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

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.

What is involution, exactly?

You won’t find involution in economics textbooks. Generally, it means excessive competition, but it has become a shorthand for a range of maladies, especially deflation and overcapacity. The term in Mandarin is neijuan. In anthropology, involution is used to describe a kind of change without progress.

When the word first became popular on Chinese social media in 2020, it was mostly used by young people in China to describe the grind of education and work.

“The whole game is meaningless, crushing, exhausting," said Xiang Biao, a director at the Max Planck Institute for Social Anthropology in Germany. “They want to step out of it, but yet they cannot find a way, because everyone is doing it."

Then, involution started being used to describe a similar dynamic in industries where a mismatch of supply and demand has spawned aggressive price wars.

What causes involution?

Amid a property-market downturn over the past few years, China cranked up manufacturing as a growth engine, funneling subsidies and loans to producers, especially in high-tech areas favored by Beijing, such as electric vehicles and solar panels. At the same time, the real-estate slump has weighed on consumer confidence, leading households to guard their savings and watch their spending.

When there are too many products and not enough demand, companies resort to price cuts to bring in customers and unload excess inventory. Take the auto sector, where China has more than 100 EV makers all fighting to survive. After a flurry of price cuts and promotions by EV makers earlier this year, customers could buy one BYD model for less than $8,000. According to a survey by the China Automobile Dealers Association, just 30% of car dealers were profitable in the first half of the year and almost three quarters sold at least some cars below cost.

That might be good for consumers in the short run, but it can also hurt households by putting companies in cost-cutting mode: limiting wage growth, pausing hiring, shedding employees and squeezing everyone else along the supply and sales chain.

Workers are feeling the pressure. Chinese employees have long complained about the country’s “996" work schedule—9 a.m. to 9 p.m., six days a week. Lately, workers joke that the schedule has been updated to “007"—midnight to midnight, seven days a week.

Is involution new?

This isn’t the first time China has dealt with overcapacity, but the current iteration is far more widespread, according to economists. During the last major bout of deflation roughly a decade ago, excess supply was mostly concentrated in state-owned enterprises making commodities such as steel. Beijing around 2015 embarked on supply-side policy changes, setting production quotas, guiding mergers and shutting down “zombie" factories.

This time around, private companies across a variety of sectors are affected, making a top-down approach more challenging. The economy is growing at a slower pace, the property market is still in the doldrums and unemployment, especially for young people, is on the rise.

“It’s uncharted waters," said Chen Bo, a senior research fellow at the East Asian Institute of the National University of Singapore.

What do economists think?

Tackling involution at its root, many economists argue, would require a fundamental restructuring of the economic system that puts consumer spending in the driver’s seat, rather than leaning on investments and manufacturing. Until then, involution is the price to pay for Chinese leader Xi Jinping’s goal of industrial self-reliance and global leadership in advanced technologies.

“Involution is both a feature and a bug of the China model," said Larry Hu, chief China economist at Australian investment bank Macquarie Group.

Advisers inside and outside China have long advocated for a rebalancing of the economic system so that household spending becomes a bigger driver of the economy. The International Monetary Fund in its latest World Economic Outlook report recommended that China pursue such a shift and scale back industrial policies.

Boosting consumption could involve measures such as shoring up the property market, widening social services and pensions, adjusting local-government performance evaluations to focus on consumption, rewriting the tax system to encourage spending rather than production, growing the services sector in fields such as healthcare and tourism, and generally increasing government spending to stimulate demand.

What is China doing about it?

Beijing had previously dismissed concerns from the U.S. and Europe about Chinese overcapacity, but Chinese officials have since embraced “anti-involution" and fighting “disorderly price competition."

Policymakers face a dilemma: cut production drastically, which risks a collapse in growth, or move too slowly and risk letting the problem fester.

China so far is taking a gradual, supply-side approach. Piecemeal guidelines from various governmental bodies have centered on stopping below-cost pricing and curbing capacity in oversaturated sectors with measures such as tightening regulations and discouraging new investment in production. The efforts so far focus on several industries where involution is particularly pronounced such as steel, coal, batteries, electric vehicles and food delivery.

Recent economic data suggest the efforts are starting to make some inroads. Growth in industrial production and investment has slowed in recent months. Profits among industrial firms surged 20% in August. Producer-price deflation narrowed in September.

A recent editorial in the People’s Daily, the Communist Party’s official newspaper, acknowledged issues in China’s economy but suggested they are growing pains in the country’s industrial transformation. The editorial—one in a series published under a pseudonym lending them the authority of China’s top economic policymakers—doubled down on Beijing’s tech-focused industrial policy.