China's New Economic Priority: Ending the Race to the Bottom

Latest economic meeting chaired by Xi suggests Beijing is serious about ending the price wars destroying Chinese industries

Today, Chinese President Xi Jinping chaired the sixth meeting of the Central Financial and Economic Commission, China's core economic decision-making body. The Commission convenes quarterly to deliberate and determine national economic policy directions. Since 1987, this influential body (formerly known as the Central Financial and Economic Leading Group) has had the incumbent General Secretary of the Communist Party of China serving as Director, while the Premier serves as Deputy Director.

Today's meeting agenda centered on two strategic priorities: constructing a unified national market and advancing high-quality development of China's marine economy. In previous sessions of the 20th Central Financial and Economic Commission, topics addressed included the modernization of China's industrial system and high-quality population development (1st meeting), farmland preservation (2nd meeting), and large-scale equipment renewal programs, consumer trade-in initiatives, and logistics cost reduction strategies (4th meeting).

In the official outlet of today’s meeting, I found several frames interesting. After the opening, the first thing the meeting tackled was the need to

legally regulate enterprises' low-price disorderly competition, guide enterprises to improve product quality, and promote the orderly exit of outdated production capacity. It's important to standardize government procurement and bidding, strengthen fairness reviews of bid results, regulate local investment promotion, enhance investment promotion information disclosure

依法依规治理企业低价无序竞争，引导企业提升产品品质，推动落后产能有序退出；规范政府采购和招标投标，加强对中标结果的公平性审查；规范地方招商引资，加强招商引资信息披露；

In Chinese policy analysis, sequencing matters a lot. The prominence accorded to market exit mechanisms suggests leadership recognition of an institutional failure: enterprises persist in destructive low-price competition precisely because reasonable market exit pathways remain obstructed. Local governments, driven by protectionist impulses, artificially sustain market barriers and extend financial lifelines to inefficient enterprises, preventing natural competitive selection from operating effectively. This also echoes the recent speech by former Deputy Secretary-General of China's State Council Jiang Xiaojuan that I translated last week. She said:

Generally speaking, with large entry points and extensive support for participating enterprises, market survival of the fittest should occur. However, the "fittest" exit mechanism is particularly constrained—not because it's prohibited, but because specific arrangements are extremely difficult. Individual exits require enormous effort because there are no specific procedures for debt repayment, employee compensation, or bank handling. Without specific regulations, each case must be handled individually. Therefore, poor exit mechanisms represent a fundamental institutional deficiency underlying our discussions of overcapacity and "involution" over the years.

Though it's not explicitly mentioned, I believe the timing and emphasis strongly suggest targeting both the electric vehicle industry dynamics and local governments' increasingly aggressive investment attraction strategies. The trace can be found in the latest episode of Qiushi, the CPC's flagship journal. In the article "Deeply Understanding and Comprehensively Governing 'Involution-style' Competition 深刻认识和综合整治“内卷式”竞争" published on July 1, 2025, it notes that some enterprises use various tactics to lower costs, citing statistics that "some domestic new energy vehicle manufacturers have payment periods averaging over 170 days, with some even exceeding 240 days." The article identifies this as a manifestation of harmful involution-style competition that squeezes upstream and downstream profit margins, affecting both business reproduction and R&D investment.

The article also analyzes governmental intervention behaviors that exacerbate these market distortions. The article criticizes local governments for "artificially creating policy havens" through "illegal implementation of unfair and non-universal preferential policies in taxation, subsidies, and land use," leading to what it terms "disorderly competition." Furthermore, it condemns the practice of localities "disregarding local industrial foundations and resource endowments" while "blindly launching emerging and key industries," resulting in "massive redundant construction and overproduction." The journal emphasizes that such governmental behaviors create a destructive cycle where jurisdictions compete not on the basis of genuine comparative advantages or business environment improvements, but through unsustainable policy bidding wars that ultimately undermine national economic coordination.

San li he三里河, the WeChat account operated by China News Service, also published its readout of the meeting, echoing the topic. It said

Legally regulating enterprises' low-price disorderly competition, guiding enterprises to improve product quality, promoting the orderly exit of outdated production capacity," "standardizing local investment promotion, strengthening disclosure of investment promotion information"... the meeting directly addressed critical pain points in current market operations.

