China's anti-monopoly push is back, but more measured and systematic this time
A panoramic perspective and governance logic of "involutionary" competition in Chinese manufacturing sector, analyzed by Prof. Liu Shangxi, the vice-chairman of the Chinese Society of Macroeconomics.
So far this year, a sudden and remarkably intensive wave of regulation has swept across the Chinese market.
On January 14, the State Administration for Market Regulation (SAMR), China's top market regulator, launched a probe into Trip.com over alleged monopolistic practices involving abuse of market dominance.
And it was in late March that the pace became strikingly concentrated.
March 23: Regulators summoned and issued administrative guidance to 12 major internet platforms, including Ctrip, JD.com, Taobao Flash Shopping, Meituan, and Douyin, targeting hyper-competitive behaviors that allegedly harm both merchants and consumers.
March 24: Officials at a national symposium on price supervision and anti-unfair competition signaled that regulators would continue to step up price oversight and intensify the clean-up of "involutionary" competition.
March 25: The state-run Economic Daily published an unusually blunt commentary titled "It is time to end the food delivery price war 外卖大战该结束了." The piece directly linked the cash-burning subsidy wars of food delivery platforms to China's current sluggish CPI, essentially blaming these predatory price wars for dragging down inflation.
March 26: SAMR held its first fair competition symposium of the year with corporate representatives, urging Chinese firms to standardize their competitive behavior and "build a healthy competition ecosystem" as they expand overseas.
For many China watchers, this rapid-fire regulatory wave triggers immediate flashbacks to 2021. Is China entering another round of heavy-handed, sweeping crackdown cycle?
Not quite. But something important is shifting. Unlike the storm-like rectification campaign of 2021, the current push against "involution" looks more measured, systemic, and structural. That caution reflects several factors at once.
Part of it stems from a leadership's reassessment of how the last cycle of regulation was handled. In 2021, ministries largely moved on their own track. Antitrust pressure on platform companies came alongside a broader wave of contractionary policies: the "three red lines" in property, the crackdown on private tutoring, and production curbs. The cumulative effect was severe, especially on private-sector confidence and expectations.
That experience appears to have forced a rethink. By 2022, policymakers were already warning against the "fallacy of composition" — the risk that individually rational moves by different departments could, in aggregate, produce macroeconomic damage. From there emerged a stronger emphasis on field research, caution in rolling out tightening measures, and consistency checks on the overall stance of macro policy.
The shift also reflects harder economic constraints. Compared with 2021, growth and expectations today remain far less secure. The central leadership's repeated call to stabilize employment, enterprises, markets, and expectations places real limits on how far regulators can go. Platform companies now serve not only as corporate actors, but also as reservoirs of employment and key consumption channels. A return to the old, blunt style of regulation would carry much higher political and economic risks.
Against this backdrop, an essay published in January this year by Liu Shangxi stands out as especially relevant.
Prof. Liu is the vice-chairman of the Chinese Society of Macroeconomics, and former president of the Chinese Academy of Fiscal Sciences.
In "A Panoramic Perspective and Governance Logic of 'Involutionary' Competition in the Manufacturing Sector", Liu argues that the root of China's involutionary manufacturing competition lies not simply in market saturation, but in the operating logic of local government.
Driven by the imperative to secure tax revenue and political performance, local authorities compete to attract the same kinds of investment at almost any cost. The result is a classic fallacy of composition: locally rational behavior producing nationally excessive capacity.
Liu is also explicit in criticizing China's long-standing mercantilist instincts and export-led inertia. Swapping real resources for larger foreign exchange, while exporting ever more cheaply, is not a sustainable model, he argues.
In his view, Beijing's eventual answer to this impasse is clear: force a shift from scale expansion to efficiency and innovation, and accelerate the export not just of cheap goods, but of industrial and financial capital.
Below is the English translation of Dr. Liu's piece, which has not been reviewed by him.
