We have been warning of China being in the grips of deflation. If it becomes entrenched, which is a realistic risk, the downside is considerable. Deflation leads to business closures, falling incomes and job losses. Those effects can then kick off a deflationary spiral. Bad economic conditions and falling prices lead businesses to hunker down and defer spending, which then intensifies the contraction. On top of that, falling prices increase the cost of debt in real terms. That produces defaults, which reduce investor incomes and can lead to bank failures, or at least to a great reduction in new lending, again amplifying the depression.
China is particularly exposed due to its lack of demographic growth and further decline in births, and its high private debt to GDP levels. Some sources put that on the par with the US, which is particularly striking given that China is a less developed and supposedly less financialized economy. Some believe that actual private debt to GDP levels are even worse. Recall that it is excessive private debt to GDP levels that generate financial crises.
We’ll turn to new evidence that the situation is getting worse, not better, despite China reporting 5% GDP growth for the last quarter. Aside from the fact that there is long-standing skepticism about China’s official growth figures, the growth that China has been having had been in its exports. It has not been sufficiently widely noted that the increased dependence on exports is a shift.
Even though China had been stereotyped as export driven (it has yet to transition to a consumer-led economy), it had for many years had investment, particularly in real estate, as a bigger driver of growth. The Economist last week took note of the shift:
In a chaotic world, China did the predictable thing. Its economy met the official growth target for 2025, according to figures released on January 19th, just as it had the year before and the year before that. GDP grew by 5%, although China’s population fell even faster than forecast. Growth was boosted by a record trade surplus, which reached almost $1.2trn, despite the country’s tariff war with America (see chart 1).
The unexpected strength of China’s exports last year made up for the weakness of other sources of spending. The government had set itself the task of “vigorously boosting consumption”, but households did not play along. They saved an even higher share of their income in 2025 (32%) than they had the year before (31.7%)…..
China has usually relied on investment spending to keep its economy humming. But according to the official figures, fixed-asset investment (FAI) shrank in 2025 for the first time since 1989 (see chart 2). The slump in property investment continued, accompanied by a decline in infrastructure spending and negligible growth (0.6%) in manufacturing investment. The combined figure is so awful that many economists refuse to take it at face value.
Another official measure of investment—gross capital formation—suggests that capital spending continued to expand, albeit slowly, last year. Investment accounted for 0.75 percentage points of China’s overall growth, a seventh of the total, according to Mr Kang [Yi, head of the National Bureau of Statistics]. For that to be true, investment must have increased by about 2% in real terms.
Some of the glaring gap between the two statistics may reflect technical differences. FAI is not adjusted for inflation, excludes inventories and includes land purchases. But it is also possible that China’s local governments are now understating the growth of fai to make up for overstatements in the past.
China’s trade surplus is so large that it is already pushing the limits of what its partners can absorb. China is already deporting deflation to Southeast Asia. Europe is facing poor growth prospects, so its ability to absorb much more in the way of exports from China is questionable. Trump trashing the dollar will have the effect of reducing US demand, even with US dependence on China in many sectors.
We’ll turn soon to a new Wall Street Journal article which gives a solid recap of recent data plus some local color. Additional sightings:
🇨🇳 China struggles with the longest deflation period in decades!
Chart: @Bloomberg pic.twitter.com/yq7gROMf0u
— Alex Joosten (@joosteninvestor) January 27, 2026
Chinese consumer spending is now falling. Never happened before outside of lockdowns. This isn’t a month or two, the contraction is seven months and counting. Stimulus didn’t work. Instead, Chinese consumers are – like Americans – very worried about jobs and incomes.
All the… pic.twitter.com/zSOucFh4ac
— Jeffrey P. Snider (@JeffSnider_EDU) January 21, 2026
And from the South China Morning Post at the beginning of January, China must take action to avoid Japan-style deflation spiral, scholars warn:
As China grapples with persistent deflationary pressure, scholars from one of the country’s top universities have urged the government to take more forceful action to prevent the economy from becoming trapped in a Japan-style downward spiral…
“Japan’s experience has shown that once households form the expectation that prices won’t rise over the medium to long term, it becomes nearly impossible to break that mindset,” said He Xiaobei, a professor at Peking University’s National School of Development.
“Japan has only just emerged from deflation – but that was largely driven by external shocks like the pandemic and the Russia-Ukraine war,” she said, stressing that it was not caused by changing public expectations…
Prices in China have remained largely flat for years, with the country’s consumer price index growing at less than 1 per cent for 33 months in a row and factory-gate prices stuck in a prolonged contraction that has lasted more than three years.
China’s gross domestic product deflator – a key indicator that tracks the price changes of all goods and services – has been falling for 10 consecutive quarters, the longest downturn recorded since data first became available in the 1990s, according to the Peking University report.
Falling prices can trigger a vicious cycle as wages are dragged down and then households become less willing to consume, adding further deflationary pressure, He said. The longer low prices persist, the harder it becomes to escape the downward spiral, she added.
