China faces rising deflation risks and market volatility

China faces rising deflationary risks as weak domestic demand persists despite growth in technology-driven exports. A Morgan Stanley report indicates that while exports provide a buffer, they may not offset the impact of shrinking domestic consumption and significant household deleveraging. The real estate sector, which previously supported GDP, continues to decline due to structural issues and a shrinking population.

Economic indicators show a rise in household savings rates and a trend of residents reducing debt. Xie Jinhe, chairman of Taixin Media Group, warned that China may be entering a period similar to Japan’s post-bubble era, characterized by a struggle to repair balance sheets and low consumer confidence.

In the equity markets, China Asset Management predicts a sideways trading pattern for Chinese stocks through September. While mainland companies saw double-digit profit growth in the first half of the year, market gains are expected to be capped by external pressures, including potential monetary tightening by the US Federal Reserve and elevated oil prices.