Executive Summary
- China has launched an “anti-involution” campaign to curb aggressive price cuts and address overcapacity, which regulators warn are damaging the national economy.
- The initiative aims to mitigate widespread price wars, which are causing shrinking corporate profit margins, risking employment, and fueling concerns of entrenched deflation.
- Key sectors such as electric vehicles, solar panels, and food delivery have been significantly impacted by intense price competition and oversupply.
The Story So Far
- China’s new “anti-involution” campaign is a direct response to widespread overcapacity among its manufacturers, particularly in sectors like electric vehicles and solar, which has triggered intense price wars. These aggressive price cuts are significantly shrinking corporate profit margins, risking employment, and contributing to concerns of entrenched deflation, thereby damaging the national economy and hindering efforts to stabilize it.
Why This Matters
- China’s “anti-involution” campaign signals a critical government intervention to curb aggressive price cuts and address widespread overcapacity, aiming to prevent entrenched deflation and stabilize the nation’s $19 trillion economy. This initiative is crucial for improving corporate profit margins and safeguarding employment, as current price wars are severely impacting key sectors like electric vehicles and solar, leading to financial strain and unsustainable market practices.
Who Thinks What?
- China’s leaders and regulators believe that aggressive price cuts and excessive competition stemming from overcapacity are damaging the national economy, leading to shrinking corporate profit margins, risks to employment, and hindering efforts to stabilize the economy.
- Economists fear that the widespread price reductions, combined with changing consumer behavior, could further depress prices and entrench deflation within the economy.
China’s leaders have pledged to curb aggressive price cuts by domestic companies, launching an “anti-involution” campaign aimed at addressing excessive competition and overcapacity that regulators warn are damaging the national economy. This initiative seeks to mitigate the widespread price wars across various sectors, which are fueling concerns of entrenched deflation and hindering efforts to stabilize the nation’s $19 trillion economy.
The “Anti-Involution” Campaign
The “anti-involution” campaign is a direct response to a surge in overcapacity among Chinese manufacturers. Companies have increasingly resorted to deep price cuts to clear inventory or stimulate consumption, inadvertently triggering intense price wars.
Regulators are concerned that these dynamics are leading to shrinking corporate profit margins and posing significant risks to employment and economic growth. Economists also fear that changing consumer behavior, coupled with these price reductions, could further depress prices and entrench deflation.
Sector-Specific Price Wars
The impact of excessive competition is evident across numerous key sectors of the Chinese economy. Industries such as electric vehicles, solar panels, lithium batteries, steel, cement, and food delivery have all experienced significant pressure.
Electric Vehicles and Solar
The electric vehicle (EV) sector witnessed a particularly brutal price war in 2023, prompting regulators to intervene and order a halt to further price reductions. This intensity reflects the broader challenge of balancing rapid industrial expansion with sustainable market practices.
Similarly, China’s solar industry is grappling with severe overcapacity, which contributed to billions of dollars in losses last year due to aggressive price competition. While restructuring efforts have commenced to address the oversupply, significant progress is still required before output aligns with demand.
Food Delivery Sector
In the food delivery sector, major tech companies are engaged in a subsidy-driven battle for market share. Analysts estimate that this intense competition led to substantial cash burn in the second quarter alone, underscoring the financial strain induced by these price wars.
Outlook and Challenges
The Chinese government’s pledge to end aggressive price cuts highlights a critical juncture for the economy. Addressing overcapacity and fostering healthy competition are paramount to preventing entrenched deflation and ensuring stable economic growth.
The campaign underscores the complex challenges China faces in managing its unique economic system, where rapid industrial development can sometimes outpace market demand and lead to unsustainable competitive practices.