会议精准聚焦重点难点，如内卷、招商引资乱象等，针对性提出解决方案。

“依法依规治理企业低价无序竞争，引导企业提升产品品质，推动落后产能有序退出”“规范地方招商引资，加强招商引资信息披露”……会议直击当前市场运行中的关键痛点。

The account explicitly connects today's focus to recent market complaints:

Recently, malicious "involution-style" competition in sectors like the automotive industry has continued to draw attention, with the central leadership repeatedly emphasizing the need to rectify such competitive practices.

近一段时间以来，汽车等一些领域“内卷式”恶性竞争持续引发关注，中央也多次强调要整治“内卷式”竞争。

To me, the meeting emphasises, along with the articles, that dealing with excessive competition has become the new top-tier policy focus. (We may need to put focus on further legislation on market clearing.) And in today’s newsletter, I’m featuring the article published by Qiushi. Feel free to share it and subscribe if you think it’s useful.

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Deeply Understanding and Comprehensively Governing 'Involution-style' Competition 深刻认识和综合整治“内卷式”竞争

Ju Li(巨力)

In recent years, "involutionary" competition has severely harmed numerous industries and enterprises, drawing widespread social attention and urgently requiring effective governance. The 2024 Central Economic Work Conference proposed comprehensively addressing "involutionary" competition and regulating the behavior of local governments and enterprises. During this year's National People's Congress and Chinese People's Political Consultative Conference sessions, General Secretary Xi Jinping explicitly called for proactively eliminating local protectionism, market fragmentation, and "involutionary" competition. This year's Government Work Report made relevant arrangements for comprehensively addressing "involutionary" competition. The recently revised Anti-Unfair Competition Law implements the Party Central Committee's spirit regarding comprehensive governance of "involutionary" competition and improves related provisions. We must deeply understand the great significance of addressing "involutionary" competition, accurately grasp its harms and causes, and continuously explore effective measures for addressing "involutionary" competition in practice, striving to create a fair competitive market environment and provide strong guarantees for high-quality development.

I. What are the prominent manifestations and main harms of "involutionary" competition?

What is "involutionary" competition? To summarize its general characteristics, it refers to malicious competitive phenomena where economic entities continuously invest substantial energy and resources to maintain market position or compete for limited markets, yet fail to bring about overall revenue growth. There are large enterprises "involuting" small enterprises, platform enterprises "involuting" platform operators, as well as "involution" in production capacity, prices, and among peers, with results that harm all parties and seriously affect high-quality economic development.

In reality, "involutionary" competition manifests differently with varying characteristics, mainly involving two types of behavioral entities: enterprises and local governments. From an enterprise behavior perspective, "involutionary" competition mainly manifests as: First, low-price competition, where in some industries, enterprise products are highly similar in performance, quality, and after-sales service, with companies mainly relying on price wars to gain market share, selling at ultra-low prices or even below cost; Second, homogeneous competition, where some enterprises ignore industry patterns and their own capabilities, blindly pursuing so-called hot trends and expanding production, leading to serious redundant construction within industries and lack of differentiated competitive advantages; Third, "race-to-the-bottom competition" in marketing and promotion, where some enterprises invest massive resources in advertising and channel promotion while product quality and service fail to improve correspondingly, trapping market competition in a vicious cycle that emphasizes promotion over quality. From a local government behavior perspective, "involutionary" competition mainly manifests as: First, artificially creating policy havens to attract enterprises and cultivate industries, illegally implementing unfair and non-universal preferential policies in taxation, subsidies, and land use, leading to disorderly competition; Second, disregarding local industrial foundations and resource endowments, blindly launching emerging and key industries, causing massive redundant construction and overproduction within industries; Third, setting explicit or implicit market barriers to protect local markets and support local enterprises, treating various enterprises differently and undermining fair competition order.

