Raychaudhuri: China's price wars are a steep battle.
Price wars have led to a collapse in profitability and an acceleration of deflation on the Chinese domestic market due to overcapacity. In response, the government launched a program called "anti-involution", which aims to counter deflationary pricing wars. This battle could last a long time. It has already seen some success, but it is still a long-term fight. Involution, the Chinese internet slang term for "competitive pressures" faced by young Chinese at school and in the workplace, was originally used to describe these pressures. The word "involution" has been used to describe the alleged excessive and unsustainable competition between Chinese firms since early 2024. This is because more resources are invested in these companies without increasing their returns. In June 2024, the Chinese government started to warn of the dangers of involution due to the declining profitability and corporate margins in diverse industries such as electric cars, solar panels and lithium batteries, as well as steel, cement, and food delivery. In the first half 2025, as price wars intensified, critics of "excessive competition" became more vocal. BYD, the leader in electric vehicles, began to drastically reduce prices. Meituan, the food delivery giant, and JD.com, a new ecommerce platform, also started offering discounts and subsides. The increased competition in China is also believed to be a factor contributing to deflationary pressures. China's Producer Price Index has been in the negative for most of the past three years. However, in mid-2024, domestic demand began to recover and there were hopes that this situation would be resolved. This optimism has been squelched by the intensification of price wars, which saw PPI fall 3.6% on an annual basis in the latest report. Early Days Recognizing that industrial overcapacity was a danger to the economy in China, the government launched a multifaceted anti-involution program in July.
The program aims to direct investment funds into advanced manufacturing, to control production in industries that are highly competitive, such as steel, to oversee pricing and subsidies for EVs and in food delivery and to continue phasing-out obsolete industrial capacity. Although it's still early, some effects are already visible. In July, the average discount for carmakers fell. Meituan JD.com, and Alibaba have recently agreed to stop aggressive discounts in food delivery in order to promote "fair competition". Consolidation in the industry has also increased. Polysilicon producers are discussing the creation a $7 billion fund for the acquisition and shutdown of almost one third of their production capacity, and restructuring part of the losing sector. China Shenhua Energy - the largest coal miner in the country - has also announced its intention to purchase various assets from its controlling shareholder's subsidiaries to improve its operational efficiency.
The anti-involution programme in China faces a number of challenges. The anti-involution program is primarily aimed at the private sector. This means that most targets will make voluntary commitments to maintain price discipline, but could resort to aggressive tactics if market pressure increases.
Beijing's previous structural supply reforms, from 2015-17, reduced excess capacity in state-owned companies, which Beijing had, by definition more control over. Many local governments in China are heavily indebted, and they may prioritize short-term revenue over long-term change. They could offer subsidies to firms in order to attract investment, even in industries that have been targeted by anti-involution campaigns. If preventing overlapping investment hinders the experimentation of different approaches, innovation in emerging technologies may also suffer. A tighter control over pricing and capacity may dampen the enthusiasm of private capital to invest. One of the greatest risks of the program's implementation is job loss as industries consolidate or become inefficient.
China's youth employment rate, while it has decreased in recent months, is still high. It could rise over the next few weeks as more than 12 million new graduates enter the workforce. The private sector, which is the main target of the anti involution program, generates most of China's incremental jobs. The anti-involution program in China has had some success. However, this is not going to be an easy fight. Beijing will have to boost domestic consumption much more than in the past to absorb excess capacity across industries. The mood among Chinese consumers is still quite low. This suggests that the fiscal and monetary stimulus measures taken by the Chinese government in the last year had only a small impact. The government may also be considering more innovative policies that have not been tested before. It could, for example, mandate superior product qualities to eliminate players who compete solely on price to encourage consolidation in the industry. This strategy is less likely to be effective in the services industry because it would be difficult to define "low quality". A second way to reduce extreme competition is by encouraging firms to collaborate through technology sharing or mutual equity ownership. The increased availability of long-term patient capital could also eliminate the need for firms to rapidly ramp up their production and revenue. China's quest for high-quality development has entered a new phase with the anti-involution programme. It will not be easy to enforce pricing discipline and maintain market stability in industries that are fiercely competitive. This may mean that a new playbook is needed.
The views expressed are those of Manishi Rachaudhuri. He is the founder and CEO Emmer Capital Partners Ltd. and former Head of Asia-Pacific Equity Research for BNP Paribas Securities.
You like this column? Open Interest (ROI) is your new essential source of global financial commentary. ROI provides data-driven, thought-provoking analysis on everything from soybeans to swap rates. The markets are changing faster than ever. ROI, can help you keep up. Follow ROI and X on LinkedIn.
(source: Reuters)