A Panoramic Perspective and Governance Logic of "Involutionary" Competition in the Manufacturing Sector
制造业“内卷式”竞争的全景透视与治理逻辑
Author: Liu Shangxi
(Ph.D. in Economics, Doctoral Supervisor, Researcher at the Chinese Academy of Fiscal Sciences, Member of the 13th and 14th National Committee of the Chinese People’s Political Consultative Conference)
Abstract: The core characteristics of current manufacturing "involution" manifest in two dimensions: horizontal "price involution" and vertical "supply chain involution." Its root cause lies in the systemic misalignment of macroeconomic structure, industrial organization, and the international division of labor. Specifically, this can be deconstructed into three mechanisms: the convergence of local government behaviors, insufficient industrial concentration, and a lack of internationalization within supply chains. Currently, the central government has integrated "anti-involution" into the core agenda of high-quality development, forming a multi-level governance framework that includes the upgrading of national legislation and regulation, industry self-discipline and structural optimization, local innovative service practices, and globalized layout. Moving forward, for the manufacturing sector to achieve innovation-driven development, it must balance the coupling of policy intervention and market regulation, as well as the synergy between domestic governance and international expansion. Moreover, to enhance the international competitiveness of China's manufacturing sector, in addition to the development of the supply chain itself, it is imperative to promote the export of financial capital to uplift China's position in the global value chain.
I. Introduction
Currently, the problem of "involutionary" competition in the manufacturing sector has extended far beyond the realm of fiscal and tax policy. The decision-making logic behind local governments' investment attraction has fundamentally changed. In the past, introducing projects was about expanding the tax base; now, some localities pursue construction projects at almost any cost. Some not only refund tax revenues and land transfer fees through "collect first, refund later" schemes, but also promise massive subsidies, creating substantial future expenditure obligations. This type of debt snowballs, and some localities have even begun to default.
For a period following the implementation of the tax-sharing system, local governments, acting as independent interest entities, had to continuously develop the economy. Only through continuous growth could they secure more financial resources and tax revenues to spend, with transfer payments serving as a supplement to local financial capacity. However, now that the scale of transfer payments has expanded to 10 trillion RMB, an increasing number of localities have become highly dependent on them, thereby altering their behavioral logic.
China's manufacturing sector is currently facing the severe challenge of "involutionary" competition, a phenomenon that has drawn high-level attention from the central government and has been incorporated into the scope of national strategic governance. The July 2024 Politburo meeting explicitly proposed "preventing 'involutionary' vicious competition" for the first time, a task reiterated in the 2025 Government Work Report. Manufacturing "involution" not only depletes corporate innovation resources and reduces industrial efficiency, but is also highly likely to trigger a public risk where "bad money drives out good" (Gresham's Law).
This article aims to understand the internal logic of "involutionary" competition primarily through industrial policy theory, behavioral response mode theory, and the latest empirical data. In reality, viewed through the lens of the relationship between the government and the market, while "involutionary" competition manifests in the market, its root cause lies in skewed incentive mechanisms. This is the resulting byproduct of the continuous adjustment and evolution of the government-market relationship under China's socialist market economy.
II. Definition and Multi-dimensional Manifestations of "Involution": From Concept to Reality
A. Definition of "Involution"
In the context of manufacturing, "involution" specifically refers to a zero-sum game where enterprises fight for a limited market through homogenized competition and inefficient resource inputs, trapping the manufacturing sector in a vicious cycle of "growth without development."
"Development" and "growth" are conceptually distinct: when GDP grows, but industrial competitiveness, social welfare levels, and residents' employment, income, and consumption levels do not symmetrically improve, development lags behind growth. Such growth is unsustainable. For instance, price cuts in automobiles may appear beneficial to consumers, but if they are caused by "involution" rather than an increase in labor productivity, they are harmful to the auto industry in both the short and long term.
B. Core Characteristics of "Involution"
The core characteristics of "involution" manifest in two dimensions.
The first is horizontal "price involution." Price involution is essentially driven by enterprises' lack of differentiating capabilities based on core technologies. As technology diffuses faster and with lower barriers to entry, companies lacking core technological differentiation can only capture market share through "price wars." The typical manifestations are a continuous decline in corporate profit margins coupled with rising sales costs.
For example, from 2021 to 2024, the manufacturing sales profit margin dropped from 13.24% to 11.87%, a record low; the operating profit margin of the auto manufacturing sector fell from 6%-7% (2018-2021) to 4.2% in 2024, with the average price of new energy vehicles dropping by 6.5% year-on-year. Solar photovoltaic (PV) module prices plummeted by 70% in two years; despite the industry adding 200GW of new installations, it suffered across-the-board losses.
