Opinion | How anti-involution campaign can help China escape low-price trap
China’s economy has been stuck in relentless price competition rather than deflation, something the government is moving to alleviate
The main challenge facing China’s economy is not a deflationary spiral but a low-price trap. This might sound unusual since low prices are typically a key feature of deflation.
Classic deflation often starts with wealth evaporation and credit contraction, which leads to collapsing demand. Households stop consuming, firms halt investment, consumer and producer prices drop. This process slows economic activity, amplifies debt burdens amid falling asset values and crushes both money supply and financing demand, creating a vicious cycle between the financial system and the real economy.
These are signs that seem to point towards deflation. However, several aspects of China’s economy look very different from deflation.
For one, manufacturing investment remains strong. It grew 9.2 per cent year on year in 2024, and although the growth rate slowed to 6.2 per cent from January to July this year, it is still twice the level of 2019.