China Deflation Risk 2026: Is It Still a Concern After 2 Years?

China CPI has been below 1% for 24 consecutive months (2024-2026). Core CPI (ex-food, energy) at 0.3%. Producer prices (PPI) at -1.8% YoY. Is deflation still a risk? Supporting factors: (1) Property wealth effect negative - housing prices down 15% from 2021 peak, reducing consumer spending via wealth channel (2) Consumer confidence index at 82 (100 = neutral) - consumers saving at record rate (savings rate 34%) rather than spending (3) Local government debt overhang - fiscal contraction reduces aggregate demand (4) Youth unemployment at 18.2% - young people not forming households = reduced consumption. Policy response: (a) PBOC cutting rates (7-day repo at 1.5%, 5-year LPR at 3.45%) (b) Housing destocking: government buying unsold apartments for affordable housing (1T yuan program) (c) Consumption subsidies: 200B yuan for trade-in (cars, appliances). Deflation is a demand problem, not a supply problem. China has enough policy tools to prevent a Japan-style deflation spiral but fiscal transmission (getting money to consumers) is slow. Recovery expected H2 2026-H1 2027.

China Deflation Risk 2026: Is It Still a Concern After 2 Years?

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