China's Deepening Deflationary Pressures: Implications for Global Commodity and Consumer Equity Markets

The world is watching as China's deflationary pressures intensify, casting a long shadow over global commodity markets and equity valuations. By September 2025, the Consumer Price Index (CPI) had fallen 0.3% year-on-year, while the Producer Price Index (PPI) plummeted 2.3%, underscoring a prolonged period of falling prices driven by weak demand and industrial overcapacity. This deflationary spiral, exacerbated by a property crisis, sluggish consumer spending, and aggressive price competition in sectors like electric vehicles and solar panels, has forced Beijing to recalibrate its supply-side structural reforms. Yet, the efficacy of these measures remains constrained by structural imbalances and external headwinds, including U.S.-China trade tensions and a fragile global economic environment.

The Limits of Supply-Side Reforms

China's supply-side structural reforms, initiated in 2015, aimed to address overcapacity in traditional industries and rebalance the economy toward consumption and innovation. However, by 2025, these efforts have proven insufficient to counteract deflationary forces. While targeted interventions-such as curbing price wars in key sectors-have stabilized producer prices slightly, they lack the breadth and urgency of earlier reform cycles. For instance, the government's anti-involution campaign, designed to prevent self-destructive competition among firms, has failed to reverse the 29-month decline in PPI. This reflects a broader challenge: Beijing's cautious approach to fiscal and monetary stimulus, which prioritizes financial stability over aggressive demand-side interventions, has left structural gaps unaddressed.

The reforms' focus on industrial upgrading-such as investments in green energy and advanced manufacturing has yielded progress in sectors like photovoltaics and lithium-ion batteries. China's $625 billion investment in clean energy in 2024, for example, has accelerated its dominance in renewables. Yet, these gains are offset by persistent overcapacity in traditional industries and a property market slump that continues to drag on domestic demand. The result is a paradox: while China's green transition bolsters its global influence, its deflationary domestic environment dampens the very demand needed to sustain these innovations.

Global Commodity Markets: A Double-Edged Sword

China's deflationary pressures have sent shockwaves through global commodity markets. As the world's largest importer of crude oil, copper, and industrial metals, its weakening demand has contributed to a 10%-13% projected decline in exports of refined oil products in 2025. This trend is compounded by Beijing's recent reduction of export tax rebates on clean oil products, which has tightened regional supply-demand dynamics and supported crack spreads. Meanwhile, the green energy transition has created new demand for battery metals like lithium and cobalt, but this has been unevenly distributed. Southern China's rapid adoption of renewables contrasts with lagging demand in northern regions, creating spatial disparities that complicate global supply chains.

The interplay between deflation and commodity prices is further muddied by geopolitical tensions. U.S. tariffs and retaliatory measures have disrupted trade flows, while China's Belt and Road Initiative (BRI) continues to reshape infrastructure and logistics networks. For now, global commodity markets face a tug-of-war: rising demand for green energy metals and geopolitical disruptions push prices higher, while weak economic growth and high inventory levels exert downward pressure.

Equity Markets: Short-Term Gains, Long-Term Uncertainties

China's equity markets have experienced a short-term rally in response to stimulus measures. The March 2025 "Consumption Boosting Action Plan," which included expanded trade-in programs and pension hikes, spurred a 16% surge in the MSCI China Index by late September. Sectors like consumer staples and semiconductors outperformed, while utilities and banks lagged. However, analysts caution that these gains are fragile. The property market's collapse and low household consumption remain existential risks, with deflationary pressures eroding corporate profitability and investor confidence.

The government's reliance on targeted fiscal measures-such as RRR cuts and mortgage rate reductions-has provided temporary relief but lacks the scale needed to address systemic issues. For instance, while the auto industry's price wars have boosted short-term sales, they have also deepened deflationary pressures, squeezing margins and profitabilityChina consumer deflation deepens as demand stays ...^[18]. This dynamic raises questions about the sustainability of the equity market rebound, particularly as external factors like U.S. monetary policy and geopolitical tensions continue to loom.

The Path Forward: Balancing Act or Systemic Risk?

China's policymakers face a delicate balancing act. On one hand, they must address deflationary pressures through more aggressive demand-side stimulus, such as expanding social welfare spending and reducing precautionary savings among low-income households. On the other, they must avoid exacerbating asset bubbles in sectors like real estate, which remain a critical drag on economic recovery. The success of these efforts will hinge on the government's ability to coordinate supply-side reforms with demand-side interventions-a challenge compounded by fragmented governance and regional disparities.

For global investors, the implications are clear. China's deflationary environment will likely continue to weigh on commodity prices, particularly for construction-related metals like copper and lithium. Meanwhile, equity markets will remain volatile, with short-term gains driven by stimulus measures but long-term risks tied to structural weaknesses. The green energy transition offers a glimmer of hope, but its benefits will only materialize if China can navigate its domestic challenges and maintain its role as a global innovation leader.