China’s economy struggles with deflation, weak consumption despite state stimulus

By Burhan Sansarlioglu, Ali Canberk Ozbugutu, and Emir Yildirim

ISTANBUL (AA) – China’s economy continues to struggle with deflation and weak household consumption despite stimulus efforts, as the government’s focus on industrial and tech policies overshadows measures to boost consumer demand.

The Communist Party of China (CPC) Central Committee concluded its fourth plenary session to finalize the 15th Five-Year Plan, setting economic and social goals for 2026–2030.

The plan envisions major advances in science, technology, and national security, calling for the development of a modern industrial system to strengthen China’s global competitiveness.

President Xi Jinping said the plan will be crucial for “completing socialist modernization” by 2035, stressing people-centered growth, high-quality development, and harmony between markets and governance.

The plan is expected to be implemented at the National People’s Congress in March 2026.

- Global economy pressured by China’s supply surplus

Sadi Kaymaz, an Asian markets analyst, told Anadolu that one of the most important issues in the global economy is the excess supply in China, while the root of this issue lies in the country's investment policies, as so many industrial and manufacturing investments have come to the fore under Xi.

Kaymaz stated that demand has been on a structural decline, while the falling housing prices due to the deteriorating housing market prompted people to save money, leading to uncertainties due to the problems housing firms face in this climate.

He noted that the government's restrictions during the pandemic also led to loss of confidence, while its pressure on giant tech firms like Alibaba and the private sector as a whole increased youth unemployment.

“Due to the efforts of household savings, bank deposits exceeded $23 trillion,” he said. “The growth rate in retail sales remained well below its potential, falling 3% in September.”

Kaymaz said the housing downturn and weak consumer confidence, worsened by strict pandemic measures and state pressure on private tech firms such as Alibaba, have driven youth unemployment higher.

He added that household consumption accounts for less than 40% of China’s economy, a low ratio compared to other major economies.

“The final version of the new five-year plan was made behind closed doors last week, and the press coverage following the meeting point to more priority is being given to technology and industry, so we can safely say that consumption will continue taking a backseat moving forward,” he said. “Though household consumption is gaining some foothold, as some officials talked about significantly boosting the household's GDP ratio as one of the main goals of the plan.”

- Deflation tied to overproduction and weak consumer confidence

Kaymaz said China is focusing on supply-side reforms to address deflation, viewing overproduction as the root of the problem.

“The CPC believes deflation stems from overproduction but we need to consider steps like reducing excess capacity, increasing company margins, and curbing excessive competition that leads to discounts,” he said. He stressed that without structural reforms to boost household consumption, deflationary pressures will persist.

“Structural reforms are essential for household consumption to increase enough to reduce global imbalances,” he said. “The health insurance system, for instance, is extremely inadequate, and the public’s biggest concern is contracting diseases.”

"The insurance system covers a large portion of treatment costs but the share borne by patients can be heavy still," he noted, adding that this prompts households to save, while the aging population and the imbalances due to the one-child policy become increasingly apparent each passing year.

"The youth unemployment is around 17%, as per official data, and including those not seeking work, one in three young people is estimates to be unemployed," he said. "And for savers and holders of wealth, housing prices pose the biggest roadblock, as housing investment has been used as a savings vehicle for the past three decades in China.”

"The four-year decline in house prices is having the opposite effect in wealth — whether China can escape this deflationary spiral depends on what policies it implements in demographics, social security, and the housing market, but the Xi admin is cold to the idea of creating artificial domestic demand with monetary expansion," he added.