Now to the Journal story. We will skip over its discussion of “involution” which is the government’s attempt to underplay its deflation problem by rebranding it. China has acknowledged, with “involution,” that it has what US economists in the 19th century called “ruinous competition,” the result of overinvestment and resulting overcapacity, in key sectors such as electric vehicles and solar panels. China had an earlier overcapacity/deflationary pressures problem in middle of the last decade, which it did combat successfully. Most experts argue that it will be harder to do this time due to the difficultly of rationalizing these sectors (for instance, electronic vehicle plants often had investment support of local governments; rationalizing would mean making some areas winners and others losers) along with the sheer magnitude of the challenge being greater this time/
The Deflation Doom Loop Trapping China’s Economy starts with an extended anecdote about how vendors at China’s biggest wholesale clothes market are handling more returns than sales, since retailers can send back unsold wares. From the article proper:
Across China’s economy, consumers aren’t spending enough and producers are making too much. That leaves companies all along the supply chain earning less. Many feel they have no choice but to lower prices to unload inventory, eating into profits.
With less money on hand, businesses are limiting wage growth, pausing hiring and shedding employees, which means workers have less to spend, continuing the vicious cycle….
Corporate filings show profits shrinking at companies in a wide range of industries, including steel, concrete, electric vehicles, robotics, condiments and cosmetics. Profit margins among publicly traded companies in China are at their lowest levels since 2009, according to a FactSet index of 5,000 mainland-domiciled firms.
Fixed-asset investment—which tracks spending on assets such as homes, factories and roads—fell in 2025 for the first time on record.
The risk is that China could get stuck in a prolonged period of stagnation similar to what Japan experienced during the 1990s and early 2000s—a mindset that becomes ingrained over time and even harder to shift.
Deflation is increasingly a geopolitical liability. Squeezed in China, manufacturers are exporting more, notching a record $1.2 trillion trade surplus in 2025. Governments around the world are complaining about an influx of cheap Chinese goods that could hurt local industries.…
When Beijing sets economic goals, provinces and municipalities compete for glory. Local governments pour money into industries, creating a flood of companies all fighting to come out on top.
The system has made local governments and the financial system more incentivized to boost production than consumer spending. Businesses get cheap loans from Chinese banks, as well as investments and tax breaks from local governments.
Meanwhile, many everyday Chinese get by with bare-bones health insurance or small pensions, sometimes as low as around $30 a month. While the government has worked to strengthen the social safety net over the years, China’s spending on such programs still lags behind many large economies.
As a result, people tend to save for emergencies rather than spend. The average Chinese household stashes about one-third of its income, while Americans save less than 5%. Household spending made up only 40% of China’s gross domestic product in 2024, compared with a world average of around 55%—and a U.S. average of about 68%, according to the World Bank…..
The multiyear property-market slump—another example of overcapacity in China—is weighing further on spending.
It also describes that overcapacity extends beyond the oft-cited electric vehicle and solar panel sectors:
The humanoid robotics sector—one of Beijing’s newer favored industries—may already be falling into the pattern of overinvestment and excess competition. China’s top economic-planning agency last year warned of the risk of a bubble, with more than 150 companies in the industry.
Nontech sectors are also struggling. China’s paper industry was supported by significant government subsidies in the 2000s and has continued to suffer from overcapacity on and off for years. In the first 11 months of 2025, profits among large paper makers fell about 11% year over year, according to government data.
Shandong Chenming Paper, one of China’s biggest paper manufacturers, cut prices. Its profits shrank, then turned into mounting losses. As of June, it had racked up more than $500 million in overdue debt, had hundreds of bank accounts frozen and was forced to shut down production lines, according to a filing.
Rising pet ownership in China has sparked a rush of companies into making items such as dog food, leashes and toys. Eric Yan, a manager at Petstar, a pet product maker in Hangzhou, said the industry has become extremely competitive, with new rivals cutting prices and constantly rolling out new designs.
Honworld Group, the holding company for cooking wine and soy sauce maker Lao Heng He in Zhejiang province, said household spending was weaker than expected, leading other brands to unload inventory at low prices…
After more examples, the Journal describes a classic deflationary symptom, falling wages and employment:
With businesses struggling to make money, employees are having to do more work for less while companies avoid making new hires. Wage growth has stalled. Surveys by the People’s Bank of China show widespread anxiety about job prospects. The unemployment rate among 16- to 24-year-olds, excluding students, was around 17% in November, according to government data.
The article omits a key reason why China may not be able to free itself from this trap. President Xi is deeply committed to China’s having technological and manufacturing primacy and is philosophically opposed to much in the way of social safety nets. From a 2023 post:
However, as we have pointed out (following Michael Pettis and Marshall Auerback, among others) and PlutoniumKun highlights, China seems not just to be having what would be expected difficulty in changing from an investment/export led growth model to one with domestic consumption being far more important. China also appears to have an ideological, or one might say political problem in making this shift. Higher consumption would require lower savings rates. Not only do Chinese consumers not feel secure enough to do that (too much history of crises in China and its neighbors) but China under Xi is unwilling to implement the social safety nets that would encourage more spending.
I don’t want to take up too much time with this intro, but some relevant recent sightings. Note that Setser among other things is the man on dollar holdings and flows outside the US:
I suspected that parts of China’s top leadership objected to a household focused stimulus. Turns out the epicenter of opposition is Xi himself: “Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse”
2/
— Brad Setser (@Brad_Setser) August 27, 2023
Beijing’s mind seems made up — but Chinese policy makers have this backwards.
Using the central government’s clean balance sheet to support household demand would actually make it easier for households, property developers and local governments to delever.
