Deutsche Bank-China Macro Understanding Chinas _Anti-involution_ Drive-117768693

T2se3r0Ot6kwoPaT2se3r0Ot6kwoPaDistributed on: 15/09/2025 11:00:35 GMTDistributed on: 15/09/2025 11:00:35 GMTDeutsche Bank Research Deutsche Bank AG/Hong Kong IMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS. Economics China Macro Date 15 September 2025 Understanding China's "Anti-involution" Drive China's economic policy is undergoing a significant reorientation in 2025, centered on a new initiative: "anti-involution". This strategy directly confronts the issue of excessive, self-defeating competition within key industries, a phenomenon termed "involution." This article will explore the origins and consequences of "involution". The compelling case of China's automotive industry shows how failure to enable consolidation in a highly innovative and rapidly growing industry has led to prolonged price war that could damage the broader economy. The “anti-involution” policy push is set to reshape China's economic landscape, with critical implications for China and Europe. While potentially leading to a near-term slowdown in China's headline growth as capacity is rationalized, successful "anti-involution" could alleviate persistent deflationary pressures and reduce China’s trade imbalances in the long run. Success in reflating China’s economy could also lead to a stronger Renminbi. 1. What is "involution"? INVOLUTION /ˌɪn vəˈlu ʃən/ noun. Anthropology, Sociology., Growth without evolution, as in a growing agrarian society with increased field labor whose production mechanisms become more complex without increasing yield. A defining term has emerged at the forefront China's economic policymaking in recent months: fan nei juan, literally translated as "anti-involution." This concept represents Beijing's ambitious attempt to break free from self-destructive economic cycles that have plagued several key industries. For European policymakers and business leaders, understanding this shift is critical because it signals a significant reorientation of China's economic policy focus, with profound implications for growth, inflation and trade. China's internal economic rebalancing, driven by this policy framework, could reshape the competitive landscape in industries from electric vehicles to renewable energy technology — sectors where European firms maintain vital interests. To understand "anti-involution," we must first grasp the phenomenon it seeks to combat. In China's economic context, "involution" (nei juan) describes a vicious cycle where companies engage in increasingly intense competition that yields diminishing returns for all participants. Picture a crowded theatre where one person stands for a better view, forcing others to stand until everyone is equally uncomfortable but now on their feet. This captures the essence of involution: increased effort doesn't lead to proportional gains; inst