Overcapacity to keep China in deflation

Deflation has reared its head again in China, underscoring the problem of persistent supply and demand imbalances. The limited extra support for consumption outlined at the National People’s Congress and in the new “Special Action Plan” for consumption will not remedy this. While most analysts expect inflation to rebound and average above 1% in 2026, we expect worsening overcapacity to keep China in deflation for the next couple of years. This will make debt servicing more difficult and, along with slowing trend growth, keep China on a path toward ultra-low interest rates.