— Brad Setser (@Brad_Setser) August 27, 2023
A hypothesis: there can be no durably stable Chinese and global economy so long China’s national savings rate stays around 45% of GDP …
(note that, contrary to the IMF’s forecasts, savings has been rising since 2020 …)
— Brad Setser (@Brad_Setser) August 28, 2023
China’s shoppers hesitate to spend big in face of deflation via @FT
🇨🇳
”Excess savings in China have increased in the first half of the year compared with the same period last year, and there is still a gap between pre-pandemic and current consumption” https://t.co/dvQvhP1lrU— Iikka Korhonen (@IikkaKorhonen) August 29, 2023
Even though many have predicted that China’s growth model would hit its sell-by date many year ago, and China has defied those expectations, as economist Herbert Stein said, “That which can’t continue, won’t.” China looks finally to have hit that limit.
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If I am correct, excess savings here are, roughly, an accounting difference between what China produces and consumes. So there would be two ways of treating it: increasing demand and consumption in China (particularly demand for foreign products in the end) and/or reducing external demand (less imports from China elsewhere). We could be demanding such escalation on household demand or we could be doing the best ourselves to reduce imports. Setser here is asking (as I see it) only for part of the action. May be the first part of the equation is not as easy as presumed and we should focus our minds (in the rest of the world) if we want a more equilibrated world economy.
Because of the relative weakness of internal domestic demand, the excess production is being dumped on other countries in the form of excess exports over imports causing all sorts of issues internationally due to China’s economic enormity. The problem with the article is it doesn’t get into the detail of why this is so internally. According to Michael Pettis it’s not that ordinary people are sockiing away extra wads of cash. Rather, it has a lot do do with the highly decentralised governance of China’s economy and the power and vested interests at provincial and local government level. This worked well to redirect production into investment and led to the astonishingly rapid development over the last forty years, but this is now becoming a problem in its own right. Interestingly, Pettis points out that this transition difficulty has faced other countries that took this road of forced investment to economic development. It’s just that China’s vastness means its problems in transiting from an investment led economy to a consumption led economy has global consequences.
Seems like every single major economy is struggling but in very different ways those days.
The EU is stuck with low/no growth and de industrialization.
The US is growing but isn’t adding any jobs, is increasingly unequal and is reliant on the capex from AI which might or might not be a bubble.
China is growing but has high unemployment, deflation and falling profit margins everywhere.
Ah yes and stock markets keep going up everywhere despite everything.
This doesn’t seem like something that will end well.
throw in country-specific and total global debt.
all the debt needs to get repaid (ie, sell an asset to repay debt), or defaulted (ie, eventual credit crunch and/or printing press “brrrrrr”).
China has done extend and pretend.
Actual debt forgiveness doesn’t seem to be in the cards.
Prefacing by saying I’m far from any kind of China expert; as regards deflation, ruinous competition (a great term) seems to be the main driver, but can’t we account for debt deflation as well? The LGFVs, to consider a singular kind of entity, were so dramatically indebted that it beggared belief of any possibility of repayment. As per the statistics yearbook, section 18-3 and 18-4, the measurement of Aggregate Financing to the Real Economy (i.e. the economy’s balance sheet composition) there seemed to be a drive to deleverage the economy and transform debts into equity, but which per the 2025 numbers seems to have stopped somewhat. My point being that shouldn’t we add debt deflation to the competition deflation, at least potentially? At some point Beijing has to make a choice about which assets and companies will have their balance sheets rescued and which won’t, a choice that comes with difficult consequences attached.
I was more sanguine about future prospects, and in the end if war is on the horizon it’s always better to have too many factories and not enough demand than the contrary. Monetary arrangements can be done on a tight timeframe; factory construction workforce training cannot (see the Koreans ICE kidnapped a while ago for an example of the consequences of short timeframes). Furthermore, we’re probably reaching the limits of an undervalued RMB that the world economy can handle. Much more than the current situation and I imagine that clearing arrangements will become unstuck, especially as the dollar loses its role of universal money of account. If China does have to make some serious structural adjustments, then I imagine the world economy will suffer tremendously, both in collapse of demand and difficulties in supply. We’re in for a rough couple of years.
I think the point you make in the middle of the article, about whether the overgrown sectors can be rationalized, will be the key sticking point. That’s the approach that plays to China’s strengths & cultural characteristics.
I’ve said it before, but even if Xi changed his mind personally, I don’t think China would ever implement the sort of safety nets or pro-consumerist policies the West takes as obvious. AFAIK they’ve consistently rejected that sort of policy across 22 centuries, and it directly conflicts with basic moral sentiments that even most of the populace takes for granted.
Thanks Yves, an excellent overview and summary.
Just a point on investment bubbles – the whole humanoid robot thing is a very obvious bubble and scam (there is no reason whatever for a useable robot to mimic human movements unless you are engaged in stock market boosting via TikTok), but there are many others at the moment in China. A particularly weird one is a massive over construction of waste incinerators which has created enormous liability issues for local governments (they are contractually obliged to supply waste that doesn’t exist). The data centre bubble has already popped too, with enormous amounts of empty unused centres around Beijing. There is also likely a forthcoming bust in commercial property to follow the housing bubble pop.
And another point about debt – it can be particularly hard to measure private debt levels in China as there are multiple ways for these debts to be hidden. A very common one is for suppliers for ‘favoured’ companies to be pressurised to accept late payments. These debts are implicitly covered by local governments, but never appear on anyones balance sheets. It’s rumoured that BYD alone has unpaid bills of this nature which dwarf its official debts.