Market allocation of resources is the most efficient form, and competition is an important mechanism for the operation of a market economy. Through competition, resource allocation is optimized and survival of the fittest is achieved, forcing enterprises to continuously innovate technology and improve business management, thereby enhancing economic operational efficiency and promoting economic development and technological progress—this is where the advantages of market economy lie. Since reform and opening up, as China's socialist market economy system has been established and gradually improved, our ability to grasp and utilize market economy laws has significantly enhanced. We have gradually resolved issues that long troubled us, such as insufficient market competition, irregular market order, lagging development of factor markets, and non-unified market rules, driving China to grow within decades into a super-large economy with GDP exceeding 130 trillion yuan. Social productivity has achieved leapfrog development, completely bidding farewell to shortage economy, with increasingly abundant material products and increasingly prosperous people's lives. In recent years, China's technological and industrial innovation achievements have emerged competitively, with new breakthroughs in integrated circuits, artificial intelligence, new energy, and other fields. More and more enterprises demonstrate strong competitiveness in international markets, closely related to fierce domestic market competition, forcing enterprises to continuously innovate technology, promoting rapid development of related industrial chains and China's industrial upgrading. Practice fully proves that developing socialist market economy and encouraging market competition is an important reason why China's economy continuously creates development miracles.

However, market competition has conditions and scope. Market competition helps improve resource allocation efficiency, but once competition goes too far and crosses boundaries, evolving into disorderly "involution," it distorts market mechanisms, destroys market fairness, and causes numerous negative impacts. At the micro level, malicious low-price competition and other behaviors lead enterprises to compress necessary production costs and reduce product quality, creating "bad money drives out good" phenomena that ultimately harm consumer interests. At the meso level, various disorderly competitive behaviors cause dramatic declines in industry profit rates, destroying entire industry ecosystems. For example, some enterprises use advantageous positions to reduce costs through advance construction payments, delayed account payments, and non-cash settlements. Media statistics on some domestic new energy vehicle companies found their average account periods exceed 170 days, with some exceeding 240 days. Additionally, some leading platforms grab market share through "refund-only" policies and excessive subsidies, essentially transferring pressure to numerous merchants. These behaviors squeeze profit margins up and down industrial chains, seriously affecting enterprise reproduction and R&D investment while impacting entire industry development momentum. At the macro level, "involutionary" competition causes backward capacity to crowd out advanced capacity, suppresses social innovation vitality, distorts resource allocation efficiency, leads to market elimination mechanism failure, causes enormous waste of social resources, and particularly when some localities pursue short-term economic growth regardless of cost, may bring serious debt risks and unsustainable development problems.

In summary, "involutionary" competition traps various entities in low-price, low-quality, unprofitable competition, breaking through market competition boundaries and bottom lines, disrupting market order. Allowing it to develop will cause endless harm. Over 20 years ago, Chinese motorcycle companies competing for Southeast Asian markets staged "fratricidal" price cuts to gain footing, ultimately affecting technological innovation and product quality, leading to a rapid decline in exported product reputation and cliff-like drops in market share—a painful lesson that evokes deep regret. Currently, some of China's emerging industries are deeply troubled by "involutionary" competition. If not addressed in a timely and effective manner, this will not only damage an enterprise's reputation and brand image but also hinder enterprises’ "going global" and delay China's technological innovation, industrial upgrading, and high-quality development. We must deeply learn from historical lessons and address this timely and effectively to avoid repeating mistakes.

II. How does "involutionary" competition form?

As a prominent phenomenon in current economic development, the formation of "involutionary" competition has multi-dimensional and complex causes, involving enterprises, industries, and government at multiple levels. It includes both regular factors, such as economic development and technological progress, as well as deep-seated institutional and mechanism issues, plus path dependence of economic entities—a comprehensive formation of multiple factors.

First, a supply-demand imbalance exists at the macroeconomic level. An important reason for "involution" lies in prominent supply-demand contradictions with oversupply. After decades of development, China has become the world's largest manufacturing country with the most complete and largest-scale industrial system globally, forming powerful production capacity. Compared to this powerful supply capacity, China currently faces prominent insufficient effective domestic demand, with obvious problems including insufficient consumer capacity and willingness, weak consumption demand, and relatively weak effective investment growth. Meanwhile, due to slowing global economic growth and intensifying unilateralism and trade protectionism, external demand faces considerable uncertainty. Macroeconomic supply-demand imbalance manifests concentratedly as weak demand and overcapacity in some industries, forcing existing enterprises to compete within a limited market space for survival.

