China's electric vehicle makers and food delivery giants including BYD Co. and JD.com are locked in a fierce price war, prompting government concern over deflationary pressures and long-term sustainability. In response, President Xi Jinping has launched an "anti-involution" campaign to curb these practices.

Beijing

China is confronting widespread price wars across industries, with aggressive discounting seen in sectors like food delivery and electric vehicles. This phenomenon, known as 'involution' or 'neijuan', refers to cutthroat competition that leads to diminishing returns for businesses. In response, the government has initiated an 'anti-involution' campaign, with President Xi Jinping calling for an end to irrational price competition. Authorities have summoned company leaders to encourage self-regulation and curb practices that have squeezed profits and contributed to prolonged factory deflation. 

The challenge is particularly acute among private firms, where managing competition is more complex than in state-owned enterprises. While similar efforts in the past helped stabilize certain industries, analysts suggest that current reforms will likely be gradual to avoid job losses and broader economic disruption. The government aims to boost domestic consumption and reflate the economy, but the process is expected to take time.

What is China's 'anti-involution' campaign?

It's vouchers galore on China's food delivery platforms, intense promotions leaving customers spoiled for choice, milk tea going practically free. I drank four to five cups of milk tea in a day. The vouchers for first-time buyers are too good. It's a waste not to use them. But I overused them and drank until I ended up in the hospital. The race to the bottom has become a national obsession and a policy problem. In July, China's Politburo vowed to curb what it calls irrational price competition. The directive coming right from the very top, President Xi himself calling for an end to involution or neijuan in Chinese, literally meaning rolling inwards, a phenomenon where vicious competition leads to diminishing returns. It was used back in 2020 to describe mindless workplace competition. Now it's permeating sectors from electric vehicles to e-commerce. In June, officials summoned the heads of BYD and other major EV makers, warning them to self-regulate after BYD launched a new price war with discounts as steep as 34%. In July, food delivery giants were summoned after JD.com started a price war with its entry into a space once dominated by Meituan and Alamar. The anti-involution campaign comes as cutthroat competition has squeezed industrial profits. Factory deflation has lasted 34 months, while the consumer price index hovers around zero. The need to reflate the economy and expand domestic consumption increasingly urgent under the threat of more tariffs. But China has done this before. A decade ago, capacity cuts in steel and coal sectors helped end a 54-month stretch of factory deflation. But this time, the job is much harder. The most severe price wars are dominated by private firms. Managing private companies to stop them from over-competing against each other is a much more tough job and much different task compared to control SOEs to cut capacity. Anti-involution will not work in the next probably four to eight months. But over time, the capital market will pick up the positive sentiment. And in a year or two, the real economy will respond. So I'm fairly positive over the impact of this in the long run. As China charges priorities for the next five years in the upcoming October plenum, Xi faces a challenge. How to coax CEOs to cut production, consumers to accept higher prices, and local officials not to compete for new investments crowding into the same sectors. Analysts say any supply-side reforms will likely be gradual to avoid job losses and painful repercussions for the economy. Lin Minloh, Bloomberg News, Hong Kong.

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