China's Deflation Dilemma: What Negative CPI Means for the Global Economy
- ▸China's CPI has hovered at or below zero since early 2024, driven by a property sector collapse and persistently weak consumer demand.
- ▸Chinese factory-gate prices (PPI) have been negative for 18 consecutive months, exporting disinflation directly to trading partners through lower goods prices.
- ▸Without large-scale household income transfers, China risks replicating Japan's 1990s demand stagnation — a lost decade now two years in the making.
Quantifying the Deflationary Spiral
The GDP deflator at an estimated -1.2% (Q4 2025) confirms economy-wide deflation, not just goods. M2 money supply growth (~8-9% YoY) continues, but the money multiplier has collapsed — banks lend, but borrowers do not borrow. Velocity of money is at multi-decade lows. This is textbook liquidity trap: monetary policy is ineffective when private sector risk appetite has collapsed.
IMF Spillover Estimates
The IMF's Global Trade Model estimates that a 1 percentage point decline in China's domestic demand reduces trading partners' GDP by 0.1-0.3 percentage points on average, with ASEAN economies most exposed (0.4-0.6pp). Transmission channels include trade volume (lower Chinese import demand), commodity prices (depressed by reduced Chinese construction activity), and financial flows (capital reallocation as investors reprice EM exposure).
Policy Implications
For the Federal Reserve and ECB, Chinese deflation has been a structurally disinflationary force, supporting the goods deflation that drove headline CPI down from 2022-23 peaks. If China reflates — unlikely near-term — policymakers should model a scenario where Chinese demand recovery removes 40-60bps of global disinflationary pressure in 2027-28.
India faces a double-edged exposure to China's deflation. Cheaper Chinese steel, chemicals, and electronics components lower Indian manufacturers' input costs. But the same deflationary exports can flood Indian markets and undercut domestic producers. India's anti-dumping filings against Chinese products have risen sharply since 2023, reflecting this tension. For the RBI, lower imported goods prices partially offset domestic food inflation, providing some room to hold rates even when domestic demand is firm.
Primary Sources
Cite This Article
Khagan Rao. (2026, June 28). China's Deflation Dilemma: What Negative CPI Means for the Global Economy. EconoLens. https://econolens.co.in/news/china-deflation-dilemma-global-economy-2026
Khagan Rao is an economist and analyst specialising in global monetary policy, fiscal frameworks, and international trade. He tracks publications from the IMF, World Bank, BIS, and RBI to deliver accessible, data-driven analysis for a global audience.