China’s Domestic Price Wars Worsen Economic Deflation Crisis

Price wars ignite deflation spiral as China's economy stumbles.

Cutthroat competition slashes margins—and consumer confidence.

Beijing's stimulus? Too little, too late for factories drowning in overcapacity.

Bonus jab: Meanwhile, hedge funds still betting on 'imminent recovery' like it's 2008.

Beijing faces new overcapacity crisis

One prominent example appears in the electric-vehicle segment. This year, BYD has trimmed sticker prices by close to a third, and Xiaomi’s new SUV undercuts the cost of Tesla’s Model Y.

In the café sector, Starbucks has found limited growth while holding its tall latte at roughly 30 yuan, whereas competitors from Luckin Coffee to local boutiques are selling brews for as low as 9.9 yuan.

The pattern extends to commercial property. Landlords in Beijing who increased lease rates experienced a surge in empty units, JLL’s North China chief Rayman Zhang said, pointing to ongoing demand shortfalls and little hope for a near-term recovery.

A Reuters survey suggests that official data due Tuesday will show Q2 GDP up 5.1% year-over-year. Its a slight pullback from the 5.4% rise in Q1 yet still in line with Beijing’s roughly 5% growth goal for 2025.

However, conditions are likely to deteriorate in the latter half, cautioned Jianwei Xu, Natixis’ senior economist for Greater China. “Profits, especially in manufacturing, are still decreasing,” he said, adding that households could feel more stress as jobs grow harder to find.

China has faced similar overcapacity before.

About ten years ago, state-led commodity industries ran into comparable challenges. Today’s situation is compounded by a reduced state presence, leaving regulators with fewer levers to pull.

Morgan Stanley’s Robin Xing said that when private companies create too much supply, it’s harder to coordinate mergers and consolidation, even with government backing. His group also cautioned that public debt nearing 100% of GDP might limit Beijing’s capacity for major fiscal stimulus.

Boosting demand seen as key to recovery

Authorities are set to sustain existing support policies at a Politburo session before month-end. In March, the budget-gap ceiling for 2025 was lifted to 4% of GDP from 3% in the previous year.

On July 1, state media reported that President Xi Jinping asked the Financial and Economic Affairs Commission to clamp down on “low-price, disorderly competition.” In its Qiushi journal the same day, the party laid out measures to normalize administrative conduct and cautioned that unchecked market competition could harm economic stability.

Hu added that raising overall demand will likely be necessary to meet the government’s targets. Stronger consumer demand could ease price wars among suppliers and tech firms, but factories will still need a long time to use up their excess capacity.

Analysts at Goldman Sachs noted on July 1 that international trade disputes are compounding China’s domestic surplus. Tariff hikes by Washington and Brussels have prompted automakers to shift production abroad, which may create duplicate inventories.

Their forecast put expansion in seven key industries, including air conditioners, solar modules, lithium batteries, electric vehicles, power semiconductors, steel, and construction machinery. These industries will grow 0.5%–14%, and five of them already produce more than the global demand.

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