The problem in terms of domestic harmony is that Beijing has always focused on job creation as an alternative to social welfare in all its forms. There have been rapid improvements in various forms of social welfare, including pensions, over the past few years, but China is till only ‘average’ in terms of such provisions with regard to its state of development. At the moment, the vast informal gig economy is keeping the wolf from the door for tens of millions of Chinese, but this really isn’t sustainable if there is long term deflation, as the youth employment level will get worse and worse, and local governments will be facing very hard choices when it comes to maintaining jobs in SOE’s.
On the points of demographics – it was hard to believe that any country could be worse than South Korean in terms of birth rates, but China’s has dipped so much post Covid that it may actually be worse now (0.7 TFR or even lower). This isn’t just a potential long term issue, it is I think a symptom of a highly dysfunctional job market and economic stresses among the under 40’s. The very unbalanced gender ratio doesn’t help.
A very obvious first step for China to start to address its problems is to directly intervene to cover mortgage debts. An important point often overlooked about China is that many people pre-purchase properties before they are built. In other words, they are paying out a mortgage for an apartment that doesn’t yet exist. A blanket amnesty on a significant proportion of domestic mortgages would take much of the pressure off many domestic households and if properly funded would help regional banks significantly. It is (probably) affordable by Beijing, although it would have to be accompanied by changes to the banking and tax systems – by, for example, introducing local property taxes to create a proper funding base for local governments that doesn’t rely on boosting land prices. .However, while there seems to be whispers about this at local and regional levels (there are approximately five levels of government in China, with most of the debt on the lower levels), there seems little interest – so far – from Beijing.
A recent post by Dr Warwick Powell (https://warwickpowell.substack.com) shows that China’s deflation is simply a product of industrial efficiency and reduced energy costs. It is not anything to trouble the Chinese economy, and quite the opposite. Failure to see this point of view stems from an unfortunate lack of imagination of Western analysts to see that the PRC is not like Western neoliberal economies.
This is nonsense. Go look at the data in the post. A collapsing birth rate, falling wages (working more hours for the same pay is a big wage decline), falling consumer spending, are all signs of economic malaise. Even the Chinese government knows it has a problem. It would not be trying to combat “involution” which is its rebranding of “deflation” if it didn’t think it was a problem. Chinese economists are saying the same thing.
Your judgement here may be a bit rushed and possibly misleading re. wage growth in China:
Powell: “Despite modest nominal wage growth – 3.9% to 4.3% across the broader economy – real wages have risen due to falling consumer prices. Average per capita disposable incomes rose 5.4% in 2025, more so in rural areas and less so in urban areas.” It may be that you have access to different data, but my overall impression of Powell is that he gets his basics (i.e. numbers) right. He is enthusiastically bullish about China and his analysis may be suffering a bias because of that (above my pay grade), but I am not under the impression that he makes stuff up or distorts facts. If, as he points out, slow nominal wage growth coexists with improving real living standards due to cost compression in essential goods, what are the consequences going to be? A headache for companies? Sure! A macro demand-managing problem? Possibly. Consumer sentiment? It averages out over time. Political outcome? I would say stability.
On the issue of demographic (de)growth: it is extremely frustrating as an Economics degree holder that the relationship between development and demography is just not an issue in the curriculum. 4 years of Economics (back in the 90s, Uni of Barcelona) and never, never, I heard one single comment on the issue. Hardly discussed in the press from a theoretical point of view (Pilkington has said things about it). Discussions tend to be either micro (hardship for the poor companies, slowdown in innovation…) or social (we’ll need more elder care workers!). A humble suggestion for the site: a long-form article about the history and current state of the debate about that relationship would be great value.
My instinct goes with economic growth being a function of demographic growth, and the moment the latter disappears, so does the former. Which means that the whole world (not only China) is going to undergo a drastic change in its political economy. But I am skeptical about the issue of debt in the China context: I can imagine an unimaginable array of financial repression tools that the Chinese government has at it fingertips. Also, China has a significant trade surplus and giant FOREX reserves, which provide significant buffers in terms of policy options. Again, above my pay grade, but [Twittersphere expert mode on 😉] I wouldn’t worry about the possibility of a Chinese debt crisis for quite a few years.
The Japan downward spiral: Jeffrey Sachs has made the argument that the spiral is linked to the Plaza Accords, and that points to political constraints, rather than only economic ones. China is different.
The Pettis argument… meh! He is like every bubble doomsayer in the world: he will eventually be proven right, but the question is when. The “That which can’t continue, won’t” line is a fine line, but, again, the FOREX reserves and the trade surplus point to China not being there quite yet.
(One thing that Powell leaves out in his analysis is the issue of consolidation in the economy: the period of the 1870s-1890s saw a wave of ever-growing concentration of capital. The wave of business closures would point to that, which would mean, at least temporarily, an unemployment problem. But the Chinese government seems reluctant to allow unemployment to go beyond certain levels. They will have to work hard on that, perhaps even by keeping whole zombie sectors going. However, the trend to consolidation will likely be replicated in China in the next few decades and that may be an important development to watch.)
The whole point of Powell’s article is that the intellectual framework that we use to understand an economy is faulty in deflation conditions. I would say that that is a point that merits exploration.
