The “Anti-Involution” Implementation in China

“Anti-Involution" Progressively Becomes a Key Focus of China's Policy

Since China first proposed the "preventing vicious involution competition" in July 2024, "anti-involution" policies have swiftly captured market attention.  This anti-involution measure not only covers traditional industries such as steel and cement, but also involves emerging industries with a high proportion of private enterprises, such as photovoltaics, new energy vehicles, and lithium batteries. It aims to curb unfair low-price competition, improve product quality, phase out obsolete industrial capacity gradually, and standardize local investment incentives.  

Anti-involution faces challenges

A decade ago, similar supply-side reforms emerged in China. Those policies effectively reduced industrial output in targeted sectors while boosting the Producer Price Index (PPI). This consequently enhanced corporate profitability within those industries.

However, the current anti-involution policy faces significant challenges that pose risks to domestic employment and economic growth. Major reasons:

1) Existing efforts predominantly rely on corporate self-regulation and industry advocacy, the "anti-involution" campaign demands greater policy wisdom;

2) The debt of local governments in China is too high. By March 2025, it had exceeded 50.16 trillion yuan. Local governments will prioritize debt resolution.

3) Endogenous demand remains weak. The growth rate of social consumer goods retail sales in Q1, 2025 (4.6%) was lower than that of GDP (5.4%). The core reason lies in the slow growth of residents' income and the consumers’ lack of confidence. In Q1, 2025, the actual growth of per capita disposable income of urban residents in China was only 2.9%, while the CPI rose by 3.2% during the same period. This indicates a decline in actual purchasing power. A deeper reason is the unstable job market. In March 2025, the unemployment rate among young people aged 25-34 reached 18.6%, a record high. Under such circumstances, consumers are more inclined to save rather than consume. In 2024, the national savings rate reached 35.7%, much higher than the global average.

4) Compounded by potential external demand shocks amid deglobalization，particularly given Trump's unpredictable trade policies, demand-side management carries particularly hefty weight in the current policy calculus.

Overcapacity is the is the main factor for implementing “Anti-Involution" China’s industrial performance from January to May 2025 showed robust growth, with the industrial output value of enterprises above designated size rising by 6.3% year-on-year cumulatively. However, beneath this growth lies a deepening challenge. Industrial capacity utilization has declined from 77.7% in Q3 2021 to 75.1% in Q1 2025. Overcapacity has now escalated into a severe constraint.

The current overcapacity is mainly due to overly rapid investment expansion in previous years. From 2021, the growth of manufacturing investment has significantly outpaced that of overall investment. In, 2022, 2023, and 2024, manufacturing investment grew by 8.64%, 3.5%, and 6%, respectively. 

Particularly concerns the industries:

Auto: the automobile industry’s production capacity utilization is 59%, new energy vehicles have fallen below the 70% warning line in 2024;

PV: The overall capacity utilization rate across the entire photovoltaic industry is 44% to 50%, with leading enterprises achieving over 70% and small and medium-sized enterprises falling below 10% in 2024.

Energy Storage:  China's planned production capacity for energy storage cells exceeded 1000 GWh, but the actual shipment volume was only 300 GWh, with the capacity utilization rate falling below 35% in 2024.

Steel: The capacity utilization rate of the steel industry is approximately 81% in 2024. Continuously affected by the sluggish real estate market, demand remains weak, and a large number of construction steel production facilities operate at low capacity and are in a state of disuse.

Producing more but making low profit

This overcapacity, compounded by unregulated competition, continues to depress industrial prices and squeeze corporate profits. The Producer Price Index (PPI) contracted by 3.6% year-on-year in June 2025, marking the lowest reading since August 2023, and the 10th consecutive quarter of negative growth since Q4 2022. Consequently, industrial profits remain under pressure. The operating profit margin of large-scale manufacturing enterprises dropped to 4.25% in the first five months of 2025. The operating income generated per 100 yuan of assets by large-scale manufacturing enterprises has also continued to decline from 107 yuan in 2022 to 92.3 yuan in 2024, and further decreased to 85.2 yuan in the first five months of 2025. Facing the continuously increasing operational pressure, competition among enterprises has intensified. Some businesses use price wars to exchange price for volume, trying to maximize demand and seize more market share. The result is increased volume without incremental revenue, or increased revenue without profit growth.

Exporters face similar pressure.  According to China’s National Bureau of Statistics, in 2024, the export volume increased by 5.9% year-on-year to 3.58 trillion US dollars, reaching a new high. However, the average export price index decreased by 5.5% year-on-year,  their lowest level since 2009.

Concerned margins of the industries:

Auto: In 2024, the profit margin of China's automotive manufacturing industry is expected to be approximately 5%. The profit margin of the Chinese automotive industry declined to 4.3% in the first half of 2025.

PV: In 2024, China's solar photovoltaic (PV) industry experienced a significant squeeze on profit margins, with many companies reporting losses and declining profits. The gross profit margins of the six leading solar manufacturing companies (such as Jinko, Longi, Trina, etc.) are projected to be -15% to -2% in 2025. For energy storage converters (PCS), the gross profit margin is 33.6% (in Q1 of 2025).

Energy storage: The core materials (lithium/sodium battery materials) in the energy storage industry had a gross profit margin of 15% - 25% in the first quarter of 2025, while the gross profit margin of the battery cells was only 22.6% (in the first quarter of 2025).

Steel: According to the statistics from Mysteel, the average profit of 36 listed steel enterprises was 3.96%. 21 companies made profits while 15 suffered losses in 2024.

Excessive exports lead to trade disputes

According to Deutsche Bank, 32% of the world’s manufacturing originates from China, but only 12% of global consumption is based in China. This creates a huge trade gap, which was nearly US$1 trillion in 2024. A glut of cheap Chinese goods is flooding the world. Overcapacity in China has led to an oversupply in the international market, triggering trade disputes and anti-dumping investigations.  

The oversupply of Chinese goods in key industries is stoking tensions between the world’s biggest manufacturer and its major trading partners, including the United States and the European Union.  “Europe cannot just accept that strategically viable industries constituting the European industrial base are being priced out of the market,” Jens Eskelund, president of the European Union Chamber of Commerce in China.

A significant increase in the export of affordable goods from China is creating trade imbalances and disrupting local industries in many countries, particularly in emerging economies. This "glut" of cheap Chinese goods, driven by factors like China's slowing domestic demand and government support for manufacturing, is leading to increased trade investigations against Chinese imports and raising concerns about unfair competition,  according to the New York Times on June 18, 2025.

The global trade disputes triggered by China's overcapacity and low-price competition have spread from traditional manufacturing industries to high-end manufacturing and emerging sectors, with the scope of these related industries and regions also expanding continuously. In the following Newsletter to be released in September 2025, we will elaborate on related tariffs, anti-dumping, and other issues. Thank you for your attention.

*** The above data are sourced from Bloomberg, Industry associations of China, the National Bureau of Statistics of China, etc. If you find any inconsistencies, please contact us at jcroning@cca-im.com. Or visit our website www.cca-im.com, and contact us through the contact tab