China’s financial crisis deepens – Now economists expect a recession

China’s economy is unraveling right before our very eyes. The 10-year government bond yield just tanked below 1.60% for the first time ever, sending a clear message: this is no ordinary slowdown.

Investors are ditching Chinese bonds, and who can blame them? While the U.S. bond yield shoots up, China’s plummets, widening the gap to a record 296 basis points. That means risk-free U.S. investments now pay nearly 300 basis points more than their Chinese counterparts.

What’s worse, China is neck-deep in deflation, a condition far more destructive than the inflation gripping the U.S. Falling prices erode profits, stifle wages, and hammer economic growth. Add in a crumbling real estate market that has wiped out $18 trillion in wealth since 2021, and the cracks in China’s economic facade are impossible to ignore.

Real estate collapse and staggering losses

China’s real estate sector was once a goldmine. Now, it’s a black hole. Since 2021, property values have plunged, erasing $18 trillion in wealth, according to Barclays. The high-yield real estate index, which tracks risky debt in the sector, has collapsed by over 80% from its peak.

Home sales have fallen off a cliff—down more than 50% in just three years. For context, this is worse than what happened in the U.S. during the 2008 financial crisis.

And it’s not just homebuyers feeling the heat. Private sector debt in China has skyrocketed, surpassing 200% of GDP for the first time ever. That’s about 70 percentage points higher than the peak of 2008. In contrast, the U.S. has actually reduced private sector debt since then.

Desperate to stop the bleeding, China launched a series of stimulus measures in late 2024. They cut reserve requirements by 0.5%, slashed mortgage rates, and pumped $142 billion into banks. Beijing also dropped the 7-day reverse repo rate by 0.2% and initiated what it called “forceful” rate cuts. But none of this has been enough to fix the deeper issues.

Even the government’s budget is stretched to its limits. The deficit is projected to hit 4% of GDP in 2025, the highest since 1994. For years, Beijing had a self-imposed cap of 3%, a rule it’s now willing to break in an attempt to prop up the economy.

U.S. tariffs and global implications

China’s problems aren’t just internal. Trump, back in the White House, has vowed to crank up tariffs on Chinese imports to 60%. If he follows through, that would shrink a $575 billion trade pipeline to almost nothing, according to Bloomberg. The effects would be devastating for China’s export-reliant economy.

Meanwhile, Beijing is betting big on gold. Gold prices have soared to record highs as China buys in bulk. Analysts see this as a hedge against instability, but it’s a strategy that signals a lack of faith in other recovery options.

The economic pain is also amplifying inequality. While 32% of China’s population had joined the middle class by 2021, over half still live in economic insecurity.

And global markets aren’t immune to China’s meltdown. Equities, commodities, and bond yields worldwide are bracing for the ripple effects. The $411 billion in special treasury bonds China plans to issue in 2025 might provide some relief, but skepticism is high.