Powell is doing nothing more than cherry picking random pieces of data to justify his stance that there is something unique about China. Deflation due to over investment is a well studied phenomenon and indeed, was predicted by many for China as far back as the 1990’s. Chinese economists were pointing this out 2-3 decades ago and back then it was considered a truism that at some stage, Beijing would put on the breaks and pursue a different economic model (the 2008 Crash stymied this). You simply cannot distort an economy by over investing in output while engaging in domestic consumer suppression without at some stage running out of consumers, and deflation is an inevitable result. China is repeating a playbook we’ve seen many times in economic development history and the results are visibly the same. What is different between China and Western economies is that China has the political power and export power to keep the process going further than anyone else. But this just postpones the problem, it doesn’t fix it.
‘Consolidation’ is a fancy word for ‘reducing output’, and that can’t be done without unemployment on a huge scale. China can only manage this through either finding a new outlet for growth (i.e. someone else to buy the surplus) or putting in place very robust social protections. There are a vast array of companies in China that are living on extended debt. The car industry alone has literally dozens of companies with no hope whatever of finding a market, but are backed with billions in debt. And this is replicated in many sectors.
The evidence suggests that China thinks it can build its way out of this with yet another round of concrete pouring. Good news for lovers of HSR and other baubles, but it’s not likely to address the core structural issues within the economy.
The analogue here is Japan, which was brought down by high levels of private debt. It had very high FX reserves which did nada to impede the deflationary impact of its slow motion bubble implosions and resulting decades of zombification and stagnation. You do not address these issues, nor effectively rebut the considerable evidence presented in the post of stagnating internal demand. Japan also had a robust export sector during its lost decades and that did not serve to counter it.
Sachs is incorrect regarding the Plaza Accords. He’s not an expert on Japan; in fact, he has almost put his foot in mouth and chewed by acting as if he could have learned something through a short visit in the 1980s with Ezra Vogel. Anyone who knows Japan knows that decision are not made at the top (the level Americans think are in charge and therefore fetishize seeing) but the cadre of mid-career officers (early mid 40s).
Neither the data nor my view of Japan from inside Sumitomo Bank during that period, then the biggest bank in Japan, supports his view.
Japan’s exports did fall as a result of the 1985 Plaza Accord, but that resulted only in about 6 months of slowed GDP (not even a recession!!!) Imports held up, contrary to what economists like Sachs would have predicted due to what were politely called non-tariff trade barriers, the overwhelming one being the very strong preference for Japanese goods.
I was dealing regularly with the managers of Sumitomo’s domestic branches, who were very powerful and responsible for both corporate and retail business. They were also held to very tough revenue production targets by upper management. I heard no bitching about a difficult business environment from them, which is what you would have expected if Sachs were correct.
The US did wreck Japan, but in a different, accidental way that took a bit longer to play out.
The US forced a very rapid deregulation on Japanese banks. They were so unsophisticated in risk management that I had to give them a primer on how to set up asset liability management in my earlier relationship with them as a McKinsey consultant in 1985.
This rapid deregulation was tantamount to telling the operators of a drayage company that they were really in the transportation business and giving them a 747 to fly. A crash was inevitable.
Sumitomo was already lending 100% against the value of urban land, whose prices were grossly inflated due to the absolute lack of any trading (many reason..cultural, tax, insurance).
The great creation of additional liquidity was NOT due to the BoJ as Sachs misleadingly claims but due to deregulation leading to much more leverage, called zaitech as the time, such as a new stock warrant market and interest rate swaps. At the time of the unwind of the real estate and stock market bubbles, the private debt to GDP level was massive. Japan has never provided proper stats but the estimates I have seen that seem credible were indeed extreme.
Can both public savings and debt be so high because they are different groups? Corp and personal?
This is confusing stocks and flows.
1. The article is discussing housedhold savings RATES, as in on a year to year basis, not overall household balance sheets. Even with high savings, with limited safety nets, that means the savings are easily eaten into by Shit Happens. As the story notes:
2. Households have had their balance sheets badly hit (in aggregate) due to the collapse of the RE bubble, which is still unwinding. Again from the article:
3. China has also had a lot of financial repression, as in safe savings products paying less than the rate of inflation. This was particularly pronounced after the early 2000s banking crisis, to help them rebuild their balance sheets through high profits. As I recall, saving accounts paid 3% when inflation was about 6%. So you have to save even more to make up for losses to inflation.
4. As you allude, the article discusses savings by earners, while “private debt” is both business and household borrowing
“China’s trade surplus is so large that it is already pushing the limits of what its partners can absorb. China is already deporting deflation to Southeast Asia. Europe is facing poor growth prospects, so its ability to absorb much more in the way of exports from China is questionable. Trump trashing the dollar will have the effect of reducing US demand, even with US dependence on China in many sectors.”
Some generalized observations/musings and not all particularly about China:
Many officials outside what is called the West (using for shorthand), elected and appointed, have spent years meeting and conferencing about their seat at the table with other “elites” in the West and protecting their officials and high earners from sanctions. Not enough attention paid to the wealth inequality that would need to be tackled to get similar high growth from consumer spending from non-Western countries.
The trade partners also need a measure of stability and security in order to sustain such a switch.
Additionally, it appears as though many countries, Western and non-Western, are occupied with stock market/financial sector growth – pacifying their PMCs and seeing how much the high earners can keep things afloat.
China does see these as problems. Another big one is that educated young people cannot find jobs — in US terms, they are living in their parent’s basements and thus cannot get married etc.
Simultaneously, it is pioneering, in Carlota Perez’s terms a new techno-economic paradigm with EVs that are cheaper (and more environmentally beneficial) than internal combustion engines.
