SHANGHAI: China’s leaders have pledged to put an end to aggressive price cuts by some Chinese companies which regulators say are spurring excessive competition that is damaging the economy.
The so-called “anti-involution” campaign has been sparked by overcapacity among Chinese manufacturers — a legacy of past government efforts to stimulate the economy — and price cuts made to clear stock or spur consumption. Those cuts have prompted price wars across various sectors that are raising concerns deflation may become entrenched and hinder efforts to stabilize China’s $19 trillion economy.
What is involution?
The Chinese term for involution, “neijuan,” began trending online in 2020 and was initially used by young people to describe the hypercompetitive and often self-defeating pursuit of traditional markers of success.
Some of the contexts they used it in included questioning what was the point of working hard to get into a good school if the reward was working 996 hours (9 a.m. to 9 p.m., six days per week) in a tech company? If you were lucky enough to land a job, that is, in an era of high graduate unemployment.
Though the term is far less commonly used in English, involution comes from a latin term which means “to roll or turn inwards.” It was popularized by American cultural anthropologist Clifford Geertz in the 1960s — in relation to his studies of Javanese agriculture — to describe economic or cultural stagnation despite increasing complexity or effort.
More recently, neijuan has become shorthand in China for the exhausting but also often futile and sometimes self-destructive grind of hyper-competition more broadly.
The concept is now also linked to the country’s pivot from property-driven growth to an industrial complex encompassing a third of global manufacturing, which has seen more resources invested without any accompanying increase in returns. It’s a race to the bottom.
Why is competition a bad thing?
On social media in China there is an oft-repeated joke that goes something like this: In other countries, governments intervene to prevent anti-competitive behavior; here (in China), they intervene to curb competition.
The issue is that the level of competition has reached a point where the returns are not only diminishing, they are threatening economic stability.
Beijing is facing decisions to take action against overcapacity, excessive competition and brutal price wars because deflationary pressures have been mounting in the world’s second-largest economy.
Consumer behavior is changing in ways that could lead to further downward pressure on prices, economists say, raising concerns that deflation could become entrenched, and posing more headaches for China’s policymakers.
The fight against deflation is a complicated one that poses risks to employment and growth. It comes as an unresolved trade spat with the US intensifies the squeeze on factory profits.
Beijing sees employment as key to social stability. Exporters and even the state sector are already shedding jobs and cutting wages, while youth unemployment runs at 17.8 percent.
Which industries are most exposed?
Excessive competition has led to shrinking corporate profit margins across multiple sectors, including electric vehicles (EVs), solar panels, lithium batteries, steel, cement and food delivery.
In the EV sector, a brutal price war erupted in the world’s largest auto market in 2023 between dozens of brands including BYD and Tesla. In May, Chinese regulators ordered the sector to stop its incessant price cuts.
According to data from LSEG covering 33 listed automakers headquartered in China, the sector’s median net profit margin fell to just 0.83 percent in 2024 from 2.7 percent in 2019.
China’s solar industry has also been in the cross-hairs of the anti-involution drive as massive levels of overcapacity and price wars have led to losses in the photovoltaic manufacturing value chain reaching $40 billion last year, according to Trina Solar Chairman Gao Jifan.
Even though restructuring to cut oversupply has begun, there is a long way to go before China’s solar output matches demand. Analysts estimated that China’s 2024 wafer, cell and module capacity alone is sufficient to meet annual global demand through to 2032.
Some industries remain embroiled in the policy change.
In the food delivery sector, tech giants Alibaba, JD.com and Meituan have poured billions of dollars into a subsidy-driven battle for “instant retail” market share in an expensive bet that the fast-growing one-hour delivery segment will be vital to the future of China’s e-commerce market as a whole.
Analysts at Nomura estimate industry-wide cash burn exceeded $4 billion in the second quarter alone, investment expected to further depress their short- to medium-term profits.