The second is vertical "supply chain involution." Dominant enterprises in the industrial chain leverage their monopolistic momentum to squeeze the profit margins of upstream and downstream partners, resulting in a dynamic of "compressing costs, compressing schedules, and compressing services."
Typical examples include the cement industry, where the profit margin fell to 43.3% in 2024, nearly halving from its 2020 peak; spot glass prices fell from 2,488 RMB/tonne in 2021 to 1,463 RMB/tonne, a drop of nearly 50%; the biopharmaceutical industry also faced capacity constraints due to homogenized R&D (such as the crowding into PD-1 targets). Vertical supply chain involution means that enterprises with market advantage in the chain (i.e., chain leaders) squeeze upstream and downstream profits by shifting costs.
In short, the consequences of "involution" have transcended the economic realm, touching upon sustainable economic development and social employment issues. According to behavioral response mode theory, enterprises exhibit a "survival first" behavioral preference in resource-scarce environments: under "involution," they reduce R&D intensity and pivot toward marketing competition.
For instance, a leading EV manufacturer saw its sales expenses rise from 9% to 14%. This type of "involutionary" competition ultimately leads to a decline in total factor productivity (TFP). Historically, the market share of Chinese motorcycles in Vietnam plummeted from 90% in 2002 to 1% in 2006, serving as stark evidence of how involution triggers quality deterioration and damages international reputation.
III. Deep-seated Generative Mechanisms: Three-Dimensional Structural Contradictions
The root of manufacturing "involution" lies in the systemic misalignment of the macroeconomic structure, industrial organizational formats, and the international division of labor, which can be broken down into three specific mechanisms.
A. Convergence of Local Government Behaviors: Policy Catalyzing Overcapacity
Local governments resonate with the central government; thus, when responding to central decision-making deployments, they are prone to forming "homogenized" behavioral patterns, driving redundant construction through land concessions and tax breaks.
For instance, to attract a leading auto company, a city in a central province offered "move-in ready" incentives—free land, pre-built factories, and even personalized services for worker recruitment and training. As long as the company deployed personnel to initiate production, promised to build a set number of production lines within a specific timeframe, and met the targets, it could receive up to 5 billion RMB (around USD 714 million) in subsidies. Faced with such lucrative terms, it is naturally difficult for companies to refuse.
The photovoltaic industry tells a similar story. Stimulated by local subsidies, the total planned capacity across provinces currently exceeds total global demand. Meanwhile, from 2023 to 2024, new energy vehicle industrial parks were launched simultaneously in 12 provinces, with a planned capacity of 20 million vehicles annually—again, far exceeding domestic demand.
This converged behavior, on one hand, aligns with the "mimetic mechanism" in institutional isomorphism theory, where local governments replicate the successful experiences of other regions to avoid policy risks, leading to regional industrial structure convergence and overcapacity.
On the other hand, it is driven by coercive mechanisms stemming from top-down supervision. In the process of developing the economy, local governments often need to strike a balance between "flexible innovation" and "strict alignment with central directives". Emphasizing localization might lead to accusations of "bending the rules or discounting implementation"; conversely, mechanical, copy-and-paste execution often detaches from reality, becoming "formally compliant but practically unreasonable."
This produces a fallacy of composition—viewed individually, local practices are irreproachable, but the aggregated outcome is unsatisfactory and often contradicts the overall goal.
B. Insufficient Industrial Concentration: The Structural Basis for Inefficient Competition
China has a massive number of manufacturing enterprises, but industrial concentration is low, weakening the industry's capacity for synergy. For example, the market share of the top four biopharmaceutical companies is 18.5%, far below the international average of 40%; the top ten cement companies account for about 57% of capacity, whereas in developed countries, this generally exceeds 80%.
A market with low concentration naturally breeds a "prisoner's dilemma," where enterprises are forced into "price wars" just to maintain market share. Cases where local governments facilitated industry coordination to "reduce production and stabilize prices," successfully pushing regional prices to the forefront nationally, confirm that moderate concentration improves competitive efficiency.