Oddly, Chinese success is creating problems that are difficult to solve.
It is now at the leading edge in so many technologies, but how to handle the difficulties is certainly vexxing the Party and government.
I know you are not saying this, but those that suggest that China is “on the verge of collapse”, may also be exaggerating the intractability of these problems. Also, the constant refrain that China must consume more may or may not be true. Also, consumption can come in many ways beyond just capital investment. Further improving healthcare, the environment, etc. are ways of increasing consumption while also being an investment — there is ample evidence that government is doing this. Finally, investing abroad in infrastructure can use some of the excess capital.
I am no expert, but these seem possible.
Yet, even more oddly and everywhere else, creating problems that are difficult to solve have people yelling “collapse”.
From the tenth ‘graph:
A very timely way of phrasing it!
Yes one would have deflation if, for example, one sold EVs in SE Asia that were cheaper than ICEVs. Cars would become cheaper to buy (simpler drive trains) and to operate. This would appear as deflation in the statistics, but people would be better off.
Sorry, you have this wrong. I hate to seem harsh, but your claims are so incorrect as to amount to disinforming readers, hence the tart response.
You appear not to understand how deflation works. It results in falling wages, failing businesses, and a contractionary cycle. The only ones who benefit are those with no or little debt and savings and/or income that is not pulled down by the deflationary spiral.
1. I see very few Chinese EVs on the road. They are not a serious factor. Plus Thais are still pretty poor and motorbikes are the main mode of personal transport.
2. I see falling casual wage rates, which is very bad, many reports of weak demand for condos and an overhang in major markets. This is not merely a sign of weak consumer incomes. It has knock-on effects since real estate construction is a major economic driver here.
3.Thailand in particular has VERY high personal debt levels for a county at its stage of development (over 130%) so deflation hits households very hard here.
Chinese EVs absolutely are a massive factor in Thailand. In terms of overall rank by market share in 2025, Chinese brands occupy 4th (BYD), 6th (MG), 9th (Aion) and 10th (ChangAn) positions, all selling exclusively/majority EVs and having massive year on year growth in sales. Ora, Jaecoo, Xpeng, Zeekr are also Chinese brands rocketing up the sales charts. 20% of all new car sales are now EVs, mostly Chinese, and that proportion is going up, fast.
Source: https://bestsellingcarsblog.com/sales/?_sft_market=thailand
#4 as the top seller is not massive.
Toyota has market share of 36% to 40%. Honda has 12% to 13%. Isuzu has 11-12%.
I order ride share cars as least 6x/week. I get Chinese EVs well under 5% of the time. And that if anything exceeds the level I see riding around.
I also made a point today of looking on a 25 minute ride into the center of town, both at moving traffic (a lot, the roads are pretty busy here) and parked cars as best I could and in the parking lof ot my tony gym (often has some Mercedes parked there and an occasional BMW). We do have one BYD some of the time but not today. None at a pretty upmarket farang grocer. The Chinese cars stand out due to cute shapes and colors. I saw only two today. No question I saw over 100 cars in total.
You also talked past my point about motorbikes. Cars, even cheaper ones, are out of the reach of many Thais. A quick check on search confirms that motorcycle ownership is more prevalent than car ownership.
Chinese EV market penetration worldwide is very country-dependent – a huge proportion of their sales are in Brazil and Mexico. In simple terms, if a country has domestic car manufacturing ambitions, they are very reluctant to let in too many Chinese cars of any type. I suspect that to some degree Chinese EV’s are cannibalising potential sales of Chinese ICE vehicles and hybrids.
Of course, sales of Chinese EV brands is just part of the picture. Chinese EV’s are manufactured elsewhere, including in Thailand (although sometimes they are probably screwdriver factories). And many, if not most, non-Chinese EV’s have very significant elements of Chinese manufactured underpinnings, in particular drivetrains and batteries. It is unquestionable that Chinese EV parts will underpin most future cars worldwide, its less obvious if they will be sold under Chinese brand names.
Forgive me if I don’t put too much weight on your personal observations, as it is anecdotal evidence, which I’ve seen you dismiss when other posters present it in place of hard evidence.
The numbers are in the link I posted: for Thai new car sales, the share of Chinese brands was about 4% in 2022, 10% in 2023, 11% in 2024 and 20% in 2025 (up to Nov). Obviously not at the share of the big Japanese brands but the trend is clearly of significant growth. It’s certainly plausible that in a few years BYD will become #2 behind only Toyota with other Chinese brands displacing Honda and Isuzu in the top 5.
Similar growth is seen in Indonesia: https://auto.katadata.co.id/car/a-look-at-japanese-korean-brand-sales-following-the-entry-of-chinese-cars-22946
And in Malaysia (2024+2025 figures):
https://paultan.org/2026/01/12/top-20-ev-brands-in-2025/
https://paultan.org/2025/01/08/top-20-best-selling-ev-brands-in-malaysia-in-2024/
I admit I don’t know much about the motorbike market, but when that electrifies too I wouldn’t be surprised to see Chinese brands also taking significant market share, given now China is also one of the world’s largest manufacturer of eBikes.
This is confirmation that you have argued in bad faith. Your claim was “Chinese EVs absolutely are a massive factor in Thailand.” I showed that your even your initial data did not support that, and FIRST provided market data regarding sales, then anecdata regarding the impact on the impact on the total fleet now out and about. So my anecdata addressed a different matter, which you have yet to even acknowledge, and have not provided any data addressing that issue (I was unable to find any given the state of search, but it presumably exists since all cars have to be registered).
