What is ‘Involution’ and Why is it Worrying China’s Policymakers?

#ChinaEconomy #Involution #Neijuan #Overcompetition #MarketRegulation

The Growing Concern of Neijuan in China

Neijuan (内卷), or ‘involution,’ has become a major concern in China’s economic landscape. The term describes a cycle of excessive competition where companies and individuals invest more effort and resources without achieving proportional returns. This issue has been particularly prevalent in sectors such as technology, e-commerce, and electric vehicles (EVs), leading to stagnation, stress, and financial strain on businesses and workers alike.

The Impact on Innovation and Startups

Startups in China’s major tech hubs, such as Shenzhen, Hangzhou, and Shanghai, often struggle with involution. Ma Lingfei, a 30-year-old engineer, and her team designed a state-of-the-art wearable headband to improve children’s attention spans. Despite their quick development cycle, they found the market already flooded with similar products.

This intense competition creates psychological pressure on entrepreneurs, making it difficult for new businesses to differentiate themselves. Companies frequently find themselves chasing competitors rather than focusing on user-driven innovation.

Government Response to Involution

For the first time, Chinese Premier Li Qiang addressed neijuan-style competition in the annual government work report. He emphasized the need to eliminate local protectionism, ease market entry and exit barriers, and improve economic flows. This follows discussions at the Central Economic Work Conference, where officials highlighted the importance of industry self-discipline and sustainable market practices.

The State Administration for Market Regulation (SAMR) has also engaged in discussions with major corporations like Alibaba, JD.com, and Mercedes-Benz China to address overcompetition and explore regulatory measures. Meanwhile, regional governments in provinces like Jiangsu and Hunan have introduced plans to manage competition more effectively in key industries.

The Struggles of Key Industries

Electric Vehicle Sector

China’s EV industry has been hit hard by involution. Following Tesla’s price cuts in 2023, a wave of price wars forced many domestic automakers to sell vehicles below production costs. This unsustainable competition has led to shrinking margins for three consecutive years, according to the China Passenger Car Association. As smaller firms struggle to survive, factory closures and layoffs are becoming more common.

E-Commerce and Digital Platforms

China’s trillion-dollar e-commerce sector has also been deeply affected. Major platforms are locked in fierce competition, continuously lowering prices to attract customers. While consumers benefit from cheaper products, merchants suffer from razor-thin margins, leading to business closures and industry instability.

Solar Panel Manufacturing

The solar panel industry, once a dominant force in global supply chains, is now grappling with oversupply. The China Photovoltaic Industry Association (CPIA) has reported a sharp decline in material prices and widespread financial losses. To address the crisis, industry groups have urged companies to adopt self-regulation strategies, including setting minimum price limits and focusing on product quality.

The Long Road to Economic Reform

Experts believe resolving China’s involution crisis will take multiple Five-Year Plans. The key lies in shifting from a production-first mindset to demand-driven growth. Rather than focusing solely on expanding capacity and investment, businesses need to prioritize consumer needs, innovation, and sustainable development.

Regulating large platforms and enforcing anti-monopoly policies will also be essential in curbing unhealthy competition. China’s landmark 18 billion yuan (US$2.8 billion) fine on Alibaba in 2021 demonstrated the government’s willingness to intervene when necessary.

Towards a Healthier Competitive Environment

While involution is often viewed negatively, some argue that competition itself is not the problem—rather, it is the type of competition that matters. Experts suggest that China should encourage efficiency, quality, and innovation while eliminating outdated and inefficient business models.

By fostering a more balanced economic structure, China can ensure that businesses grow sustainably and contribute to a healthier market ecosystem.