Fitch Signals China’s Re‑Deflation Risk: A Quiet Threat to Global Growth

Fitch Ratings announced that China exited deflation in Q2 of 2026, yet issued a warning about a potential re‑deflation risk.

First Positive Step in 2026

■The 2026 Q2 GDP deflator grew 1.6% year‑on‑year, the first positive reading since Q1 of 2023.

■The report stresses that this does not indicate a permanent price‑upward trend, only a temporary rebound.

Price Pressures Stay Cool

■The Consumer Price Index (CPI) is expected to rise to 1.2% by the end of 2026, with the trend continuing into 2027.

■Weak price pressures heighten risks to inflation forecasts.

Labor Dynamics: Wage Growth Limited

■Employment metrics show weak dynamics that constrain wage increases and dampen consumer confidence.

■These data suggest China’s economy is operating below capacity, continuing downward price pressure.

Policy Implications: Central Bank and Credit Conditions

■Fitch indicates that China’s monetary authorities may adopt tighter measures to alleviate price pressures.

■Tightening in SME credit and slowing commercial loan growth deepen macro‑risk concerns.

Fitch’s warning on China’s re‑deflation risk injects uncertainty into global markets. The under‑capacity operation and weak price pressures could trigger a decline in dividend payouts and investor confidence. Consequently, central banks are likely to focus on maintaining or slightly raising rates to steer inflation.