Key takeaways

  • China recently slipped into deflation for the first time in two years due to weak domestic demand and a housing slump.
  • This could contribute to near-term global disinflation, with China’s declining export prices translating into lower import prices for other countries.
  • Despite recent stimulus measures, China’s deflation risk is expected to persist through the end of 2023.

What does deflation in China mean for global markets? 


China has slipped into deflation for the first time in two years due to weak domestic demand and a housing slump. 


This could aid global disinflation, with China’s declining export prices translating into lower import prices elsewhere. 


The yuan’s depreciation is further driving down import prices in local currency terms, especially in Latin America and Europe. 


Overall, despite recent stimulus measures, Chain’s deflation risk is expected to persist through the end of 2023.  


 

China’s economy has flourished over the past few decades, with GDP growth averaging nearly 10% annually. However, after the pandemic, the country’s economic rebound has proven weaker than expected due to factors including low consumer confidence, a housing slump and mounting local government debt, which has risen to 92 trillion yuan or $12.8 trillion. As a result, the world’s second largest economy recently slipped into deflation for the first time in two years, with consumer prices falling 0.3% year over year in July 2023 before edging up 0.1% in August. 

“China is an outlier in the post-pandemic reopening process in that its economy is facing intensified deflation risk instead of inflation pressure,” said Grace Ng, Senior Economist for Greater China at J.P. Morgan. Indeed, the country is the first G20 economy to report a year-on-year decline in consumer prices since August 2021. 

What does deflation in China mean for the rest of the world? 

China’s inflation dynamics

Line chart depicting China’s CPI and PPI, which have both fallen in 2023.

Why did China recently slip into deflation? 

“The deflation risk in China is in part due to the decline in the global commodity cycle, including the fading of supply chain pressures, but is more importantly driven by unique domestic factors,” Ng said. 

Firstly, government policies have been geared toward supporting production and investment instead of consumption, resulting in tepid domestic demand. Moreover, households are maintaining high precautionary savings against an increasingly uncertain economic backdrop. “Also, high unemployment in China — in particular, youth unemployment — suggests that the wage inflation pressure observed in other countries is absent here,” Ng added.  

Looking across sectors, China’s real estate slump is weighing heavily on the economy, with renewed weakness in home prices. “The weak housing market points at softness in rental cost in CPI components,” Ng said. “Plus, auto price cuts and falling pork prices due to oversupply are adding further pressure on the deflation risk.” 

Falling prices in China

Infographic depicting falling food prices, producer goods PPI and consumer goods PPI in China in August 2023.

How will deflation in China impact the global economy? 

Deflation in China could aid near-term global disinflation, as declining export prices out of China translate into lower import prices for trading partner countries. J.P. Morgan Research estimates China’s deflation will lower global core goods inflation (ex-China) by 70 bp (basis points) over the second half of 2023. 

“China plays a significant role in global goods disinflation. In 2021 and 2022, as much of the world recovered from the pandemic, China went into lockdown and a large positive shock to global goods demand coincided with a negative supply shock and broad disruptions to domestic supply chains,” said Nora Szentivanyi, Senior Economist at J.P. Morgan. “Then, earlier in 2023 when China reopened, the rest of the world was slowing down and the boost to global demand from China’s reopening bounce was outweighed by the boost to global supply. This dynamic of excess supply has driven China’s domestic and export prices into deflation.” 

China’s export prices have fallen at a pace of 18%ar (annual rate) in the three months leading to July as exporters slash prices to boost demand. The declines, initially led by processed raw materials, have since broadened to other key exports. “The fall in upstream prices has lowered costs for China’s downstream producers, and as a result, export price declines are now substantial not just in processed materials such as metals and chemicals, but also in lower-end consumer goods. This enhances the near-term spillover for the rest of the world,” Szentivanyi said. Indeed, this is facilitating the disinflation process for major trading partners: for instance, U.S. import prices from China fell -4.1%ar in the three months to July, while the Euro area saw a decline of -15%ar. 

In addition, the depreciation of the yuan over the past year has magnified China’s disinflationary impulse on global import prices. With roughly two-thirds of China’s goods trade transacted in dollars and the rest in CNY, the appreciation of most major currencies against the CNY is driving down import prices in local currency terms, especially in Latin America and Europe.

“Overall, China’s export price deflation combined with the fall in China’s trade-weighted currency is likely reinforcing the slide in global core goods inflation currently under way,” Szentivanyi said. “Taken together with other near-term disinflationary forces including the continued fading of supply bottlenecks, Chain’s excess supply is likely to weaken the pricing power and profit margins of goods producers elsewhere.” 

“We expect that China’s general pricing environment will remain relatively soft for the rest of the year as the imbalance between domestic supply and demand conditions will take time to be resolved.”

Why is China’s housing market experiencing a downturn? 

China’s housing market has been experiencing a downtown both cyclically and structurally since 2021, when several property developers defaulted due to tightened regulations on their debt limits. New home sales have plunged to just 50.9% of December 2020 levels, while house prices have slipped at a relatively milder pace. 

“Other than macro and financial drags, a double-dip in the housing market — in which two periods of contraction are separated by a brief period of expansion — may shake market confidence in the ability of the Chinese government to control risk and stabilize growth,” said Tingting Ge, China Economist at J.P. Morgan. “Echoing our call for rising urgency for housing policy relaxation, the government announced several demand-side easing measures around the end of August, including lower down-payment requirements. However, uncertainty remains about how the September-October seasonal pickup will play out in the coming weeks.”

Is deflation in China here to stay? 

China’s deflation risk is expected to persist through the end of this year. Although headline CPI may turn positive in the fourth quarter as a result of the base effect — or comparing current price levels to those of the previous year — overall CPI inflation will likely remain low.

This is in large part due to China’s prevailing policy. While the government recently rolled out several macro- and housing-related stimulus measures, including reducing the down-payment ratio for first and second homes, the impact will likely be modest and take several months to feed through to the wider economy. 

“In all, we expect that China’s general pricing environment will remain relatively soft for the rest of the year as the imbalance between domestic supply and demand conditions will take time to be resolved,” Ng said. “More meaningful policy response will be crucial to boost household income, reduce precautionary savings and provide funding support for pro-consumption measures.” 

Related insights

  • Global Research

    What’s next for the luxury market?

    April 27, 2023

    The luxury market should see two vastly different dynamics playing out in the coming months. How will this impact luxury shoppers and brands?

  • Global Research

    Global Research

    Leveraging cutting-edge technology and innovative tools to bring clients industry-leading analysis and investment advice.


This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan.