Prices won't stop falling in China, and Beijing is grasping for solutions

Pressure is building on Beijing to take more forceful action to prevent a downward spiral of deflation

- Hannah Miao

The country that invented paper is making way too much of it. So Shandong Chenming Paper, one of China's biggest paper manufacturers, did what any company faced with overcapacity would do: It cut prices to unload more supply while it tried to ride out the storm.

Instead, its losses mounted. Last month, the company said it had racked up around $250 million in overdue debts. Creditors sued and some of the manufacturer's bank accounts were frozen, it said.

The papermaker's troubles are only the latest sign of the havoc caused by falling prices in China, as factories struggle to cope with overcapacity and weak demand.

Chinese leaders this week pledged to do more to stimulate the economy, including by cutting interest rates and boosting government borrowing. But pressure is building on Beijing to take even more forceful action to prevent a downward spiral of deflation that becomes self-reinforcing, potentially landing China in a longer-term recession.

Prices for goods leaving Chinese factories have fallen year-over-year for 26 consecutive months, dropping 2.5% in November from a year earlier, and there is little sign of them turning up again soon. China's gross domestic product deflator, a broader gauge of price levels across the economy, has been in negative territory for six consecutive quarters, the longest stretch since the late 1990s.

A potential new trade war with President-elect Donald Trump could worsen the problem, by making it harder for China to unload excess factory production on the U.S., leaving it with more goods it can't absorb at home.

The fear is that deflation is becoming ingrained in China. As falling prices sap profitability, companies could postpone investments or shed workers, leading more people to cut back on spending. Others might put off purchases because they think prices will drop even more.