In a report by the Wall Street Journal, journalist Wei Lingling revealed that at the beginning of 2024, a think tank warned the top leadership of the Chinese Communist Party that without measures, the Chinese economy would fall into a deflationary trap. However, the party leader seemed indifferent, and the term deflation even became a taboo, with no one daring to discuss it.
Economists have long been concerned that post-COVID-19 pandemic, the Chinese economy may face a downward spiral of prices and weak demand amidst a backdrop of real estate downturn, sluggish consumer spending, and declining investments, potentially leading to a deflationary cycle.
In early 2024, as dark clouds loomed over the Chinese economy, a major consultancy prepared a report for the top Chinese leadership, warning that without urgent measures to revive economic growth, China could spiral into a deflationary crisis.
Despite these warnings, the party leader showed little concern. Sources close to the decision-making circle revealed that the party leader once asked advisors, “What’s wrong with deflation? Don’t people like lower prices?”
While economists fear China may fall into a vicious cycle of falling prices and weak demand, Xi’s dismissive attitude has made deflation almost a forbidden topic in the Communist Party’s decision-making circle.
During a recent high-level meeting, the Chinese leadership acknowledged the need for “reasonable price rebounds,” but details on how this would be achieved remain unclear. Richard Koo, Chief Economist at Nomura Research Institute, pointed out that many economic issues in China are self-inflicted by the government.
Many economists believe that implementing difficult but necessary measures to repair the damaged Chinese domestic economy is something that the Chinese leaders should have done but failed to do.
Over the past decade, China’s economy has increasingly been controlled by state-owned enterprises. Excess capacity in industries like steel and electric vehicles has worsened. China now relies more on exports for growth, making it vulnerable to tariff threats from the likes of the U.S. President Trump.
To consolidate power, the party leader centralized control over the economy and appointed inexperienced cronies in economic policy positions. Policies aimed at bursting the real estate bubble and managing local debts have been procrastinated and poorly executed.
As a result, the Chinese economy is heavily indebted, with the collapse of the real estate bubble leading to the evaporation of trillions of dollars in household wealth, driving the country into a deflationary spiral. Economic growth has slowed, Western investment has dried up, and consumer confidence is at historic lows.
Xi Jinping’s administration has failed to boost the consumer sector, dismissing American-style consumption as wasteful and worrying that providing too much government support to households could foster “welfarism.”
Reports reveal that Xi’s rule has mainly propelled economic growth in China through unsustainable borrowing, real estate speculation, and investments that aren’t genuinely needed. The government has ignored the difficult reforms that could unleash sustainable growth drivers, opting instead for policies geared towards strengthening Communist Party control.
According to insiders close to China’s decision-making circle, all recent events in China haven’t altered the party leader’s mindset. One diplomat in Beijing mentioned that Xi still believes in the country’s ascendancy, even if it may not be a smooth process.
Under his leadership, the CCP is gearing up to counter any tariffs that President Trump may impose by restricting the sale of raw materials for manufacturing chips, car engines, and defense-related products to the U.S. Additionally, Beijing is rallying developing countries to exert pressure on the U.S.
In an interview with The Wire China, Yu Maochun, the director of the China Center at the Hudson Institute, stated that the rise of China itself isn’t a threat to the U.S.; rather, it’s China’s ascent under Communist Party control that poses a threat. He is a former chief advisor on China policy planning at the State Department during the Trump administration.