HONG KONG — If the specter of deflation has yet to chill the whole of China, it has already spooked Rebecca Zhang.

Just a few weeks after putting an aging apartment up for sale in Beijing, Zhang has had to lower her asking price. Having received only one vague inquiry, she fears if she can’t sell now prices will only go lower.

“Prices of pre-owned homes fell off a cliff after March, because people dare not get loans due to massive layoffs across industries,” said Zhang, a 43-year-old consulting industry employee. She was referring to the ongoing slump across the world’s second-biggest economy that has roiled manufacturing, stoked youth unemployment and pounded the property sector, once a driving force behind China’s growth.

If only she had sold before March, when it became apparent China’s economic rebound from COVID-19 was stalling. Then, she said, she could have sold the 65-square-meter apartment in downtown Beijing for 5.2 million yuan ($710,000). Now, she has had to list the place at 4.8 million yuan — and her agent is already asking her to further lower the price as the market is “very gloomy.”

For citizens like Zhang and the country’s legions of small and medium-size businesses, as well as regional and global economies that have come to rely on China’s economic health, the prospect of deflation after decades of rapid expansion is an unsettling new reality. When deflation occurs, people suspend spending on the assumption they will be able to buy goods more cheaply later because prices are falling, undermining consumption growth and casting a shadow on the overall economy.

China’s consumer price index (CPI) inflated ultra slowly post-COVID, then in July fell to a reading of -0.3% compared with a year earlier, turning negative for the first time in two years. In August, that measure crept back up to 0.1% growth, but remained below estimates. It still points to weak demand.

China’s National Bureau of Statistics has repeatedly denied the country is falling into deflation, but economists argue the trend of soft demand will persist, hitting the Chinese economy hard.

Signs of a major economic crunch have multiplied this year, posing new risks for a global economy that has come to depend on China. The crisis also reflects structural problems such as large amounts of debt and a shrinking population. China’s decades-old growth model, mainly driven by exports, infrastructure and the real estate sector, cannot be followed in the years to come, economists say.

Aerial photo shows apartment blocks in Nanjing, Jiangsu province, Sept. 1, 2023. Once a key motor of China’s economic growth, the country’s property sector has run into major problems.   © Getty Images

Meanwhile, China’s producer price index (PPI), a measure of factory gate prices, dropped to -3% in August and has declined at an average rate of 3.2% this year.

“Whether China’s economic status can be characterized as ‘deflation’ is a matter of debate,” said Yu Yongding, a prominent economist and former adviser to the People’s Bank of China, the country’s central bank. “But the challenge China has to deal with is very clear.”

Although analysts still debate whether deflation will set in for good, the blow is already hitting small and medium-sized enterprises.

September used to be peak season for James Su, who runs a wallpaper factory in the eastern province of Jiangsu. This year, he said, his outfit is like any of the dozens of other factories remaining in the same industrial park, most of which make home and decoration products: with orders shrinking unexpectedly, they are all struggling to survive.

“We had anticipated an increase in orders after the (post-COVID) reopening, and that didn’t happen,” Su said, predicting his company’s annual revenue will shrink to below 30 million yuan this year, less than half the usual 70 million yuan.

“However, what took us by surprise was that the current business situation is considerably worse compared to the period when the zero-COVID strategy was implemented,” Su said. Beijing’s stringent anti-COVID curbs severely restricted movements of people and goods, hobbling the economy until the measures were lifted in late 2022.

Every day now Su has to think about how to tell workers to take days off. “Although they are unhappy with the decrease in income,” he said, “they have nowhere else to go [for jobs] because this issue is not specific to just one factory.

“The entire industry is facing this problem.”

Assembly line workers produce garments for export orders in Lianyungang, Jiangsu province, June 27, 2023.   © Getty Images

Splurge spending still persists but only in certain pockets.

Late last month, when U.S. big-box wholesale giant Costco opened its first store in the city of Hangzhou, a flood of shoppers braved a lengthy wait in a sun-drenched parking lot to snap up deals on high-end booze and handbags.

Elsewhere, busy peak-summer season travel routes, overcrowded restaurants and bustling concert venues in some districts in first-tier cities offered glimpses of vacation hope that China, or parts of it, might escape the worst of deflation’s potential grip.

But the broader picture remains clouded and distant from expectations of when China first emerged from zero-COVID curbs. Most economists then expected moderate inflation to set in, and none expected the country’s CPI to average just 0.5% so far this year, compared with 2.4% in 2019, before the pandemic.

As of the end of August, core inflation, which excludes food and energy and is often described by economists and policymakers as a better predictor of future overall inflation, was averaging 0.7% for the year.

Some economists say drops in pig and pork prices for July and August are significantly impacting the CPI. Pork, a staple protein in China, cost more in summer 2022 due to the impact of African swine flu, a deadly virus that decimated the country’s pig herd.

Whatever factor is most weighing down the CPI, some say the time has come for Beijing to act decisively. This year’s GDP growth target of “around 5%” — below what Chinese have come to expect over the past four decades — was already seen as out of reach.

“Expansionary monetary and fiscal policies have to be implemented to stimulate the economy and reverse the continuous decline in growth since 2010,” said Yu, the former People’s Bank of China adviser.

Workers make export orders on the production line of a corrugated paper workshop in Taizhou, Jiangsu province, Apr. 18, 2023.    © Getty Images

Others warn deflation can also worsen the country’s debt burden: The real value of debt rises as prices fall, according to Justinas Liuima and Lan Ha, analysts at Euromonitor International, a London-based consultancy.

“As a result, China’s companies and local governments will have to allocate greater financial resources to service debt, leaving fewer resources for spending and investment,” the analysts wrote in a note.

A Shanghai-based economist who asked not to be named told Nikkei peers have received directives not to publicly debate whether deflation has set in.

“But we are now indeed in a low inflation period,” the economist said, “and even if it doesn’t reach a negative level, the inflation is still too low, which clearly indicates problems: weak domestic demand and a poor economic outlook.”