‘Disorderly competition’
After years of dismissing these concerns about overcapacity in EVs and other sectors, China’s leadership is cracking down.
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“The Chinese government knows that overcapacity is a phenomenon that it cannot deny or cannot ignore,” says Dr Bo Chen, a senior research fellow at the National University of Singapore’s East Asian Institute.
But it has eschewed the language of its critics in favour of “disorderly competition” and “involution”, a term that essentially means the same thing as overcapacity — a self-defeating competitive spiral that leads companies to chase diminishing returns, often at the expense of their employees overworking.
“This distinction matters because it allows Chinese policymakers to address the underlying issue while avoiding the admission that their industrial policy created systemic overproduction,” economist and China analyst Diana Choyleva writes in Channel News Asia.
For the Chinese system that is fastidious about maintaining societal control, chaotic competition that fuels a race to bottom carries with it an unacceptable risk of inflaming the country’s deflationary spiral, and triggering social unrest and joblessness.
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In the past month, there has been a string of signals that the issue is now a major priority. In July, the Politburo, the Chinese Communist Party’s highest policymaking body, declared it would rein in “disorderly competition” among enterprises.
Separately, Chinese state media has carried reports of President Xi Jinping warning local governments against racing into investment in the artificial intelligence, EV and computing sectors and calling for the need to “break the cycle of involution”.
“Should every province in the country be developing industries in these areas?” Xi was quoted telling an urban development conference in a report on the front page of the People’s Daily, the CCP’s official mouthpiece.
China’s top economic planning body has also unveiled proposed changes to pricing laws that will ban businesses from selling below cost to wipe out competitors or monopolise the market.
Chen argues that the challenges in the EV and solar panel sector, where there is also severe overcapacity, have not been solely driven by China’s industrial policy and overinvestment, as is the case with other state-subsidised industries such as coal and steel. Heavy tariffs and other protectionist measures from the EU and US have also created demand-side problems.
Chinese EV makers are locked in a furious price war that has captured the attention of the country’s leaders.Credit: Sanghee Liu
Nonetheless, the end point is the same, Chen says, and consolidation is inevitable.
“For these industries, no matter whether it is fair or not, the reality is for the solar panel and the EV industries, they both face very gloomy demand ahead of them,” Chen says.
It’s not just the EV sector being targeted by the government’s anti-involution campaign. China’s food delivery platforms were last month summoned by the state’s market regulator and warned to cool it on their cut-throat pricing strategies to win customers.
This week, China’s central bank pledged to target “involution style” competition in the financial industry, while state media carried a report criticising the banking sector for engaging in aggressively competitive practices.
“Some small and medium-sized lenders have offered shopping cards, cash vouchers and even cooking oil to attract depositors,” China Daily reported this week.
Many analysts remain sceptical that these topic-level edicts will translate to substantial action or a change in investment priorities by the local governments that stand to be lumped with growing unemployment when businesses fail. But the Wild West days of ultra-bargains, ridiculous promotions and “free gifts” for sales are probably on borrowed time.
