6 days ago
China's anti-involution campaign gains momentum
[SINGAPORE] 'Nei juan' or involution, has become a hot topic in China, popping up frequently in social media and public debate. It was an issue that featured repeatedly in conversations with retailers, consumers, business tycoons, civil servants and students on my frequent trips to China.
The term originally described a situation in the countryside, where farmers had been working harder, but their output had barely increased, resulting in per capita returns falling.
Today, involution is used to describe a state of excessive competition that leads to diminishing returns, whether it's in the workplace, classroom or marketplace. The phenomenon is not unique to China and is also found in varying degrees in Confucian-influenced societies such as Singapore, Hong Kong, South Korea, Japan and Taiwan.
Confucianist principles themselves do not directly result in involution. However, values such as meritocratic pressure, collectivism, and an emphasis on hard work significantly influence social structures and educational systems, thereby fostering conditions conducive to involution.
In this context, involution refers to a process where increased effort does not lead to proportional progress or innovation, often resulting in stagnation within social or educational systems.
For example, meritocratic pressure can lead to excessive competition among students, while collectivism may discourage individual innovation, both contributing to repetitive cycles within educational environments.
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Scholars such as Dr Yan Yunxiang, professor of anthropology at the University of California, have observed that the modern institutionalisation of Confucian ideals in corporate cultures – illustrated by Japan's 'salaryman' model and China's '996' work culture – can intensify the phenomenon of involution.
The outcome is increased competition, higher rates of burnout, and greater inequality, in contrast to Confucianism's ideals of balance.
Increased capacity, anaemic demand
In China, this phenomenon of involution has been widely seen in many industries in recent years, on the back of increased production capacity but anaemic demand. Companies prioritise scale and market share, often at the expense of profitability and long-term sustainability. The result is disorderly price-cutting and excessive competition.
Companies in the electric vehicle (EV), food delivery, solar, steel and cement sectors have all expanded aggressively, driving down prices and squeezing margins.
According to estimates, excess capacity ranges from 30 to 50 per cent for most of these sectors. Chinese capacity accounted for 149 per cent of the global demand for solar panels, 126 per cent for lithium batteries and 105 per cent for EVs in 2024. If unchecked, China's large-scale production and export capacity could overwhelm global markets, fuelling ongoing trade disputes and devastating local industries in other countries.
The implementation of 'anti-involution' policies, initially proposed during the Politburo meeting in July 2024, was likely delayed due to economic headwinds experienced last year. Currently, with China's producer price index (PPI) remaining negative for 33 consecutive months since October 2022 and nominal gross domestic product growth trailing real GDP growth over the past nine quarters, these concerns have intensified.
And with steady export growth and progress in US-China trade talks, policymakers are pushing these initiatives ahead. On Jul 24, the National Development and Reform Commission and the State Administration for Market Regulation jointly released a draft amendment to China's pricing law – the first update since 1998 – with the aim of addressing what regulators characterise as 'disorderly low-price competition'.
Encouraging move
Supply-side reforms in China have historical precedent. One such comparison can be made with the supply-side reforms implemented during 2015 to 2018, which throws up both similarities and differences. In 2015 also, the Chinese economy encountered challenges including production overcapacity in certain industrial sectors, extended periods of PPI deflation, and elevated housing inventory levels in lower-tier cities.
The previous reforms focused on traditional industries such as steel, coal, and cement, aiming to reduce inefficiency and pollution. Currently, policy measures are directed not only at these traditional sectors, but also at rapidly growing industries such as solar energy, lithium batteries, EVs, and e-commerce.
With the economy still recovering from Covid-19 losses and a housing market downturn, large-scale production cuts are now more challenging. Domestic demand is weaker than it was a decade ago during the shanty-town redevelopment, which had boosted property demand in smaller Chinese cities and led to sharp PPI rebounds and double-digit nominal GDP growth.
The ongoing residential property downturn has led to further weakness, with June's data showing a 7.3 per cent year-on-year drop in floor space sold and a 12.6 per cent decline in value. As a result, policy measures are expected to be more nuanced and less aggressive this time.
Nevertheless, it is important to recognise the significance of anti-involution policies. It is encouraging that the authorities are addressing excessive price competition across both established and emerging sectors, while also seeking to manage capacity expansion.
These policies are expected to benefit leaders within their respective industries. Although interest rates in China are projected to trend lower over the medium term, ongoing speculation regarding the 'reflation trade' may result in Chinese government bond yields rising in the near term.
The writer is managing director and chief investment officer (South Asia-Pacific), UBS Global Wealth Management. He is also an adjunct associate professor at the Nanyang Business School of the Nanyang Technological University.
