As China Falls Into Deflation, the Mood Turns Dark

When their government abruptly ended its harsh Covid measures in December, many Chinese expected a robust rebound from pent-up demand. Eight months later, China is instead facing an accumulation of bad news: record youth unemployment, a deep housing slump, stagnant spending, even deflation.

That’s a shock to many Chinese who are used to an economy that kept on expanding and living standards that rose with it. Now they’re contending with slowing businesses and shrinking personal fortunes.

I talked to over a dozen business owners and consumers, as I have been doing for years, and I can report: Their confidence in the future of the economy and the country is at a nadir. If they had hoped for a rebound, that hope has been extinguished. They worry that it’s the beginning of something they don’t dare to imagine and fear that the government doesn’t have solutions. The bad news just keeps coming.

“The most terrifying thing is that everyone around me is at a loss of what to do next,” said Richard Li, the owner of an auto parts wholesale business. “I used to believe that our country would become better and better.”

In the first half of 2023, the revenue of Mr. Li’s business fell 15 percent from a year ago, when the city he lives in — with more than 10 million other people — was locked down for weeks.

He discovered that other companies like his were struggling, too. Some of his clients, auto repair shops, even shut their doors because car owners were reducing spending.

Mr. Li had four stores and closed two of them. He let go two-thirds of his employees and stopped investing in new products. He also cut back on dining out and hanging out with his buddies. Strapped for cash, he tried to sell an apartment he bought in 2020 as an investment. But there have been few queries, even after he cut the price to $400,000 from $500,000.

It’s getting harder for people like Mr. Li to rely on the Chinese government to know what’s going on in the economy. Data it has released for years has been held back. Last week, it stopped sharing the unemployment rate for young people after the data hit a high at 21.3 percent in June.

But a set of official data the government was willing to share about July was bad enough.

Consumer prices in China fell last month for the first time in more than two years. Chinese banks extended $47.5 billion of new renminbi loans, tumbling 89 percent from June — and half the amount of a year earlier. Housing sales in terms of footage fell 6.5 percent in the first seven months of the year, after shrinking by nearly a quarter last year. In a country where three-fifths of the household assets are tied up in real estate, that decline is alarming.

The anxiety is running so high that people are using a social media site called Xiaohongshu to post talismans they think could help them sell houses.

China slipped into deflation after the government’s draconian “zero Covid” policy drastically suppressed consumption and business activity last year. Chenggang Xu, an economist at Stanford University, explained why deflation can be pernicious.

“The best scenario is that everyone expects prices will keep decreasing, so they will keep waiting for the prices to fall further,” he said. “The worst scenario is that people are very scared and very anxious.” Fear about their jobs or the survival of their businesses, he said, will cause them to save more and spend less, pushing the economy further into the trap of deflation.

With anxiety running high, people are already saving more and spending less.

Cob Liu, founder of an education start-up in a big city in southwestern China, said his revenue has remained flat this year, which is bad for a company that used to grow 40 percent a year. Mr. Liu, in his mid-30s, has about $1.5 million in cash but is determined to keep his monthly spending around $800, half of which goes to rent. He will keep his five-year-old Toyota Corolla and not buy property anytime soon. He bought apartments in two complexes in 2019 and the developers of both stopped building after running out of money. That is a nightmare that hundreds of thousands, if not millions, of Chinese have been going through since the housing boom came to a sudden end.

Mr. Liu believes that the decline in the Chinese economy could drag on for years. He sold all his positions in mainland China stocks earlier this year and said he would not touch shares of any Chinese companies, even if they’re traded in New York or Hong Kong.

Boris Dai, 44, is a commercial real estate consultant in Beijing who earned less than $15,000 in the first six months of this year. That is half what he made during the pandemic and less than 15 percent of his previous earnings. His other source of income — an office space he rents out — evaporated after his tenant went out of business six months ago.

“I can only lie flat,” Mr. Dai said, using a phrase that describes taking a break from relentless work. “I have no expectations for the future.” He converted his sport utility vehicle into a sleeper vehicle so he and his wife could save on hotels when they travel.

Even entrepreneurs who are doing well are reluctant to take out loans because of their uncertain prospects.

Mark Fu, founder of a financial advisory firm with offices in Chengdu and Hong Kong, said his business has been booming this year. Many wealthy Chinese, he explained, realized during the pandemic that money couldn’t buy them safety or dignity and have sought his help to move their financial assets outside China. Banks offered him business loans at low interest rates, but he’s reluctant to take on debt. Instead of expanding, he has reduced his staff to 10 employees from 12 through attrition.

He said he was horrified by the government’s clampdowns on one industry after another during the pandemic. He said he used to believe that if he worked hard, he would succeed. Now he fears that how he runs his business isn’t what matters most.

“Is the government going to wipe you all out in one go?” he asked, “or let you make some money?” He also has an apartment he’s been unable to sell.

The mood on social media has become so bleak that a commentary in Securities Daily, an official publication, called for the suppression of posts that speculate about troubles ahead. Rumormongering had set off market fluctuations, the article said, quoting headlines such as “China’s version of Lehman Brothers is coming!” and “A brokerage firm to hold a conference call of ‘the darkest hour.’”

People despair because they can’t picture how China can get out of its downward spiral. The root of the troubles, they believe, is the ideology of Xi Jinping, China’s paramount leader, who seems to dislike the private sector and has dismantled elements of the market economy that made China an economic success.

At 35, Andy Wang quit his job at a bank earlier this year to prepare to apply for graduate school in Australia. He was put off last fall when a slate of new party leaders was announced, all protégés of Mr. Xi. “The corrective ability of this country was lost after that,” he said.

His parents are wealthy, but he’s pessimistic he will have the same opportunities they once enjoyed. “I can’t see any way to make money in this country,” he said. “I’m not even sure if I can maintain my current living standard. I could only strive for survival.”