UBS Equities-China Equity Strategy _Potential market reaction to anti-inv...-116689557

ab21 July 2025Global ResearchChina Equity StrategyPotential market reaction to anti-involution drive: Lessons from 2015-16 supply-side reform [ERRATUM]China's anti-involution push gathering momentumIn July 2024, the Political Bureau meeting began calling for industries to exert more self-discipline to avoid damaging involutionary competition. The Central Economic Work Conference in late 2024 and the Two Sessions this March both proposed comprehensive measures to eliminate such severe competition. This initiative has gained momentum in the past month, with several sectors – new energy vehicles (NEV), solar, coal and cement – actively engaged in reining in involutionary competition. From a macro perspective, we believe the anti-involution initiative could help improve supply-demand, drive a price recovery, strengthen corporate profitability, and revitalise innovation. In fact, China's PPI fell 2.8% YoY in H125, marking a 33rd straight month of YoY declines (Figure 2PI fel 2.8% YoY in H125), compounded by a 9.1% YoY drop in industrial profit in May (Figure 3NBS industrial profit growth vs A-share industrial sectors' earnings growth ).How could stock prices react? Perspective from 2015-16 supply-side reformTo some investors, the ramping up of the anti-involution initiative is reminiscent of 2015-16 supply-side reform, which led to higher prices of materials and hence a re-rating of relevant sectors. Indeed, sectors that have begun to address unhealthy competition – such as solar and power batteries – have rebounded lately (Figure 4Solar and power batery indices have risen lately). To understand how stock prices might react to the anti-involution theme, we look at how they responded to policies, commodity prices and production, and corporate profitability during the 2015-16 supply-side reform.1) Stock prices generally reacted positively to incremental policies. In Figure 52015-16 suply-side reform's policy timeline , we summarise supply-side reform policies in a timeline. We note that in the first half of the reform push, new policies generally led to a positive reaction from relevant sectors, which provided excess returns relative to the broader market for 1-2 months. This reflected a period of intense policy roll-out involving many new guidelines. In the second half, investors' focus shifted to policy effects. 2) Stock prices moved largely in step with commodity prices and production changes. The correlation between the average commodity prices and relevant sectors’ average outperformance over the CSI 300 is 0.82. Capacity reduction efforts led to two rounds of price increases for relevant commodities, ie, from early December 2015 to late April 2016, and from early June to mid-December 2016 (Figure 6Price movements of suply-side reform-related comodities in 2015-16 ). Outperformance of sectors of materials relating to supply-side reform over the broader market started to widen from early-July 2016 to mid-November 2016.What are the di