China’s economy is seeing an interesting mix of growth while prices are shrinking.
Policy-driven overinvestment has created so much supply that domestic demand cannot absorb. And the adjustment is deflation, which means prices are going down.
Factories are busy. Shop floors are quiet. Profits are thin.
The result is an economy that looks strong in output but weak in cash flow.
Growth without price power
China reported 4.8% year-on-year GDP growth in the third quarter. That is the slowest pace in a year and down from 5.2% in the second quarter.
The data landed as leaders set the next five year plan for the country. It also showed an economy leaning hard on industry while property and consumers lag.
New home prices fell in September. Property investment fell almost 14% in the year to September.
Retail sales rose only 3%. Industrial output beat forecasts at 6.5% thanks to stronger exports and diversion away from the United States.
Under the surface, prices keep sliding. The broad GDP deflator has fallen for nine to ten straight quarters.
That is the longest run of economy-wide price declines in modern China. It tells you firms are selling more units to earn the same or less revenue.
Why prices are falling, not output
Beijing spent a decade backing “new productive forces” like electric vehicles, batteries and solar. Local officials chased the same targets.
So capacity ballooned, but demand did not. When too many producers compete for a flat market, the adjustment shows up in prices first.
Officials now talk openly about “involution” and “disorderly competition”. Campaigns to curb below-cost sales are real but early.
Price wars started in cars and solar and then spread. The EV field has thinned from hundreds of brands to a little over a hundred yet, still looks crowded. Solar module capacity sits far above global demand.
Cut-price strategies push volume but crush margins. The state can order inspections and consolidate small plants. It cannot force private firms to stop competing. Not quickly.
The on-the-ground deflation that data misses
Official consumer inflation has hovered around zero since early 2023. But if you look at the “unofficial” prices, the situation gets even darker.
A recent Bloomberg analysis tracked 67 everyday items across 36 major cities. 51 fell in price in the last two years. Homes in major cities fell about 27%.
BYD cars fell by a similar amount. Rents in big cities are down. Food staples and home appliances also show clear drops.
The gap with the headline CPI reflects limited item detail and older rent methods in the basket.
The corporate picture matches the tills. More than a quarter of listed non-financial companies reported losses in the first half of 2025, the highest share in at least twenty-five years.
Even survivors reported thinner margins than two years ago. Spending on capital and R&D fell on a median basis for the first time in a decade.
The number of “zombie” firms unable to cover interest with profits has risen markedly in five years.
And wages support this thesis. Private firms employ most urban workers. Wage growth there slowed to a record low and turned down in key sectors like manufacturing and IT.
Household behaviour is changing. Savings climbed to a record share of GDP.
Families cut travel, traded down hotels and delayed big purchases. For many, cheaper goods feel like a warning instead of a win. The lived economy is gloomy.
Factories run while households stall
The mix is clear. Industry runs hot, while households run cool. Exports rose 8.3% in September. Shipments to the United States slumped while sales to Asia and other regions rose.
The export engine keeps lines moving and helps industrial output. It does little for pay packets if pricing is weak. It also leaves China leaning on external demand when domestic demand is soft.
This is why deflation bites harder than a simple price chart suggests. Falling prices squeeze cash flow. Squeezed cash flow means lower profits, lower capex, fewer hires and wage drift.
That pushes households to save more and spend less. Which pushes prices down again. China risks getting stuck in a loop where quantities rise and prices fall. That is a hard loop to escape with small, targeted fixes.
The export valve and the new friction
When domestic demand cannot absorb output, the surplus goes abroad. That lowers goods prices for foreign consumers and raises pressure on foreign producers.
It also raises the odds of trade cases and tariffs. China has already diverted sales from the United States to Southeast Asia, the European Union, and Africa. The external surplus looks set to stay large. Partners are responding.
Talk of anti-dumping in autos and solar has picked up. The risk is a steady build in protection rather than one big shock.
Global bodies see the spillover. Analysts now discuss China as an exporter of disinflation to the world, not a source of inflation.
The IMF projects China’s consumer inflation around zero this year. The Bank of Korea has warned about imported deflation.
If China keeps pushing down traded goods prices, central banks elsewhere will notice even if services inflation stays sticky at home.
Is the model changing?
Regulators have moved against below-cost selling, which tells us that policy is not idle, at least.
Sector cleanups are under way in coal, petrochemicals and parts of solar. There are trade-in subsidies to nudge appliance and auto upgrades.
But the core incentives still point to production. Local finances still lean on investment. The new plan stresses high-quality development and technology self-reliance.
It talks less about permanent shifts of income toward households.
The lesson from the data is simple. China can raise output fast. It has a world-class scale in making things. It struggles to raise its price power at home.
Without stronger household income growth, factories will compete on price and search for foreign buyers. The economy will grow in real terms and feel tight in cash terms. Nominal growth will stay low.
Corporate earnings will stay sensitive to each new price cut. The trade surplus will stay large. Friction will rise.
There is a path out, however, and it runs through household balance sheets. More generous social insurance lowers precautionary saving. Better local public services help migrant families spend where they live.
A stable floor under housing stops the wealth effect from working in reverse. Limited, one off vouchers can lift spending but do not change the structure. The data call for durable income, not just discounts.
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