Second, structural supply-demand contradictions appear in emerging industries. Unlike past malicious competition mainly concentrated in traditional industries like steel, cement, and light industrial products, a current prominent phenomenon is that emerging industries like photovoltaics, lithium batteries, new energy vehicles, and e-commerce platforms are also deeply trapped, fundamentally related to technology and industrial development patterns. From previous technological revolutions and industrial transformations, the emergence of new technologies, new business forms, and new models attracts massive investment into related industries and may bring overinvestment problems. In the early stages of emerging technology and industry development, uncertain multiple technological routes often exist, with each route attracting corresponding investment, leading to capacity expansion speeds exceeding demand release speeds during technological iteration and updating processes. Moreover, technology and industry development have cyclical characteristics. As technology and industry development enter maturity, markets gradually saturate, and for some time, enterprises tend toward similarity in product functions, production processes, and service models, making it difficult to form generational differences, leading some enterprises to adopt price reduction and other competitive methods. Current "involutionary" competition in emerging industries is closely related to structural contradictions between supply and demand under these patterns.

Third, institutional mechanisms for maintaining fair competitive environments are incomplete. The effective operation of a market economy requires better government functioning. However, due to occasional government absence and overreach, this significantly affects the formation of fair, competitive market environments. First, some localities have imperfect performance evaluation mechanisms, leading to misplaced performance and development concepts, pursuing short-term economic growth through local protectionism, market segmentation, and malicious competition in investment attraction policies, hindering the efficient flow of resource elements. Second, laws, regulations, and regulatory institutional mechanisms are incomplete. Particularly as new technologies, new business forms, and new models develop rapidly, market boundaries continuously expand, but matching regulatory measures haven't kept pace, giving some enterprises opportunities to take risks and break bottom lines. Third, market-clearing mechanisms are incomplete. Due to imperfect bankruptcy reorganization systems plus administrative intervention from some local governments, some backward and excess capacity that should be eliminated cannot exit in a timely manner, leaving some enterprises "unable to live well or die," affecting industrial reorganization and improved resource utilization efficiency.

Fourth, the dependence on past development models and short-termism tendencies is obvious. Since reform and opening up, China's market scale has expanded rapidly, but urban and rural resident income levels have been generally low for long periods, making them relatively price-sensitive, leading many enterprises to habitually rely on price competition to develop markets and focus on pursuing short-term interests. China is overall moving toward high-income country status, with increasingly diversified and personalized consumer demands and continuously upgrading consumption needs, placing higher requirements on enterprise product quality and standards. When facing market pressure, some enterprises still tend toward traditional competitive methods, with insufficient innovation investment, neglecting brand building and service improvement, making it difficult to adapt to market environment changes while intensifying internal industry competition.

Theory and practice show that market competition is a dynamic adjustment process inherently compatible with economic development levels and market system construction. Insufficient competition, characterized by lower productivity levels and a shortage economy, and excessive competition, characterized by significantly enhanced supply capacity and capacity expansion exceeding market capacity, are both unavoidable situations in market economy evolution and problems inevitably encountered in a country's economic development process. Some of these chaotic phenomena are not unique to China's economy—traditional industrial powers like Germany and Japan have also experienced excessive industrial competition. As a symptom within market competition, "involutionary" competition formation has both objective and subjective factors, both short-term and long-term deep-seated problems. We need objective and rational perspectives, identify problem crux points, further improve market competition mechanisms, and focus on guiding competition toward healthier and more orderly directions.

III. How to effectively address "involutionary" competition?

Addressing "involutionary" competition is a complex, systematic project that cannot be accomplished overnight or through single solutions. It requires following economic laws, gathering forces from all parties, and comprehensive multi-pronged governance.

