UBS Economics-China Economic Perspectives _Anti-involution Déjà vu or pan...-116883475

ab31 July 2025Global ResearchChina Economic PerspectivesAnti-involution: Déjà vu or panacea?Why does it matter and where are we now?China's policy momentum in curing "involution competition" has risen notably. Involution refers to aggressive price over-competition and excess capacity issues, with the solar, lithium battery, NEV, platform company, coal, steel and cement sectors as the campaign's key focus for now. It has contributed notably to China's prolonged deflation challenge and profitability deterioration, along with a soft demand recovery in China. According to our scorecard, the current overall overcapacity situation is not as severe as the worst episodes in 2015-16, although industries face fierce price involution and the situation may deteriorate as growth decelerates. The mining, non-metal mineral, chemical material, textile and solar sectors appear most in danger of low capacity utilization, sharp price declines and poor profitability. Déjà vu? Current campaign vs. 2015-16 supply-side reform This anti-involution campaign is different from previous supply-side reform, despite some similarities regarding the backdrop of a sharp property downturn and deflation and overcapacity challenges. The 2015-16 reform was mainly targeted at highly SOE-centric upstream sectors (especially coal and steel), implemented an explicit official capacity reduction plan, and rolled out large scale stimulus, especially shantytown renovation, to boost property activity. In contrast, the current campaign focuses not only on upstream sectors but also on mid- to downstream sectors and the "new economy" (the latter is more non-SOE dominated). The government has no intention to roll out a shantytown-style boost for the housing market or aggressive stimulus for consumption. It is focused more on market-driven and comprehensive policy rather than simply administrative orders. China now also faces a more challenging external environment. How can involution be rectified? The ongoing campaign mainly focuses on supply-side measures, including controlling capacities & production, curbing disorder pricing schemes and adjusting regulations, but has not yet prioritized boosting final demand as the most essential element. Key efforts include building a unified national market, enhancing sector standards and legislation, pushing for sector coordination of production plans and pricing schemes, encouraging self-discipline among leading companies, and promoting a "going-global" strategy, albeit amid some pushback. There is no official plan for capacity reduction yet, with profound debates about capacity issues in new economy sectors. We think boosting domestic demand will be critical to the campaign's success (although there is no clear plan so far), including stabilizing property activity, more substantial support for the household sector and consumption, and more investment in digitalization & innovation. What to expect for the future trajectory and macro impact? We expe