Involution and Industry Self-Discipline: Echoes from the Past

When the Chinese term first emerged in popular culture in China a few years ago, the initial application was to Chinese students and young people trapped in highly competitive schools and jobs that brought little personal fulfillment, with immense efforts and sacrifices that to many seemed ultimately meaningless, a feeling made more acute by the arrival of the pandemic. This led many to respond by giving up on their ambitions and “lying flat” (tangping, 躺平), which has also been a source of much social debate.

In 2025, involution now refers specifically to the widespread phenomenon of continued massive expansion of production in sector after sector despite any semblance of sufficient domestic demand to absorb these goods. 

Chinese officialdom has vociferously rebutted charges by foreign governments that China has been suffering from “overcapacity” (chanye guosheng, 产业过剩). As part of this retort, it has argued that industrial policy and subsidies are not the source of China’s industrial strength, but rather high quality and competitiveness. As a result, governments around the world are wrong to impose any restrictions on Chinese exports. 

But while China is rebuffing international charges of overcapacity, it has opened the doors to a domestic debate about involution and how to tackle it. Hence, the emergence of a highly public conversation about “anti-involution policy” (fanneijuan zhengce, 反内卷政策), a catch-phrase which has also spread like wildfire (see Figure 2).

A central feature of this conversation centers around a criticism of competition based on price. At the corporate level, there are price wars in sector after sector, with companies slashing prices to reduce their inventories and fight for market share against their opponents. In the auto sector, BYD has been criticized by some as the source of price wars, with the charge that it wants to push as many competitors out of the market as possible. The same dynamic is visible in mobile phones, solar panels, e-commerce, and many other industries. The result is deflation as a whole (see Figure 3) and in many industries (see Figure 4). 

Some sectors (such as EVs) are experiencing price wars for the first time, while others (such as solar and steel) have gone through this many times before.

Although there is variation in experiences across specific products, conflicted views about market competition are nothing new. This is not surprising given China’s long experience with state socialism and central planning. Even as China has moved in a market-oriented direction, the party-state has maintained the right – and often exercised it – to intervene in every aspect of commercial activity. Free markets are still seen as tools and not as sacrosanct spaces that party-state authorities are expected to protect no matter what. 

This ambivalence about markets came through loud and clear in the late 1990s when I was doing my dissertation research on business lobbying. (I wrote about this experience in a 2003 article for China Journal.) At the time, multiple countries in Asia were experiencing a financial crisis. The series of devaluations by China’s neighbors immediately made Chinese exports less competitive. As a result, inventories for all sorts of industrial products – mostly intermediate goods such as steel, aluminum, cement, and copper – all rose. The natural reaction for companies in this situation was to slash prices. And so price wars broke out in sector after sector. Commentators, officials, and industry insiders all attacked this behavior as “disorderly competition” (wuxu jingzheng, 无序竞争) and “vicious competition” (exing jingzheng, 恶性竞争). 

But what was even more interesting was how industry and government actually responded next. Industry associations across many sectors, goaded by their members, tried to organize cartels. The associations brought producers together and set price floors, what they called “self-discipline prices” (zilujia, 自律价). One commentator praised the Organization of Petroleum-Exporting Countries (OPEC), and said Chinese industries should create “mini-OPECs.” In some cases, associations required firms to submit deposits which they would supposedly forfeit if they cut their prices below the floors. 

Such cartels were novel because prior to this, whenever anyone thought of intervention in markets, the only entity available would have been party-state institutions. Chinese industry associations were in their infancy, and many were, in fact, former government bureaus restructured into industry associations. They were supposed to both serve their members but also represent the state, a balancing act that was very difficult to maintain. There were some genuinely grassroots local industry associations that did have the sole role of representing their members, such as in the private business hub of Wenzhou, Zhejiang, and they also tried to coordinate prices amongst their members. 

The Chinese government itself was divided at the national level. Some companies and their associations successfully lobbied the State Economic and Trade Commission (SETC) to let them try the cartels. The SETC was, in fact, the progenitor of some of these associations, which previously had been SETC bureaus. Standing on the other side of the fight was the State Development and Planning Commission (SDPC), long the home of China’s central planners. The SDPC,which created and implemented China’s five-year plans, saw the cartels as encroaching on their authority, but these officials couched all of their criticism in free-market terms, arguing that cartels violated China rules against unfair competition and the Price Law. 

