China's problem with competition is that there's too much of it

Beijing's efforts to tackle 'neijuan' face new urgency as tariffs discourage exports to US

- Daisuke Wakabayashi

TIANJIN, China - It is the circle of life in China's business world. A promising technology or product emerges. Chinese manufacturers, by the dozens or sometimes the hundreds, storm into that nascent sector. They ramp up production and drive down costs.

As the overall market grows, the competition becomes increasingly cut-throat, with rival companies undercutting one another and enduring razor-thin profit margins or even losses in the hope of outlasting the field.

Adding to the competitive fervour, China's local governments, each with its own target for economic and job growth, back a home-grown champion and shower it with financial and bureaucratic support.

Soon, the whole industry, awash in production capacity, is trapped in a race for survival.

While most governments encourage vigorous competition and low prices, China is going in the opposite direction. It is trying to rein in "involution" - or "neijuan", as it is widely used in the country to describe a self-defeating cycle of excessive competition and damaging deflation.

Chinese President Xi Jinping pledged to take steps to crack down on "low price and disorderly competition" and eliminate outdated industrial capacity at a high-level economic policy meeting in July.

At another recent gathering, on urban development, Mr Xi questioned whether every province needed to rush into sectors such as artificial intelligence and electric cars.

"Price wars and 'involutionary' competition will only encourage 'bad money driving out good money', wrote the People's Daily, the official mouthpiece of the Communist Party of China. "Simply 'rolling' prices downward will not result in a winner."

China's efforts to tackle involution face new urgency as President Donald Trump's tariffs discourage exports to the US.

Other countries are also wary of a flood of inexpensive Chinese goods redirected their way.