20% is a BIG climbdown from your initial assertion. Yet you not only fail to acknowledge that, that your further data confirms that your depiction was inaccurate, and you try further to shore up your position by finger-wagging about extensive local sightings here (a fairly affluent community with a lot of farangs, as in no reason to think local uptake would be less than what you would see across Thailand).
So you’re just going to nitpick a single word from my original post? Your whole argument against mine hinges on your personal interpretation of what the word “massive” means. Would it have been better if I used “significant” instead? Or will you also quibble that 20% sale share is not high enough to justify that word? Who are you to be the arbiter of what qualifies as massive or significant?
As an example, I can also return the nitpicking – you said Chinese EVs are “not a serious factor. ” Well the data proves you wrong – sales growth from 3% share in 2022 to 20% in 2025 IS “serious,” therefore you are arguing in bad faith – you see how it comes across if I just use my own interpretation of the word “serious” as an argument against what you said?
I apologise if you felt i was “finger wagging.” I was genuinely trying to have a productive discussion, but it feels like you missed the entire point I was trying to make by focusing on a single word in my post and then attacking me aggressively for it. For someone who has been a long time reader of NC but first time poster wishing to make positive contributions to this community this leaves a rather bitter taste.
Your argument was in bad faith and taking a ‘tude does not change that. You misrepresented your original data. You did not qualify or walk back your original LEAD claim until now.
You are still trying to defend it by depicting my reaction to not one but two comments supporting that claim before forced to try to re-characterize it as “nit picking” and “finger wagging”.
Having to resort to name calling is evidence you have lost the argument on the merits but are too invested in the need to be right to admit that.
The stated mission of this site is to promote critical thinking. We are exacting about information and using logically/rhetoriclaly valid argumentation.
Your stance now, of trying to recharacterize your information as “significant” as opposed to “massive” is ground-shifting, which is further bad faith argumentation in light of your effort to depict your position as consistent.
The fact is that 20% IN THE LATEST YEAR is not massive. It does represent a trajectory that if continued, which it appears it will be, is significant.
In addition. I presented information from extensive local sighting in a relatively affluent area that this level of sales has yet to have much impact on STOCKS given the apparent level of buys of new cars. The typical duration of car ownership in Thailand appears to be 10 years (it was shorter but protracted post Covid economic weakness appears to have led to slower car replacement).
And only 10% a year car replacement with the last year big jump to 20% Chinese EVs is 100% consistent with my claim that well under 5% on the road now are Chinese EVs. So for that part of my case, you simply engaged in dismissal rather than try to find data to refute what I was seeing. My further look provides substantiation.
The integrity of the comments section is more important to the site than the ruffled feathers of individual readers. As Barry Ritholtz has said, “Embrace the churn”.
The Chinese ambassador to New Delhi put out an op-ed in today’s The Hindu, which oddly enough, is a sort of reaction to this. He also quotes Jeff Sachs!
https://archive.ph/pq1MY
I know next to nothing about China but am interested in the subject because it certainly looks like there’s something huge going on in their economy and they keep putting out the “nothing to see here people, move along, we’re doing great” message. Weird. At least with the US, the propaganda is transparently false because it’s spread on so thick. With China, I always doubt my intuition.
I apologize if this is going on an off-topic tangent, but I do take issue with two of the assumptions that seem to have been taken for granted in this article, not least because they are a re-hash of what I’ve been hearing for 20+ years, seemingly since the start of my own political awareness in primary school. Those two assumptions are
1. The need for China to build “robust” social safety nets “as in the West”.
I’ve always been skeptical of the notion that somehow Chinese safety nets were or are 100x worse than “in the West”. During the height of the Covid emergency (not that Covid isn’t still happening, but that’s another topic…) China built a brand-new fully-functioning hospital in as little as in 10 days. My “high welfare” Western homeland, on the other hand, was using re-purposed decaying schools and gyms for vaccine rollouts while our local nurse and doctor trade unions were running ads on TV begging for more financial support from the local regional government, which, out of glorious monetarist principles, were refusing to fix our decaying healthcare infrastructure.
So the idea that somehow China needed or needs to “do more” for its “ill-protected” population always sounded off to me, and I think Covid was the final nail in the coffin. Clearly the Chinese state can mobilize resources far more efficiently than in the West. It’s not about amount of money spent but about bang for its buck. I believe that if China really did have such a paper-thin welfare state, then Western media would be awash in triumphant reporting about millions of Chinese citizens going bankrupt or dying from lack of healthcare, but somehow that hasn’t happened, which suggests to me that the notion of inadequate social safety nets isn’t truly the problem that Western analysts keep claiming it to be. I mean, hell, the standard retirement age for the Chinese is still far lower than it is in basically any Western nation, yet I hardly hear any news about the West’s need to build “more robust Pension systems like in China”. I also believe that due to increased privatization of Western health care systems and lack of accountability, much of healthcare spending in the West is actually money being diverted to private contractors (see: Blair and the UK’s New Labour NHS outsourcing) which don’t actually improve healthcare outcomes but are still being sneakily grouped under the vague and polite terms of “social spending” or “healthcare spending” when in comes to budget releases.