The commercial outcome was emphatic. In almost every case I could document, the cartels failed. Chinese industries are highly fragmented, with very low “concentration” levels, and despite inter-provincial barriers, most products even then were sold around the country. As a result, monitoring individual corporate behavior and preventing “cheating” was almost impossible. Companies routinely broke their self-discipline pledges, and associations failed to exert external discipline on them. 

The policy debate appeared to be equally decisive, but only superficially. The SDPC won the day over the SETC, and China’s government came out strongly in defense of market competition and against cartels. In the aftermath of these fights, the government subsequently updated the price law, adopted an anti-monopoly law, and passed other regulations that forbade such horizontal coordination amongst companies. 

Nevertheless, since the late 1990s China has continued to see bouts of overcapacity and massive price wars. And over the years there have continued to be moralistic calls for companies to adhere to “industry self-discipline” (hangye zilu, 行业自律), as shown in Figure 5.

During the bout of overcapacity a decade ago, in 2015-2016, the most affected industries were tied to infrastructure. Chinese vice premier Liu He led the charge to implement “supply-side reforms,” which aimed to cut capacity across various sectors, but like weeds, as the government stoked investment to support growth and technological progress, capacity was rebuilt and surpassed its previous levels. 

Because China’s legal environment explicitly forbids cartels, government agencies and associations have had to be more nuanced and use euphemisms when discussing corporate behavior. In the last few months we have seen calls by China’s top leaders, government bodies, associations, and companies to either restrict production or prices in a wide range of sectors, including electric vehicles, solar panels, wind, batteries, sewing machines, digital finance, cement, concrete, aviation, air conditioning, and food delivery. Demands for self-discipline have even spread to funeral services! 

And with bouts of overcapacity in the late 1990s and more recently, ongoing efforts have so far been for naught, as companies continue to do what companies do – try to compete and survive any way they know how. According to one source who regularly consults with officialdom in Beijing, central government bureaucrats understand that official exortations for avoiding price cuts and pushing industries to adhere to “self-discipline” are doomed to failure, but they have to at least look like they are trying. The government has considered more direct intervention to order capacity reductions and inject a larger stimulus, but it has held off taking such steps.

On the one hand, this is a positive story: China’s markets are so competitive and entrenched that cartels and government intervention cannot stop such behavior. 

On the other hand, the continued moralism and frustration that is pervasive in the public narrative and the ambivalence about how forcefully the government should intervene both distract everyone from focusing on the steps that need to address the root causes of the problem. Four matter the most. 

The first, as Gavekal’s Arthur Kroeber reminded us in a recent Trustee Chair event on the state of the economy, is eliminating the soft budget constraints of firms and their local government patrons. As long as firms have access to sufficient funds, they can cut prices and absorb losses indefinitely. Second, although bankruptcies in China have risen lately, the country’s bankruptcy law is still underutilized, another source of companies’ excessive longevity. Third, mergers and acquisitions (M&A) occur in China, but there are still substantial obstacles to industry consolidation, which would provide another exit pathway for less competitive firms and their production capacity. And fourth, Chinese government bodies and organizations connected to them are often consumers of industrial production, and there are incentives for government agencies to develop close ties with particular producers, which also facilitates the continued existence of unworthy suppliers who otherwise would not survive. 

The moralism will likely continue because adopting more fundamental reforms would constrain the party-state’s authority. And although officialdom may be unhappy with “excess competition,” it may be willing to accept it as the cost of keeping its hands firmly in control of China’s economy. 

In the coming weeks and months, China will consider its 15^th Five-Year Plan. A central measure of whether the plan represents a significant adjustment from the current course is whether it advocates policy steps that would directly address any of these problems. 

Related Trustee Chair Activity

Article: Scott Kennedy, "The Price of Competition: Pricing Policies and the Struggle to Define China's Economic System," China Journal, no. 49 (January 2003), pp. 1-30.

Event: “China’s Annual Two Sessions: Meaningful Reform or Missed Opportunities?” March 14, 2025.

Event: “China’s Economy: How Bad Is It?” September 9, 2025.