C. Insufficient Supply Chain Internationalization: Weak Outward-Looking Chain Leaders
There are many "inward-looking chain leaders" but few "outward-looking chain leaders" in Chinese manufacturing sector. And its globalization layout lags behind the capacity scale, exacerbating domestic zero-sum competition. Specifically, the average share of overseas revenue for manufacturing enterprises is under 20%, compared to over 50% for German and Japanese companies. Chinese companies' overseas revenue primarily comes from selling goods, while the share of revenue from technical services, patent licensing, and overseas production bases remains low. In the Southeast Asian EV market, Chinese brands account for over 90% of sales, but the local production fulfillment rate is only 30%.
Furthermore, the lack of international capacity synergy leads to "export-oriented inertia," where companies rely on low prices to expand exports—trading price for volume is already quite obvious.
According to related research estimates, the average price reduction for export products has reached as much as 30%, triggering trade frictions. In contrast, "supply chain going global" cases, like BYD's Thailand factory or SAIC Motor's Indonesia base, reduce reliance on domestic capacity through localized production, effectively circumventing "involution." This kind of international capacity coordination will be a critical direction for the future.
Why is it so difficult to reverse export-oriented inertia? Why is the path dependence on external circulation so strong? An underlying mercantilist mindset is a major root cause. Historically, mercantilism was characterized by "government intervention + pursuit of trade surpluses." In the era of metallic currency, a surplus meant the inflow of gold and silver. Today, we still place high value on surpluses, believing that a surplus means we have "profited." However, in the era of sovereign fiat money, a surplus often means exchanging real resources for numbers in foreign currency on a ledger; the true "costs" are frequently concealed.
Moreover, pursuing surpluses is imbued with the significance of stabilizing economic growth. Export surpluses are one of the "troika" growth drivers; the larger the surplus, the more favorable it is for supporting economic growth, and the more likely it is to achieve expected growth targets. Consequently, to achieve target growth rates, various localities and departments reflexively continue to expand exports and enlarge surpluses. Under this mercantilist mentality, once the supply chain truly moves toward international layout, the surplus will subsequently decline, weakening its support for economic growth. Relinquishing this established surplus "dividend" inevitably brings hesitation and reluctance.
Internationally, mercantilism is also widespread. Many countries believe trade deficits equate to "taking a loss," making it an excuse and bargaining chip in international political games. In modern national economic accounting systems, a deficit is unfavorable for economic growth, and countries pursuing growth targets generally prefer surpluses and abhor deficits. This means that, globally, "involution" is also occurring. Especially in manufacturing, global involution is intensifying, government intervention is strengthening, global growth is slowing, and global development is declining even faster.
IV. Anti-Involution Policy System: National Governance and Local Practice
The central government has integrated "anti-involution" into the core agenda of high-quality development, formulating a multi-level governance framework. Existing "anti-involution" policy tools include the revision of the Price Law and anti-dumping determinations at the national legislative level; capacity coordination and payment conventions at the industry self-discipline level; supply-demand platforms and regulatory integration at the local service innovation level; as well as supply chain overseas expansion and international standard co-creation at the globalization layout level. Most notably, for China to resolve current involution, it must go global, seek international capacity cooperation, transfer excess capacity, and expand demand space.
A. National Legislation and Regulatory Upgrades
Revision of the Price Law: The July 2025 Draft Amendment to the Pricing Law of the People's Republic of China added "standards for identifying low-price dumping," explicitly prohibiting pricing below cost aimed at squeezing out competitors. This means clarifying whether the motive is to eliminate rivals. Without this judgment criteria, companies pricing below cost or even negatively in special circumstances to mitigate their own risks, which is actually risk-clearing, not dumping, might be misidentified.
Dynamic Capacity Regulation: The Ministry of Industry and Information Technology (MIIT) implemented "capacity utilization warning line" management for ten major industries, including steel and non-ferrous metals, mandating production cuts when utilization falls below 75%. While different tools can be applied to different industries, high vigilance is required regarding the risks inherent in administrative measures, particularly their dampening effect on market resource allocation and the survival of the fittest.
Optimization of Centralized Procurement Rules: For instance, the National Healthcare Security Administration abolished the "lowest bid wins" rule in its 11th batch of centralized procurement, requiring companies to commit to quoting no lower than cost and to explain the rationale.
B. Industry Self-Discipline and Structural Optimization
Led by Leading Enterprises: For example, nearly 20 auto companies signed the Initiative on Standardizing Account Payments for Automotive OEMs and Suppliers, unifying the supply chain payment period to 60 days to alleviate cash flow pressure on small and medium-sized suppliers.
