The Global Impact of Chinese Deflation and Beijing's Response

China's policy makers are facing the challenge of preventing a deflationary spiral that could have severe consequences for the country's economy. While meaningful reforms could help stop this cycle, China's leadership prefers to maintain state control over liberalizing the economy, making substantial reforms unlikely. The country is grappling with weak consumer confidence, a heavily indebted property sector, slowing productivity growth, and high unemployment rates. Chinese policy makers must decide whether to bail out property firms and take on more government debt, while also addressing the imbalance between state-owned and private firms and unwinding the government's heavy-handed approach to technology and finance. A drop in housing prices and China's high debt levels could trigger a deflationary spiral, posing economic risks not only for China but also for the rest of the world.