When it comes to economic worries, inflation is naturally top of mind for many consumers in the West and in developing markets. China has long been dealing with the opposite problem: Stagnant or even falling prices. |
For example, wholesale pork prices recently recorded their lowest level in eight years due to a supply glut and a drop-off in consumer demand following the Lunar New Year holiday. During the third week of March, live pigs were averaging just over 11 yuan ($1.60) per kilogram, down 2.9 percent from the previous week and 28 percent from a year earlier, according to government data. |
Chinese economists blame the rise of gigantic, industrial hog farms that can raise more than 1 million pigs per year. One such facility, on the outskirts of the city of Ezhou in central China, is 26 stories high and uses state-of-the-art surveillance technology to optimize the breeding process. According to a 2023 New York Times report, operations are overseen by “uniformed technicians in a NASA-like command center.” |
These massive operations came to the fore in the wake of the 2019 African Swine Fever outbreak, which wiped out many small Chinese pig farms and created an opening for consolidation in the industry. But now, the increased supply has far outpaced demand, and many consumers in China complain about the poor quality of meat produced by industrial farms. |
The importance of pork for Chinese consumers is difficult to overstate. It was historically served only on special occasions, but it’s now a ubiquitous ingredient in many Chinese dishes. The government in Beijing even maintains a strategic pork reserve to stabilize prices during shortages. |
Now, however, policymakers are struggling to address the opposite problem. And it’s not limited to bacon. |
Across key sectors of China’s economy, large-scale producers with generous state backing compete to reach a limited number of consumers, often engaging in race-to-the-bottom price wars that hurt their own bottom lines. They are forced to cut back on wages and employment as a result, meaning workers have less to spend and aggregate demand declines. |
This deflationary cycle is known in China as “involution.” It repeats itself in a self-consuming fashion, like a snake eating its own tail. Every sector of the economy is affected. New model automobiles are being sold for a fraction of their break-even price, and home prices have been declining for years, destroying household wealth. |
As is common in China, official statistics don’t tell the full story. The country’s official consumer price index has hovered close to zero since 2023, but authorities don’t disclose the precise makeup of goods they use to calculate the figure. A Bloomberg investigation published last year found that of 67 items surveyed, prices for 51 declined over the preceding two years. |
We might expect that the ongoing U.S.-Israeli war against Iran is changing the equation. The conflict has pushed up oil prices, and China’s producer price index is set to trend positive for the first time. But this is inflation stemming from a rise in input costs rather than a rise in demand. Firms will be hard pressed to raise prices if they want to stay competitive, so they’ll to need to absorb the higher costs on their own. |
Chinese leader Xi Jinping has made the solution clear. As WPR’s Mary Gallagher wrote last month, the Communist Party’s latest 5-Year Plan calls for building “a unified national market, reducing redundancies across different regions and encouraging consolidation through mergers and acquisitions. This should increase productivity and profitability of the most successful firms.” |
But as Mary notes, this plan will face serious pushback from local and regional officials who have benefited handsomely from the status quo. “Xi’s vision for China might be good for the Communist Party’s legitimacy as well as for those who have benefited less from rapid growth,” she wrote. “But it threatens the legions of local officials who were winners in the old system.” |