Xi Jinping's futile war on price wars

Mint

01-07-2025

When firms raise prices, 'gouging" their customers, many governments complain. Some cannot resist intervening. But in today's China, the opposite is happening. In May the state reprimanded carmakers not for raising prices, but for cutting them. 'There are no winners in this price war," it said, blithely ignoring the happy customers who can now buy a zippy electric car for less than $8,000.
In wars, the methods are sometimes as shocking as the results. Many Chinese manufacturers sell cars cheaply to dealers, who resell them as 'used" vehicles, even though they have zero miles on the clock. The ploy, perverse as it sounds, lets carmakers split their market, offering pre-owned but undriven vehicles to price-sensitive customers, and identical, higher-priced vehicles to everyone else. 'This disguised method of reducing prices disrupts the market order," complains the People's Daily, an official newspaper. Carmaking is not the only part of the economy suffering: factory-gate prices fell year on year in May in 25 out of 30 major industries. In eight, including coal-mining and steelmaking, the drop was even steeper than for cars. Across China's vast industrial machine, average prices have now fallen for 32 months in a row (see chart).
Manufacturing investment, especially in high-tech ventures, has been a bright spot for China's struggling economy in recent years as it weathers a prolonged property crisis. But the rapid decline of industrial prices and profits has raised doubts about the sustainability of even this capital-expenditure boom. Industries such as electric cars, lithium-ion batteries and solar panels were supposed to be new engines of growth that would fill the yawning gap left by the property sector. Now they have also become engines of deflation.
The government has a new word for the problem: 'involution". This has long referred to arms races between students or workers, for whom extra effort brings no extra reward, because it obliges everyone else to try harder, too. In the past year the same term (neijuan in Chinese) has been applied to cut-throat competition between firms. It appeared in a statement from the Politburo, which comprises the 24 most powerful people in China's ruling Communist Party, in July 2024. In December it reappeared in the conclusions of the Central Economic Work Conference, which sets the tone for economic policy. 'Rectifying 'involutionary' competition is something that everyone is very concerned about," said a spokesperson for China's planning agency in May.
Which industries are most involutionary? According to Zhao Wei of Shenwan Hongyuan, a Chinese securities firm, the problem most severely afflicts electrical machinery, steelmaking and non-metallic mineral products, such as cement, ceramics and glass, where prices fell faster than the national average last year. These parts of the economy also suffer from unusual amounts of idle capacity. And, by his reckoning, another 15 industries, from cars to tobacco, show some involutionary tendencies, such as weak profit growth, rapid increases in debt, falling prices or low rates of capacity utilisation.
Although the term 'involution" is new, the problem is not. From 2012 to 2016 China suffered four and a half years of falling factory-gate prices. In response, Xi Jinping, China's ruler, introduced a policy called 'supply-side structural reform". Its original aim was to raise prices and restore profitability, not by increasing demand, but by curbing supply. China had prepared two tables of food for only one table of guests, according to an unnamed source in the People's Daily. However hard the guests ate, they could not finish it all.
To clear the tables, China's planning agency imposed production quotas and capacity cuts on oversupplied industries such as steel. It sought mergers and acquisitions to reduce competition. Coal mines were instructed to operate for only 276 days a year. Officials also strictly enforced standards for energy efficiency and pollution, forcing older, dirtier plants to shut. The policy is considered a success. Steel prices and profit margins increased. Across industry as a whole, factory-gate prices stopped falling in September 2016 and rose by more than 7% in early 2017.
Is the government trying to repeat this trick? As well as rebuking carmakers for giving customers too good a deal, it has told the solar-panel industry to exercise 'self-discipline". At the end of last year, 33 panelmakers duly pledged to set a ceiling on production and a floor under prices. The government has also tried to prevent the 'blind expansion" of steelmaking by insisting on the 'three don'ts": don't produce anything without an order, don't sell at a loss and don't ship without sure payment. E-commerce platforms have been encouraged to reduce pressure on merchants. They have, for example, phased out refund policies that allowed customers to get their money back without returning the goods. Local governments have also been told not to go too far in their efforts to promote investment or shield local champions from competition. According to Thomas Gatley of Gavekal Dragonomics, a consultancy, listed firms on China's mainland (which number over 6,300) reported receiving 195bn yuan ($27bn) in subsidies last year, some 13% less than the year before.
These interventions are less bold than those of the 2010s. The campaign may be more tentative because many of its targets are different, says Robin Xing of Morgan Stanley, a bank. In 2015-17 the industries suffering from excess capacity were dominated by large state-owned enterprises. They were easy to boss about. And they were often the biggest winners from the eventual shake-out, emerging with a bigger share of a less crowded industry. The smaller enterprises squeezed out by production limits and pollution standards were often scrappy private firms, relying on cheaper, dirtier technologies.
Many industries now suffering from involution are led by less biddable private firms. Electric cars and solar panels, for example, are dominated by sophisticated commercial enterprises, using cutting-edge technology. Some of the industries, indeed, represent the new engines of growth for which the original supply-side reform was meant to make room. 'New driving forces are being strengthened," said the anonymous sources interviewed by the People's Daily in 2016. But 'if the old does not go, the new will not come."
Moreover, some excess capacity is an inevitable result of Mr Xi's desire to maintain China's industrial might. He wants to preserve manufacturing's share of China's output whether or not anyone wants to buy it all. The problem is made worse by local governments scrambling to fulfil his wishes, thereby duplicating each other's efforts. At a symposium of economists and business leaders held last year, Mr Xi was warned his call to cultivate 'new productive forces" could result in involution, as each local government strived to ensure the cultivation happened on their patch.
Demanding problems
Some of China's struggles with involution also reflect a persistent shortfall of demand in the economy. Consumer confidence is low; the household saving rate (more than 31% of disposable income) is high; and a smaller share of that saving is flowing into the property market. In the first five months of this year households spent less than half as much on new homes as they did in the same months of 2021.
Mr Xi's 2015 reforms owed a lot to other policies that lifted demand. These included an expensive effort to replace so-called shantytowns with modern flats. If the government could once again stabilise the property market, restore consumer confidence and lift spending, some of China's overcapacity problems might disappear. Others would be easier to bear. Rising prices in booming industries could offset deflationary pressures elsewhere, and hiring in sunrise sectors could ease the pain of firings in industries that overextended themselves. 'Without a strong demand-side anchor, even the best designed supply-side measures risk falling short of delivering reflation," argues Mr Xing. Many Chinese industries have prepared two tables full of food. The government needs to invite more guests to the party.