Chinese businesses are facing a fierce price-cutting war, putting significant pressure on revenue and jobs in the domestic market.
This situation creates the phenomenon of 'involution', causing the economy to grow but with a lack of true vitality, raising concerns about recovery and the risk of supply-demand imbalance.
MAIN CONTENT
Product prices continue to drop sharply, severely impacting the revenue of businesses.
The phenomenon of 'involution' makes internal competition fierce but does not drive effective growth.
Increased consumer demand is considered a key factor to support economic recovery.
Why are Chinese companies caught in a fierce price-cutting war?
Expert Alicia Garcia Herrero – Chief Economist at Natixis Asia-Pacific, stated that many Chinese companies are experiencing a significant drop in sales prices despite increasing their sales volumes, leading to a serious decline in revenue. This accusation is based on an analysis of 2,500 listed companies, warning about the pressure to maintain market share through unsustainable price reductions.
"Outwardly, it may seem like they dominate the market, but in reality, businesses are paying a high price to maintain their positions."
Alicia Garcia Herrero, Chief Economist at Natixis Asia-Pacific (2025)
This situation is not only common in the manufacturing sector but also appears in various industries such as electric vehicles, coffee, and commercial real estate. The steep price reductions create a period of intense competition, making it difficult for many businesses to maintain revenue and jobs.
What is the phenomenon of 'involution' and how does it impact the Chinese economy?
'Involution' refers to a state of intense internal competition that does not create new value, leading to stagnation and inefficiency. Expert Larry Hu at Macquarie notes that while the Chinese economy continues to grow, the true vitality is weakening due to the slowest job market growth ever.
"With 'involution', the Chinese economy is much colder than the announced growth figures."
Larry Hu, Chief Economist at Macquarie China (2025)
This is reflected in the fact that listed companies on the A-share market in 2024 only increased their workforce by 1%, the lowest in history. Price competition not only reduces profits but also slows down the restructuring process and enhances corporate capacity.
What is the current state of the price-cutting war in key sectors in China?
The electric vehicle sector is a typical example, with BYD reducing sales prices by nearly 33%, while Xiaomi's new SUV directly competes with the Tesla Model Y on price. In the coffee sector, Starbucks struggles to grow while keeping the price at 30 yuan for a large size, while competitors like Luckin Coffee sell for only 9.9 yuan.
In the commercial real estate market, rising rental prices have led to many vacant apartments in Beijing, according to Rayman Zhang, Director of JLL North China. The overall picture shows pressure from excess capacity and prolonged demand decline.
What measures is the Chinese government implementing to improve the situation?
The government is expected to maintain support policies at the Politburo meeting before the end of July. Two new policies include raising the budget deficit ceiling for 2025 to 4% of GDP and requiring control of 'low, chaotic' price competition as directed by President Xi Jinping.
These measures aim to stabilize the market, prevent harmful price competition, and prepare conditions for creating more sustainable demand in the long term.
How does increasing domestic demand play a key role in economic recovery?
Expert Larry Hu emphasizes that growth in consumer demand is a necessary condition to mitigate price competition, especially in technology and manufacturing sectors. However, narrowing excess capacity at factories remains a significant challenge.
Goldman Sachs forecasts that seven key industries, including air conditioning, lithium batteries, electric vehicles, semiconductors, steel, and construction machinery, will grow between 0.5% and 14%, even though some manufacturing sectors have exceeded global demand. This reflects an imbalance between supply and demand and the need for more effective coordination.
Old difficulties are resurfacing, leading to debates about the role of the state and financial factors.
Just like ten years ago when state-led sectors faced excess capacity, now the private sector is overproducing, making consolidation and restructuring challenging even with government support.
Robin Xing of Morgan Stanley warns that public debt nearing 100% of GDP limits the ability for large fiscal stimulus from Beijing, making it difficult for the government to implement strong measures to revive the economy.
Frequently Asked Questions
How does the phenomenon of 'involution' impact the Chinese economy? Involution creates fierce internal competition, reducing growth efficiency and slowing job creation, according to expert Larry Hu. Why do Chinese companies have to deeply cut product prices? Due to pressure from competitors and excess supply, companies lower prices to maintain market share but negatively impact overall revenue. What has the Chinese government done to prevent price competition? The government has raised the budget deficit ceiling and required control over low, unstable price competition as directed by President Xi Jinping. Which sectors are expected to grow in the current context? Seven key sectors including air conditioning, lithium batteries, electric vehicles, semiconductors, steel, and construction machinery are expected to continue growing by 0.5% to 14%, according to Goldman Sachs. What is different about the current issue of overproduction compared to the past? The significant difference is that the private sector is playing a leading role, making restructuring more challenging, while high public debt limits economic stimulus.
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