Establishing Capacity Synergy Mechanisms: Examples include the PV glass industry collectively cutting production by 30%, and the China Cement Association issuing Opinions on Further Promoting High-Quality Development by Advancing "Anti-Involution" and "Stabilizing Growth" in the Cement Industry. Industry self-discipline issues must be placed on the agenda as early as possible; otherwise, risks to healthy market development will mount. Furthermore, there is an urgent need to promote supply chain integration. For instance, the Wuhu municipal government integrated with the "Provincial Supply and Demand Platform" to facilitate direct supply cooperation for display modules between Tianma and Chery, reducing procurement costs by 15%.
C. Local Innovative Service Practices
Localities are making efforts to respond to the central government's call against "involution." On one hand, they are strengthening government-enterprise synergy. For example, the Shenyang municipal government safeguarded Jinzhong New Materials to implement "production reduction and price stabilization," pushing Liaoning Province's cement prices to the top ranks nationally. On the other hand, they are advancing regulatory reform. Wuhu, for example, rolled out a "comprehensive single-inspection" mechanism for enterprises, integrating multi-departmental inspections and reducing enterprise inspection frequency by 60%.
V. Deep Perspective of Governance Logic: Dialectics of Theory and Reality
A. Systemic Governance under the S-C-P Framework
We can utilize the classic industrial organization model to reveal the formation and resolution pathways of "involution."
Under the S-C-P (Structure-Conduct-Performance) framework: in terms of Structure, shrinking demand (PPI declining for three consecutive years) and oversupply (industrial capacity utilization at 75.0%) lead to market misalignment; in terms of Conduct, enterprises fall into "price involution" (deteriorating gross margin-to-sales expense ratios) and "supply chain involution" (chain leaders suppressing prices); in terms of Performance, it is reflected in declining total factor productivity and the crowding out of innovation inputs.
Current policy focal points aim exactly at reshaping market structure, eliminating regional barriers by building a unified national market, and constructing international capacity cooperation networks via platforms like the China International Supply Chain Expo (CISCE).
B. The Dialectic Between Short-term Pain and Long-term Development
This adjustment process will inevitably be accompanied by short-term pain. Whether adjusting via administrative means or guiding corporate self-correction, reducing capacity inevitably entails significant "adjustment costs," including job losses, increased sunk costs, and asset devaluation.
The current task is to guide benchmark enterprises to shift toward quality and social responsibility evaluation. Society, the industry, and enterprises themselves must engage in evaluation and extend this to other firms, accelerating the paradigm shift from "price competition" to "value competition" to couple growth with development.
C. Institutional Design of a Unified National Market
Breaking "involution" requires institutional innovation. The most crucial aspect is accelerating central-local relations reform, restructuring the incentive mechanisms of the government (including central incentives for localities, and government incentives for the market and society).
Central-local relations are the core of institutional innovation. This involves not only central-local fiscal relations but also harmonizing unified national deployment with local customization. It requires integrating national strategy with differentiated local behavioral responses to achieve incentive compatibility.
Therefore, a "one-size-fits-all" approach nationwide is unworkable, as it prevents local adaptation; conversely, total laissez-faire is equally dangerous, as it risks the fallacy of composition. We must promote regulatory reform, factor mobility, and standardized rules. Ultimately, the core issue of reform is central-local relations, which is the pillar of national governance. Unsmoothed central-local relations lead to severe overreach or absence of action by both central and local governments, which in turn twists the relationship between the government and the market.
VI. Conclusion: Moving Towards a New Ecology of Innovation-Driven Development
The essence of manufacturing "involution" is the growing pain during the transition from "creative destruction" to "destructive creation." It reflects that during the rapid expansion of manufacturing, the "destructive" elements have overall outweighed the "creative" ones. The original expansionary momentum has been "destroyed", sunk costs and marketing costs have skyrocketed, yet differentiated core technologies and business models have not been "established". Competing solely on price leads to rapidly declining operating profits.
Innovation always causes "destruction" during growth, such as business bankruptcies, rising unemployment, and falling incomes. But as long as the "creativity" outweighs the "destruction", such as the proliferation of startups, new jobs, and rising incomes in new sectors, it can offset the social costs and public risks brought by the destruction, gradually forming a new development ecology and enhancing developmental vitality.
