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Deflation pushes Beijing to chart new economic path
China’s economy is changing course slowly but unmistakably. For the ninth consecutive quarter, the GDP deflator remains in negative territory, inflation stubbornly fails to meet its target, and industry produces more than anyone is ready to buy. As a result, growth is stalling, and the government is forced to rethink its strategy, stimulating the economy with old methods has become as ineffective as pouring water into an already overflowing kettle.
The campaign with the telling name “anti-involution” has become the symbol of this shift. In plain language, it means it is time to fight chronic deflation and the endless expansion of capacity in sectors where everything is already built and overproduced. Analysts see echoes of the 2015–2018 reforms here, but the situation today is different: the growth leaders are private companies in solar energy, electric vehicles, and batteries rather than the time-tested state-owned enterprises.
Accordingly, top-down directives will not solve the issue. The new course emphasizes encouragement over coercion, focusing on incentives and the gradual fine-tuning of the market. For comparison: in the coal, steel, and cement industries, reductions already resemble past measures, but it is far more difficult to rein in oversupply in the new sectors. At this stage, officials are offering little more than assurances of price and output controls, while meaningful action remains limited.
US tariffs and growing geopolitical fragmentation add little optimism. Pressure on Chinese manufacturers is mounting, turning restructuring from a choice into a necessity. Morgan Stanley notes that Chinese supply chains are gradually shifting toward higher value-added segments. In other words, away from cheap goods and toward more sophisticated products that are more resistant to external storms.
Still, the habit of chasing GDP growth targets through investment remains very much alive. In the near term, no revolution should be expected—China is cautiously making cosmetic adjustments to its policy while laying the groundwork for more substantial steps. This includes, for example, redistributing incentives for local governments, shifting from VAT to direct taxation, and expanding social support.
The first pilot measures look like this: modest subsidies for consumption, birth bonuses, and vouchers for elderly care. The scale, of course, is not yet comparable to the challenges, but the signal has been sent. Economists suggest that in the new five-year plan, the focus will shift to structural reforms rather than relying solely on the industrial policy so favored by the authorities.
The key takeaway is clear: defeating deflation requires systemic changes from revising fiscal incentives to strengthening household demand. The road ahead will be long. If China’s economy is a dragon, today it seems more like it is pausing in anticipation than breathing fire. Which means the battle against deflation still has more than one epic season ahead.
Published 22 August 2025
© InstaFintech Group
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© InstaFintech Group
