Beijing Deflation Crisis: Declining Prices Hint at Deeper Economic Challenges Ahead

Zhou Fujin anticipated that the majority of his mortgage would be paid off when he purchased an apartment in 2020 close to a reputable high school in northeast Beijing. However, the value of the apartment and the rent he receives have drastically decreased over the last two years, placing a burden on his family's finances

China is currently going through a period of deflation, or declining prices, in contrast to global inflationary pressures. While some people may benefit from lower prices, deflation is a sign of sluggish demand and slowing economic expansion.

The annual session of China's parliament, which starts Wednesday, is set against the backdrop of these difficulties. In 2020, Zhou Fujin bought an apartment near a prestigious high school in northeast Beijing, expecting to pay off most of his mortgage. But over the past two years, the apartment's value and the rent he gets have dropped significantly, making it difficult for his family to make ends meet.

While the rest of the world is experiencing inflationary pressures, China is currently experiencing deflation, or falling prices. Deflation is an indication of weak demand and slowing economic growth, even though some people may profit from lower prices.

These challenges are the backdrop for China's parliamentary annual session, which begins Wednesday.

Tightened purse strings. Deflation is an abstract economic concept, but it appears very concretely on Zhou's personal balance sheet, as it does for millions of others. Zhou bought his apartment in Beijing's Miyun district for 2 million yuan ($275,000) in 2020 and financed it with an 800,000 yuan ($110,000) bank loan. He now charges 1,700 yuan ($234) per month in rent, down from 2,300 yuan ($316). His monthly mortgage payment exceeds 3,000 yuan ($413), and the apartment is now worth only around 1.4 million yuan ($193,000), he claims.

Around the time Zhou purchased his apartment, the government began cracking down on excessive borrowing by real estate developers, plunging the industry into crisis and forcing many property companies into bankruptcy.  The father of two runs a real estate brokerage firm, which has been losing money for the past four years. He has since expanded into home decoration services, allowing him to break even.

"Given that I work in the real estate sector, my income has been greatly affected," Zhou told The Associated Press. "My largest expenses are for bank mortgages, my car, and my children's education. I've cut other expenses, such as travel. Even my children have realized how difficult it is to earn money and are willing to spend less."

Lu Wanyong, who owns a picture framing workshop in Beijing, says he now has only one or two customers per day, down from more than a dozen before the pandemic.  Many people prefer to repair broken picture frames rather than purchase new ones. Fewer new homeowners seek to decorate their apartments.

Lu's family has depleted its savings, and he fears that he will soon be unable to pay his shop's 6,000 yuan ($825) rent.

"I am thinking about changing industries, but I am not familiar with any of them. In fact, which industry is easiest to work in today?" He pondered.

A 'deflationary spiral' can signal more trouble ahead. Experts say that tackling deflation can be more difficult for governments than dealing with inflation because it requires addressing the underlying causes.

In China, it is a combination of excess capacity (manufactured goods produced in such large quantities that the market cannot absorb them all) and consumers' and businesses' reluctance to spend and invest due to concerns about the slowing economy. In addition, the housing crisis has wiped out an estimated $18 trillion in household wealth, according to a Barclays report, on top of job losses caused by the COVID-19 pandemic.

When prices fall, companies' profits suffer. This can trigger a so-called "deflationary spiral" of layoffs, further reducing household incomes, resulting in less consumption and potentially a recession or depression. In November, Fitch Ratings warned that China's deflation is becoming entrenched, urging its leaders to implement demand-boosting policies.

Meanwhile, US President Donald Trump has imposed new 20% tariffs on Chinese exports, which are expected to reduce China's GDP growth by up to 1.1 percentage points this year in a "severe scenario" in which Chinese exports to the US fall by half, according to Erica Tay, director of macro research at Maybank Investment Banking Group.

Deflation is a sensitive issue for China's Communist Party leaders, who began lowering interest rates and requiring mortgage down payments last fall. They have launched programs to encourage local governments to purchase unsold apartments and rent them out as affordable housing, as well as encouraging banks to lend more money.

However, top leaders tend to focus their public comments on the ruling party's accomplishments rather than directly mentioning deflation, which is a difficult problem with no easy solutions.

S&P Global Ratings' chief Asia economist, Louis Kuijs, believes China must address long-term, chronic issues such as excess industrial production and inefficient state industries. Renovating health-care, pension, and education systems would make people "more comfortable about their financial situation."

"In the short term, simply anything that increases household incomes will help on the consumption side," Kuijs told reporters, "but probably more importantly is that structural reform element ... and that requires beefing up of the government's role in health, education and social security."