Current policy deployments advance on three tracks: "legislative constraints — industry self-discipline — globalized layout." Their underlying logic is to reconstruct the fundamental logic of manufacturing development, shifting from a scale-expansion orientation to an innovation- and efficiency-driven one. Governing "involution" requires balancing three aspects:
First, the coupling of policy intervention and market regulation. We must avoid the "administrative reduction of capacity" from causing new distortions and risks. Anti-involution efforts should encourage mergers and acquisitions through market-oriented and law-based methods. Let the market's mechanism of survival of the fittest determine capacity levels; the government should focus on improving incentive mechanisms and the rule of law.
Second, the synergy of domestic governance and international expansion. The concentration of China's industries is relatively low, and the international competitiveness of domestic leading enterprises is limited. In response, capacity cooperation under the "Belt and Road" initiative should serve as a breakthrough point on the demand side. Industrial policy cannot be confined to our domestic "backyard" but must possess a global vision and achieve internationalization.
Moreover, industrial policy must pivot toward production and supply chain policy, looking globally to build global corporations. Industrial policy should also encompass the service sector, particularly modern finance, intermediary services (accounting, legal, consulting), commercial services, as well as technology and information services. Various digital platforms under the megatrend of the digital revolution must become a focal point of production and supply chain policy.
Third, re-examining the relationship between monopoly and competition. Monopoly and competition will move from opposition to integration, forming "monopolistic competition." The true normality of the future will not be the perfect competition of early industrialization, but monopolistic competition.
Currently, the mainstream understanding of anti-unfair competition and anti-monopoly remains trapped in the framework of early industrialization. Faced with phenomena of increasing industrial concentration, there is a reflexive tendency to suppress it, which stifles market-driven industrial M&A. This is particularly evident in the anti-monopoly crackdowns on platform enterprises. The development of the digital economy brings myriad new situations and phenomena, such as utilizing market "dominant position" to "illegally" acquire data, infringement, unfair competition, and price discrimination, all of which require theoretical redefinition.
If we directly apply the criteria for monopoly judgments from early industrialization without considering the new logic and rules of the digital economy, it will inadvertently severely suppress the development of the digital economy and platform enterprises.
The future competitiveness of the manufacturing sector depends on the market structure's capacity for self-adaptation. Domestically, it is necessary to build an industrial ecology characterized by "differentiated competition—moderate concentration—innovation-driven"; externally, it must propel the leap from "product export" to "industrial capital export" and "financial capital export."
Currently, globally speaking, China's economy is still in the preliminary stage of commodity export. Industrial capital export (such as outward foreign direct investment and setting up factories abroad) has just begun, while financial capital export has not yet been placed on the agenda. This heightens the risks associated with industrial capital export (outbound investment).
In great power competition, finance is the true lifeblood. Being choked off technologically is short-term pain; only when facing a state of war, where the market economy shifts to a wartime economy, will international production and supply chains evolve into the ultimate risk and touch upon national security. The strategic risk focal point of great power games lies in finance, not technology.
China is a major manufacturing, economic, and trading power, yet it remains weak in distribution within the global value chain. Not only has it long hovered at the mid-to-low end of the value chain, but its "value compensation" is insufficient. While supplying the international community with massive quantities of high-quality, inexpensive goods, it has effectively provided immense hidden welfare subsidies to the world.
In the past, this was viewed as a "competitive advantage." In reality, China has mostly competed on scale in the physical realm, but its returns in the value distribution stage do not match the physical scale. Currently, China's financial competitiveness does not match its goods export competitiveness; its finance sector is large but not strong, lacking true discourse power and influence in the international financial arena.
The next breakthrough requires not only accelerating the export of industrial capital but, more importantly, ensuring that the export of financial capital keeps pace, thereby achieving a substantive elevation of China's status in the global value chain. This is what China should aim for, and what must be considered for the global layout of industrial chains. Without the escort of financial capital, the risks faced by the export of industrial capital will be magnified exponentially.
In conclusion, "anti-involution" is not merely a domestic manufacturing issue. It is also a strategic issue regarding how the entire industrial chain and the financial sector accelerate their global layout.