Commentary: China’s Economic ‘Buffer Period’ Is Still on Shaky Ground

Prices function as an equilibrium point between market supply and demand, serving as a vital indicator of economic health. In 2025, China’s economy managed to overcome various challenges, achieving reasonably strong outcomes and preparing for the 15th Five-Year Plan’s launch. However, persistent low consumer-price index (CPI) levels—hovering near 0%—and a consistently negative producer-price index (PPI), along with “compensatory” real-estate price declines, show that the price floor remains unstable. Despite entering a so-called “buffer period,” prices have yet to reach the 2% CPI growth target set previously. Stronger policy actions are required in 2026 to elevate price levels and solidify recovery foundations [para. 1].

While price signals suggest that the economic “buffer period” in 2025 remains unsteady, there is optimism for 2026. Effective and coordinated management of consumption, investment, exports, and exchange rates will be necessary to bring prices back to a reasonable range, as prices reflect deeper changes in purchasing power, profit expectations, market confidence, and economic structures [para. 2][para. 3].

Whether China’s economy is truly bottoming out depends on escaping the buffer period without relapsing into a downward price trend. This buffer period started after capital markets were invigorated in late 2024 and private, innovative tech firms grew, sparking expectations that the price trend might soon hit bottom [para. 4].

Despite a government CPI growth target of 2% for 2025, actual results from the GDP deflator, CPI, and PPI hovered around zero, meaning the price floor lacked consolidation [para. 5]. For 2026, outlooks are more optimistic due to consensus on the seriousness of price stagnation and expected macro policies targeting both supply and demand. Real-estate drags have diminished after years of decline, and infrastructure and manufacturing investment may stabilize, suggesting a potential turnaround. Still, prices will not rise without firm policy moves [para. 6].

China’s price landscape divides between commodity and service prices (CPI, PPI) and asset prices (mainly housing and stocks), whose divergence in 2025 exposed underlying economic contradictions [para. 7]. The main constraint on price stability was the sharp decline in real-estate prices in first-tier cities—real estate exerts significant influence on macroeconomic operations. This “compensatory decline” greatly unsettled market expectations [para. 8]. The cause is rooted in oversupply after two decades of rapid development, with inventories of unsold homes and land acting as a “barrier lake” to higher prices. Path dependence on the debt-investment growth model and inertia for new supply contribute to these issues; supply-side controls are needed to stabilize prices [para. 9].

Housing price declines have undermined household wealth and confidence, constraining consumption—especially for highly-indebted, younger buyers who now face negative equity. This loss of wealth restrains domestic demand expansion [para. 10]. The stock market performed better in 2025, with indices recovering and stabilizing near 4,000, providing some positive wealth effects. However, the risk of overheating remains; slow, structural improvement is preferable [para. 11].

Commodity and service prices remain low, reflecting “strong supply, weak demand.” CPI weakness comes from lackluster consumer demand, while persistent PPI declines reveal structural overcapacity. Firms squeezed by price wars invest less in innovation or people [para. 12].

To shift prices back to a “reasonable range,” the 2025 experience suggests aiming for a 1% staged target for 2026, with 2% as a long-term goal [para. 13]. Policy must act on both demand—by alleviating youth debt and boosting income expectations—and supply, especially by halting new land supply, prioritizing existing inventory revitalization, and letting large developers exit. The construction focus should shift to specialized renovation rather than new building [para. 14][para. 15].

At the same time, curbing industrial overcapacity and supporting emerging industries (AI, biotech) will create new price supports and help raise PPI. Overall, concrete policy action on multiple fronts is essential for establishing a stable recovery foundation [para. 16][para. 17].