2. The idea that welfare is better than household savings
Retrenchment in the social sphere is ongoing across the entire Western bloc. I’m not going to go into the history of Thatcherite, Reaganite, etc. reforms but it is a truism that any welfare plan that still exists today in the West (assuming it wasn’t already abolished) is in a diminished state or is a far lesser shade of its original format. The West, if anything, has demonstrated the folly of relying upon government subsidies as a means of helping the downtrodden, for those subsidies can be automatically revoked or made far less generous within a single Parliamentary (or Congressional) term. I’m not even getting into the patronizing and humiliating tests that have already been attached to several of these policies (SNAP banning certain types of food for purchase, drug tests for certain welfare policies, active work requirements, etc.) With all that in mind, it’s become clear that household savings are far more important than these types of targeted government welfare policies. At least if you have 5000 in the bank, you can spend it on whatever you want and don’t need to go to a government office to fill out paperwork, or to perform a humiliation ritual, in order to gain access to the money. So on this matter over time I’ve evolved to support China’s method. I think it’s more free and I think it’s safer for the average worker. I would prefer a government that allows for high savings over a government that encourages constant spending but supplements it with welfare policies that can be rolled back or regressed at any time, because you never know if those welfare policies that you need will still be there when you finally need them.
This isn’t to say that China is a utopia with no problems. As an ideological socialist, I’ve always been confused as to why China got rid of full employment targeting. It seems to me that the simplest way to fix deflation in China would be for the government to step in as the employer-of-last-resort, the way it was in the 20th century and the way several socialist states still run things (Cuba, NK, Belarus). Bringing down youth unemployment to, idk, 3-5%, would provide the instant inflation needed to break the deflation cycle, and I think it would boost consumer sentiment as well.
I am sorry to have taken so long to free your comment, but it implicitly required a response from me.
First, your premise is wrong. Better social safety nets are not a Western fetish. Japan has extensive social support. Korea has pretty good ones and is increasing them. China has a pension system. Chinese officials support the position taken by this piece, that China needs better social safety nets:
https://www.thinkglobalhealth.org/article/chinas-emerging-welfare-crisis
The real impediment seems to be the one we identified in the article, that Xi personally would rather spend on tech than people.
Second, the article provides extensive evidence that Chinese households are saving at very high rates, out of fear of suffering harms that would be significantly reduced by government support. You try arguing, with no evidence, that is it somehow preferable to have this system continue despite the fact that it is producing considerable distortions not just in China but even globally. At most, you contend that private savings is more efficient. That is false. Any insurance scheme, mathematically, is cheaper than individuals trying to protect themselves on an isolated basis.
Third, you falsely insinuate that China does not have distress. It does. For instance, China hides what would otherwise surface as homelessness via offering very short term fixes, forcing the unhoused back to families in the hinterland and (probably the most important) allowing extreme overcrowding in substandard housing, as in slums:
You also claim that private savings are superior to government-provided pensions. That too is incorrect: https://www.nakedcapitalism.com/2026/01/is-your-pension-safe.html
Finally, as for China’s early-by-international-standards retirement age, that is an artifact of China having been a poor, agricultural society where lifespans were not all that long. China has had a very fast increase in incomes and lifespans but kept its historical retirement age in place. China is increasing its retirement age. Many experts in China say the process is going too slowly but it is not politically tenable to move faster.
These are *economic* problems, not problems of providing for people’s needs. Purely economic problems can always be addressed by moving money from here to there, whether that’s writing off loans or giving people money to purchase things.
People tend to see what’s happening in China through western eyes. Problems as perceived by US economists and pundits may not really be problems at all from a Chinese perspective. Sometimes these notions align, but because of the way China is governed, they have many more options for addressing “problems” than do western countries.
I had a similar reaction. This article makes it sound like GDP (in US$ no less) is all that matters; not even per capita GDP is considered. Whereas according to the “degrowth” view of the economy, increasing personal satisfaction while decreasing GDP per capita is not only possible, but desirable. Anathema to mainstream economics, of course, but it isn’t called the “dismal science” for nothing!
Please see my long comment below. It is China that has set a 5% GDP growth target, not this site. And it is the Chinese government that further touts its success in hitting its GDP growth targets.
I suggest you have your case of “halo effect” cognitive bias seen to.
First, you are second guessing the Chinese government itself at its very top levels. After years of denying that it has an overcapacity/overinvestment problem , it has uncharacteristically ADMITTED PUBLICLY to precisely that and is trying to address it.
Specifically, it has admitted it has a deflation/overcapacity/excess competition problem (“involution”) so serious that it needs to Do Something. But as we pointed out. this is going to be politically and practically very difficult, particularly given that in many (most? all?) of the areas where rationalization is needed (again, as China itself has said needs to happen) were heavily sponsored by local governments. Rationalizing them does not just mean creating regional winners and losers. It also means imposing big losses on some (but probably not others as much or at all) because a lot of that local government funding to these ventures was via loans and leases.
Second, you are ignoring the considerable impact in Japan of its three lost decades of growth after its real estate and stock market bubbles imploded. Japan went the zombification route because imposing losses on lenders (as opposed to have them happen more gradually over time via defaults and restructurings) was less socially/politically disruptive. Japan was starting from a higher level of development when it went into its protracted slide and also has tremendous social cohesion. China is less advantaged on those fronts, even with quite a few gleaming cities.
Third, as a testament of the severity of these issues (as in the impact on income and prosperity having societal effects), China is in the midst of a demographic collapse. From PlutoniumKun via e-mail: