China’s Problem With Competition: There’s Too Much of It

It’s the circle of life in China’s business world.

A promising technology or product emerges. Chinese manufacturers, by the dozens or sometimes the hundreds, storm into that nascent sector. They ramp up production and drive down costs. As the overall market grows, the competition becomes increasingly cutthroat, with rival companies undercutting one another and enduring razor-thin profit margins or even losses in the hope of outlasting the field.

Adding to the competitive fervor, China’s local governments, each with its own target for economic and job growth, back a homegrown champion and shower it with financial and bureaucratic support. Soon, the whole industry, awash in production capacity, is trapped in a race for survival.

While most governments encourage vigorous competition and low prices, China is going in the opposite direction. It is trying to rein in “involution,” a sociological phrase widely used in China to describe a self-defeating cycle of excessive competition and damaging deflation.

Xi Jinping, China’s top leader, pledged to take steps to crack down on “low price and disorderly competition” and eliminate outdated industrial capacity at a high-level economic policy meeting this month. At another recent gathering, on urban development, Mr. Xi questioned whether every province needed to rush into sectors like artificial intelligence and electric cars.

“Price wars and ‘involutionary’ competition will only encourage ‘bad money driving out good money,’” wrote People’s Daily, the official mouthpiece of the Chinese Communist Party. “Simply ‘rolling’ prices downward will not result in a winner.”

China’s efforts to tackle involution are taking on new life as President Trump’s tariffs discourage exports to the United States. Other countries are also wary of a flood of inexpensive Chinese goods redirected their way. These unsold goods, combined with a slowing domestic economy, have intensified competition, fueling a deflationary spiral.