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China is in the throes of cut-throat price wars that cover a range of industries and services. Known, somewhat confusingly, as “involution”, these are basically a race-to-the-bottom competition that impacts everything from corporate profits and jobs to deflation and the banking sector, as well as social morale and even mental health.
After Covid-19, as China’s property downturn accelerated, its government ramped up support for domestic manufacturing, especially in high-tech areas such as EVs, batteries and solar panels. Public and local government funds were poured into these “new productive forces” and regulatory barriers were lowered, attracting waves of entrants. The International Monetary Fund estimated that fiscal support for these favoured sectors – in the form of cash subsidies, tax benefits, and subsidised credit and land – amounted to around 4 per cent of gross domestic product annually over the last decade.
The stimulus kept GDP growth from collapsing after the property bust, but as domestic consumption tailed off, what emerged was massive overproduction relative to what domestic consumers could buy.
EV makers, which at one time numbered around 500 (now whittled down to just over 100), undercut one another repeatedly to gain or maintain market share. The same dynamic played out among battery and solar panel makers and steel producers. It also extended to e-commerce and delivery platforms, which offered deep discounts with regular promotions.
This has been a bonanza for consumers – though they remain careful with their spending because of their wealth erosion after the property crash – but the price wars are devastating companies’ profit margins, affecting even strong companies. BCA Research estimates that around 150,000 industrial companies – roughly 30 per cent of the total – are loss-making, dependent on subsidies to survive.
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Deflation has created multiple problems. For both consumers and companies, it has increased debt burdens in real terms. As a result, consumers spend less and the bottom lines of even well-run companies take a hit, crimping their ability to invest and innovate. Bad debts go up from levels that were already elevated due to the property crash, forcing banks to cut back on lending, which will affect economic growth.
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Households face stagnant or declining wages, especially in the sectors caught up in price wars, where hiring is down. The official youth unemployment rate spiked in August to 18.9 per cent, the highest since the measure was revamped in 2023 to exclude students. Around 200 million people, many with graduate degrees, have been pushed into the gig economy, where incomes and job security are precarious.
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Mental health issues are also a growing problem. A 2023 survey by the Institute of Psychology of the Chinese Academy of Sciences cited by Lianhe Zaobao found that cases of depression are not only on the increase overall, but are as high as 31 per cent among the unemployed and retrenched. Amid the cut-throat competition, even those with jobs are stressed from overwork. Among several companies, especially in tech industries, a “9-9-6 culture” (working from 9 am to 9 pm, six days a week) is common.
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Hard to reverse trend
China’s government is well aware of the problems created by the price wars and in July 2024 proposed “anti-involution” measures targeting “disorderly, low-price competition” ... But so far, such measures have not made much headway. For one thing, private companies, where much of the overproduction is happening, are difficult for the government to control.
There is also pushback from local governments, who are loath to cull the “local champions” they have nurtured. Companies, too, are putting up resistance. As the chief China equity strategist of Bank of America Securities told CNBC, they are saying: “We just built up our capacity, we are not pollutive, we are in a strategically important sector, so why do you want to shut us down?”
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Stuck with massive inventories that they cannot sell domestically, companies have been trying to boost their exports, targeting particularly the European Union as well as South-east Asian markets, which are being flooded with cheap Chinese goods.
China’s exports to the EU have risen about 14 per cent in 2025 to September compared with the same period of 2024. Its exports to ASEAN have also grown, by almost 10 per cent during the first eight months of 2025.
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But there are limits to how much foreign markets can, or are willing to, absorb. With the EU’s carmakers, especially in Germany, being undercut by subsidised cars from China, the EU has imposed tariffs ranging from 17 to 35 per cent on Chinese EVs, introduced protective measures on steel imports, and launched anti-subsidy investigations into tyres for cars, light trucks and buses as well as wind turbines imported from China.
In Asean, several industries are under threat from Chinese imports. In Indonesia, there have been textile factory closures and bankruptcies that have led to thousands of layoffs. In Thailand, Chinese EVs have disrupted Japanese and local carmakers as well as suppliers. Across several economies, local companies in several industries, such as consumer electronics, footwear, ceramics and retail, are facing stiff competition from cheap Chinese products, which economists suggest could lead to “premature de-industrialisation”.
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China’s situation has striking parallels to Japan’s in the 1990s and 2000s, where, too, there was a property crash, massive manufacturing overcapacity, high debts, deflation and zombie firms kept afloat by bank lending. The result was two “lost decades” of economic stagnation.
Moreover, Japan was then wealthier than China is today and had stronger social safety nets and a lifetime employment culture, which cushioned households. China has the advantage of a more centralised government and banking system with stronger policy tools. But it risks repeating Japan’s experience if it fails to more quickly rein in overcapacity, aggressively boost domestic demand and upgrade its social safety net.
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