Trend China's deflation trap

Summary

Eurasia Group expects China's deflationary spiral to deepen in 2026 and Beijing to do little to reverse it. Home prices have fallen for four and a half years, and weak demand combined with state-driven overcapacity has produced involution, in which too many firms cut prices to survive. With the 21st Party Congress due in 2027, Xi Jinping is expected to put political control and tech dominance ahead of consumer stimulus and structural reform. Beijing can prevent a systemic crisis, but living standards will erode and a larger wave of cheap exports will hit foreign markets. The report warns that each year of deflation makes debts heavier and escape harder.