup, while new players, including Luckin Coffee, offer a similar product for 9.9 yuan.

Real estate and office rentals are also showing deflationary trends. In Beijing, attempts to raise rental rates have resulted in an increase in vacant space. Real estate professionals note a lack of demand and do not predict improvements in the coming months.

Formally, the Chinese economy is still showing growth. According to preliminary data, in the second quarter of 2025, GDP increased by 5.2% in annual terms - within the government's target. However, the real state of the economy raises serious concerns. Jobs are created very slowly: in 2024, employment growth among public companies was only 1% — the lowest figure in the entire history of observations.

Analysts point to increasing pressure on households. Producer profits continue to decline, and competition in the labor market increases. In the second half of the year, economists predict an increase in unemployment, a decrease in consumer demand and an increase in social tension.

The current wave of crisis differs from the previous ones. If in the 2010s the problems with oversupply mainly concerned state-owned enterprises in the raw materials sector, now we are talking about private businesses in high-tech industries. This makes it more difficult for the State to intervene. Private companies do not lend themselves to centralized coordination, and any attempts at restructuring require more subtle policies.

Beijing's fiscal capacity is also limited. The level of public debt is close to 100% of GDP. Despite the increase in the budget deficit to 4% in March 2025, the authorities have so far refrained from large-scale stimulation of demand. However, at a July meeting of the Politburo and the Council for Financial and Economic Affairs, it was stated that it was necessary to strengthen control over " low prices and disorderly competition."

The pressure is also increasing in the international arena. The United States and the European Union continue to build up trade barriers against China, especially in relation to products with signs of excess exports. In April 2025, the United States imposed additional duties on a wide range of Chinese goods, including electric vehicles, solar panels and batteries.

In response, Chinese manufacturers have accelerated their expansion abroad. Analysts estimate that total production capacity in strategic industries — such as air conditioners, solar modules, lithium batteries, electric vehicles and construction machinery-will grow by 0.5-14% in the next three years. The problem is that in five of the seven industries, supply already exceeds global demand.

For the global economy, this may mean increased export pressure, especially from China, which, in turn, will contribute to increased protectionism in other countries. The possibility of China's domestic economic downturn turning into a global price shock is becoming increasingly real.

If large-scale measures to stimulate domestic consumption and structural transformation are not implemented in the near future, the Chinese economy may face a prolonged phase of stagnation and social instability — despite stable formal growth indicators.