A new challenge for China’s economy: ‘Involution’

Beijing is fighting to limit damage from a pattern of price wars and excess capacity

- Hannah Miao

China's economy is in a race to the bottom that threatens to devolve into widespread stagnation.

(AFP)

China is gripped by an insidious problem that is eroding its economy: It is trapped in a cycle of competition so fierce that it is destroying profits, driving a brutal rat race among workers and fueling a deflationary spiral.

This is “involution,” a once esoteric term that has come to define life for many in China and capture the biggest problems in the world’s second-largest economy. Involution, simply stated, means that, even as China pursues global dominance in industries of the future— artificial intelligence, renewables, robotics—much of its economy is in a race to the bottom that threatens to devolve into widespread stagnation.

Price wars and excess supply are also increasingly a geopolitical liability. China is now entering its fourth year of falling factory-gate prices, and consumer prices have barely budged, a sign of inadequate demand. Squeezed at home, Chinese manufacturers are exporting more and more, while governments around the world are complaining about an influx of cheap Chinese goods hurting local industries.

As U.S.-China trade tensions have reignited, the Trump administration is betting that these vulnerabilities in China’s economy give Beijing the weaker hand in negotiations—and that the U.S. can inflict more pain on China by targeting its exports with additional tariffs.

Involution will be top of mind over the coming week at a major policymaking meeting of China’s leaders, who face a high-stakes balancing act as they discuss the country’s next five-year plan. Technological innovation is expected to remain a defining feature of Beijing’s road map, yet this industrial policy could reinforce or accelerate the pattern of overproduction and price wars, even as policymakers weigh new initiatives to boost domestic demand.