Even China's top leadership has had enough of companies' aggressive price-cutting

Business Insider

3 days ago

It looks like China has finally recognized how a relentless price war is backfiring on its economy.
At a high-level meeting chaired by Chinese leader Xi Jinping on Tuesday, China's top leadership pledged to curb "low-price and disorderly competition among enterprises" and create a "unified national market," according to Xinhua state news agency.
China's acknowledgment of unhealthy competition among its local firms comes amid the West's criticisms over the country's industry overcapacity and cheap exports. These products have undercut domestic industries and have led to factory closures and job losses from the US to Europe.
While Beijing has consistently pushed back against those accusations, the price war is likely taking a toll on its own economy, too. The country remains stuck in a prolonged slump marked by persistent deflationary pressure and depressed consumer confidence.
Beijing has rolled out consumer-focused measures like subsidies for small appliances in an effort to stimulate demand, but it's not enough. Businesses are still cutting prices aggressively to boost sales, fueling a deflationary spiral that depresses wages and threatens broader economic stability.
Now, the Chinese government is stepping in to address challenges on the supply side, Zhiwei Zhang, the president and chief economist of Hong Kong-based Pinpoint Asset Management, wrote in a Tuesday note.
Tuesday's meeting follows a sharply worded editorial in the Communist Party-owned People's Daily on Sunday, which railed against the "involution" of excessive competition that has "distorted" the market and caused "adverse effects on high-quality development."
There were no specific details on how the Chinese government plans to address over-competition. Zhang said he expects measures to be announced in the next few months.
'Not sustainable'
China's moves to stem excessive price wars in its economy came as recent data shows renewed stresses in the world's second-largest economy that has been struggling to recover from an epic property crisis.
An official survey released Monday showed manufacturing activity continued to contract in June, with smaller firms facing "stiff pressure." US tariffs were affecting smaller companies the most, according to a Bank of America analysis on the same day.
"Going forward, with low expectations of further policy support, domestic demand may fail to compensate for the fading external demand," wrote the analysts.
Excessive competition "directly affects employee wage levels, government tax revenue, and future investment confidence, thereby affecting the overall economic development," People's Daily wrote in its editorial.
The editorial pointed to the solar cell industry, highlighting what the paper called a"temporary oversupply." China has been flooding the market with solar cells for years, driving prices so low that some Europeans even started using them as garden fencing.
Tuesday's editorial also singled out the electric vehicle industry, where profit margins declined last year.
Electric vehicle giant BYD has acknowledged the stiff competition that has led to price wars and driven down profits in the industry.
"It's very extreme, tough competition," Stella Li, BYD's executive vice president, told Bloomberg last month. "No, it's not sustainable," she added.