I started my blog, “Beat the Press,” as a source of criticism of the media’s reporting on economic issues. I have largely moved away from media criticism in recent years. The Trump administration poses an existential threat (hate that phrase, but it is appropriate here) to democracy in the United States and around the world, so I feel I have to do my part for the cause. However, since this New York Times article provides such an extraordinary opportunity, I thought I would put my old media critic hat on today. 

The gist of the piece is expressed in its subhead:

“Economic growth of 4.3 percent in the second quarter, versus the same period last year, reflected a broad slump outside of the country’s export-oriented manufacturing might.”

The point is that China’s economy is facing serious problems as it goes into the second half of 2026. That point is not wrong. China’s economy is facing problems; it has not recovered from the 2020-21 collapse of the country’s massive housing bubble. Bubbles are bad news pretty much everywhere. They don’t end well. But this piece misrepresents the nature and severity of the problems facing China’s economy. 

Starting with the most basic issue, China’s GDP growth, the piece tells readers:

“When measured on a quarter-to-quarter basis, China’s economy expanded by only 0.9 percent in the second quarter. When projected out for a year, the second-quarter data implies that the economy was growing at an annual rate of 3.6 percent, sharply down from a pace of more than 6 percent in the first quarter.”

Since GDP growth figures in the United States are almost always expressed at annual rates, this explanation is more likely to confuse than clarify. It would have been best to just say that China’s economy grew at a 3.6 percent annual rate in the second quarter, down from a 6.0 percent rate in the first quarter.

The comparison is also not the bad story the piece seems to imply. Growth is often effectively “borrowed” from a future quarter. For example, if a lot of consumers bought cars in the first quarter, they would not be likely to go out and buy another car in the second quarter. Since the 6.0 percent first quarter rate was clearly above the country’s current trend, it is reasonable to combine it with the second quarter and get a 4.8 percent average for the first half of the year, very much in line with the current trend rate of growth.

The piece also treats the current trend as being problematic:

“Shortcomings in China’s economic growth drivers prompted the ruling Communist Party earlier this year to set the lowest annual growth target in decades, with a goal of between 4.5 percent and 5 percent this year.”

There should be nothing the least disconcerting about China’s lower growth rate target. China had been a very poor country with much room to grow by catching up with the technology of the West. It has now caught up with or even surpassed this technology in many areas. Slower growth is virtually inevitable. 

While it is still considerably poorer than the US on a per capita basis (its per capita GDP is around 35 percent of the US level), it is no longer a developing country. Its level of income is on par with the poorer countries in Europe. Also, it is worth noting that China’s population is now shrinking at a rate of around 0.2 percent annually. By contrast, the US population is still growing at close to a 0.5 percent annual rate. This means that on a per capita basis, China’s 4.8 percent first half growth would be equivalent to 5.5 percent in the US, a pace far higher than we have seen in many decades. 

Misunderstanding Deflation

Before getting into the specifics of the treatment of deflation in the piece, it is worth giving a little general background on the topic. Deflation is often associated with economies experiencing little or no growth. That doesn’t mean deflation is the cause of weak growth. 

When growth is weak, there will be downward pressure on prices. Less demand makes businesses reluctant to raise prices, and could even cause them to lower prices. When demand is low enough, it can actually lead to a situation where prices are falling on average, or deflation.

This can impede growth because it raises the real interest rate. The real interest rate is the difference between the interest rate in the economy and the inflation rate. This matters for businesses because their investment decisions depend on the return they can expect on money they borrow. If they expect that the prices of the items they are selling to be stagnant, or even falling, it will make them more reluctant to invest.

Central banks, like the Federal Reserve Board, lower interest rates to help spur investment, but they can’t lower interest rates below zero, or at least not much below zero. This means that when inflation gets very low or turns negative with deflation, it becomes more difficult for central banks to boost the economy. 

But there is no magic to crossing zero. When the inflation rate falls from 1.5 percent to 0.5 percent it raises the real interest by 1.0 percentage point. That is the same story as when the inflation rate falls from plus 0.5 percent to minus 0.5 percent, it raises the real interest rate by 1.0 percentage point. That’s bad news, but the problem is having a low inflation rate; deflation is beside the point.

It is possible to have a deflationary spiral that parallels the inflationary spirals that we and other countries have seen at various points, where deflation causes more weakness, causing more deflation. But this does not come from gradually larger rates of deflation. The times where a deflationary spiral has been a real problem have been situations where there was an economic crisis, like the collapse of the stock market at the start of the Great Depression. At those times, prices were falling at 5-10 percent annual rates, not the sort of modest deflation we’ve seen in recent decades in places like Japan and China.

Now we can look at the confusion on deflation shown in the article:

“One silver lining [to the jump in fuel prices], economists said, was that rising fuel prices started to feed through to broader inflation in the quarter, reversing a problem that China has struggled to shake: more than three years of a broad-based decline in prices. Such deflation tends to chill spending, with consumers putting off purchases in expectation that prices will be lower in the future.”

The immediate issue is that higher fuel prices are pulling more money out of consumers’ pockets; it’s hard to see how that will help to boost the economy, even though a big jump in the price of a major consumption item will raise the inflation rate in the economy. 

The piece seems to be hinging on the claimed benefit that some of the rise in energy prices will be passed through in the price of other items. That is likely true, but the effect will likely be very small, less than 1.0 percent in almost all cases.  

But let’s consider the delaying consumption purchases because prices are falling story. Suppose China has a deflation rate of 1.0 percent. That would mean that the shirt or pants that someone is thinking of buying for $50.00 will cost $49.75 if they wait six months or $49.50 if they wait a full year. Do you know anyone who would put off a purchase this long for that sort of saving?

Make it a big-ticket item like a refrigerator or expensive TV, selling for $1,000. If they wait six months, they can save $5, if they wait a full year, they can save $10. Does that describe anyone you know?

Maybe with a car costing $30,000 or $40,000, the prospect of saving $300 or $400 can encourage some delay, but most dealers have periodic sales with price differences that swamp the impact of modest deflation.  

Also, it is important to remember that the inflation rate is an average rate of price change. When inflation is close to zero, there will be many goods whose prices are falling. However, their impact on the overall rate of inflation is outweighed by the impact of the goods with rising prices. The shift to deflation just means the weight of the items falling in price has become somewhat larger. 

In short, very low positive inflation is evidence of economic weakness. Deflation is somewhat more evidence of economic weakness, but crossing zero has no special importance. 

China’s Economy Is Still Troubled

I don’t want to leave the impression that everything is good with China’s economy. It is being supported by a massive export boom, especially in areas like clean energy, batteries, and EVs, but domestic consumption is growing slowly, if at all. Demand is still feeling the effects of the collapse of China’s housing bubble (as we say, economy-moving bubbles are bad news).

While the economy is in no danger of collapse, it could be doing much better. If President Xi were to call me, I would encourage him to put some serious money into boosting pensions, especially in rural areas, and also modernizing China’s health care system. This spending would have immediate benefits for the Chinese people and boost demand and growth. There is not an obvious downside. China certainly does not have to worry that this spending will lead to problems with inflation.