China needs to sort out its economic crisis at home

These are dangerous days for the Communist Party of China. Fractures are already starting to appear in its right to rule. A social contract based on prosperity in exchange for political exclusion is fraying at the edges amid a prolonged economic slump.

Behind the image of a high-tech industrial powerhouse, lies an uncomfortable truth. Deflation is running rampant amid shrinking consumer demand. Spending has been strangled by evaporating household wealth and high unemployment among the young.

The boom-to-bust property years have left the world’s second-largest economy mired in a catastrophe that has been dragging on since 2021. Whatever feel-good factor existed in China was vaporized during the Covid-19 pandemic.

“For five years now, the real estate crisis has been destroying the savings of the middle class in particular. They had already lost confidence in the stock market, and for two years now, even the demand for gold has been declining,” China Business Spotlight reported last week.

“The contract, which promised economic advancement in exchange for political passivity, is increasingly losing credibility. Today, even university graduates [are forced to] earn their living as couriers or Didi drivers,” the Substack site pointed out.

China’s deflationary spiral will deepen, and Beijing won’t do anything to stop it.

Eurasia Group

Crisis? What Crisis?

• Not that you would know the depth of the crisis sifting through the economic numbers.
• Over the years, the Communist Party state has made a fine art of airbrushing bad data.

Delve deeper: “[Yet] China’s deflationary spiral will deepen in 2026, and Beijing won’t do anything to stop it. [President] Xi Jinping will prioritize political control and technological supremacy over stimulus and structural reforms,” the Eurasia Group warned last month.

Between the lines: “Beijing has the means to prevent a crisis, but living standards will deteriorate, the fallout will spread, and the world’s second-largest economy will remain stuck in a trap of its own making,” the New York-based political risk consultancy reported.

Big picture: Still, that does not mean that Xi’s “mandate” is not in “peril.” The Communist Party “fears the masses more than the middle class,” China Business Spotlight said, adding that “history shows that dynasties fall when the poor rise up in a sea of rebellions.”

China Factor comment: Next week, the National People’s Congress will take place. It comes at a time when “household wealth destruction” is “on par with America’s 2008 crash, except it is still accelerating,” according to the Eurasia Group. Will it even be mentioned?