BEIJING (AP) — Zhou Fujin anticipated that renting out his apartment near a reputable high school in northeast Beijing would help offset most of his mortgage when he purchased it in 2020. However, the value of the apartment and the rental income have sharply dropped over the past few years, placing a strain on his family’s finances. China is currently facing a period of deflation, where prices are decreasing, in contrast to inflationary pressures seen elsewhere globally. While lower prices may benefit some, deflation indicates weak demand and a stagnation in economic growth. These challenges set the stage for the annual session of China’s parliament starting on Wednesday. The response from the ruling Communist Party remains uncertain, but some economists predict increased government spending as a potential solution. Additionally, observers will be keen to see any adjustments to the annual economic growth target, which has remained around 5% for the past two years. Falling housing prices have led many families to curtail spending, while manufacturing continues unabated. Across the economy, prices have dropped in 2023 and 2024, marking the longest deflation period since the 1960s. The gross domestic product deflator, a comprehensive measure of price changes, reached -0.8% in the last quarter of 2024, a more severe decline compared to the -0.5% in the previous quarter. The impact of deflation is palpable in Zhou’s situation, as well as for many others. Zhou’s apartment in Beijing’s Miyun district, originally priced at 2 million yuan ($275,000) in 2020, was financed with an 800,000 yuan ($110,000) bank loan. The monthly rent he charges has dropped from 2,300 yuan ($316) to 1,700 yuan ($234), while his mortgage payment exceeds 3,000 yuan ($413) per month. The current value of the apartment is around 1.4 million yuan ($193,000). Zhou, who operates a real estate brokerage firm, has seen substantial financial impact over the past four years due to the industry crisis triggered by the government’s tightening of regulations on real estate developers. He has diversified into home decoration services to balance the losses. “The biggest spending for me includes mortgage payments, car expenses, and my children’s education. I have cut down on other areas like travel. Even my children have realized the value of money and are willing to spend less,” Zhou shared with The Associated Press. Another small business owner, Lu Wanyong, who owns a picture framing workshop in Beijing, has seen a significant decline in customers, with only one or two visits per day compared to more than a dozen before the pandemic. The drop in new homeowners seeking decoration services has worsened the situation. Lu’s family savings have been depleted, and he fears not being able to afford the shop’s rent of 6
In China, the current economic challenges stem from a combination of issues such as excess manufacturing capacity leading to oversupply in the market, consumer reluctance to spend, and businesses being cautious about investing due to economic uncertainties. The housing crisis has further compounded the situation, with an estimated $18 trillion in household wealth lost and job losses due to the impact of the COVID-19 pandemic.
The decrease in housing prices has led to a decrease in consumer confidence and spending. When people feel less wealthy, they tend to save more and cut back on their expenditures, affecting overall demand. This can create a downward spiral where reduced consumer spending leads to lower profits for companies, resulting in job cuts and further reducing household incomes.
The introduction of new tariffs on Chinese exports by U.S. President Donald Trump is expected to impact China’s GDP growth significantly. The Chinese government has taken measures such as reducing interest rates and mortgage down-payments, as well as launching programs to address the issue of unsold housing stock. However, addressing deflation remains a sensitive issue for the Communist Party, with a focus on boosting demand through various initiatives without directly acknowledging the deflationary pressures.
Some economists suggest that to rebalance the economy, there is a need to increase consumer purchasing power by redirecting resources from unproductive investments. Suggestions include providing vouchers to stimulate spending and linking economic recovery to rising incomes. Structural reforms to address long-standing issues like excess industrial capacity and inefficient state industries are also seen as crucial for sustainable growth in the long term.
Al reform element… and that requires beefing up of the government’s role in health, education, and social security. Associated Press researcher Yu Bing contributed to this story.