Coordinated efforts on both supply and demand sides to promote a dynamic balance between total supply and total demand. Supply-demand mismatch and imbalance are important causes of "involutionary" competition. This requires addressing "involutionary" competition through coordinated supply and demand side efforts and coordination, both expanding market space and improving supply quality. We must organically combine an expanding domestic demand strategy with deepening supply-side structural reform, forming a higher-level dynamic balance where demand drives supply and supply creates demand. Weak residential consumption demand is a prominent bottleneck in insufficient domestic demand. We must accelerate making up for consumption insufficiency shortcomings, establish and improve long-term mechanisms for expanding residential consumption, deeply tap potential to boost consumption, promote major consumption updates and upgrades, stimulate service consumption potential, and amplify new consumption driving effects. Continue deepening supply-side structural reform, promote obvious improvements in supply systems and efficiency, and use high-quality supply to adapt to and satisfy continuously upgrading demands. Overseas markets contain enormous development opportunities and space. We must continue expanding high-level opening up, improve enterprise "going global" guarantee mechanisms, cultivate new drivers for foreign trade development, and expand new foreign trade spaces.

Regulate government behavior to promote a better combination of effective markets and capable government. General Secretary Xi Jinping pointed out that the more regulated government behavior becomes, the more effective market functions become. "Involutionary" competition reflects market failure phenomena. Comprehensively addressing "involutionary" competition fundamentally requires focusing on constructing high-level socialist market economy systems, forming an economic order that is both "liberating" and "manageable."(放的活，管的住) Governments at all levels, particularly some local governments, must persist in acting and not acting appropriately, transform government functions, establish correct performance concepts, establish thinking of calculating overall accounts and national coordination, implement the Fair Competition Review Regulations well, implement the National Unified Market Construction Guidelines (Trial) well, resolutely break local protectionism and market segmentation, and promote efficient allocation of factor resources nationwide. Focus on regulating local government investment attraction behavior, shifting investment attraction work focus from competing over policy preferences to optimizing business environments and improving service levels, strictly prohibiting illegal policy preference behavior, and forming new models of regulated and positive investment attraction. All localities must base themselves on their own conditions, follow industrial development patterns, optimize industrial layouts, and develop new quality productive forces according to local conditions, avoiding "involutionary" competition in emerging industry development. Fair competition and survival-of-the-fittest market order is an inherent requirement for effectively unleashing market mechanism vitality and functions. We must improve basic market economy systems including property rights protection, market access, fair competition, and social credit, innovate regulatory methods, strengthen regulation and quality standards, implement the Anti-Unfair Competition Law of the People's Republic of China well, severely crack down on market chaos including malicious price comparison, false advertising, and mutual defamation, strengthen governance of platform "involutionary" competition, and regulate competitive order. Forming appropriately competitive industrial organization systems through enterprise integration and reorganization is an important path for adjusting and optimizing industrial structure and forming positive market competition. We must improve market clearing mechanisms, persist in relying on market mechanisms to encourage enterprise vertical integration and horizontal mergers, improve related industry concentration, and promote effective market clearing.

Strengthen industry self-discipline and improve industry and enterprise consciousness against "involution." Industry self-discipline is a self-restraint mechanism spontaneously formed by business entities in market competition and an important guarantee for regulating enterprise behavior, maintaining market order, and promoting healthy industry development. Comprehensively addressing "involutionary" competition must start with strengthening industry self-discipline, leveraging industry association functions, advocating legal, fair, honest, proper, and orderly industry competition, improving traditional industry association functions, filling gaps in emerging business form industry organizations, and through formulating industry standards and rules, regulating market behavior, forming broad consensus, and curbing malicious competition. Strengthen enterprise social responsibility, particularly leading enterprises in chains, guide enterprises to enhance consciousness in resisting unfair competition behavior, and promote formation of positive upstream and downstream industrial chain collaborative relationships. Technological innovation and industrial upgrading are fundamental paths for enterprises to open market space and prevent low-level homogeneous competition. We must vigorously promote entrepreneurial spirit, guide enterprises to actively adapt to market changes, focus on enhancing innovation capacity, and strive to pioneer new tracks and expand new markets.