China: Escaping Deflation and Correcting “Involutionary Competition”

■ China's Producer Price Index (PPI) Turns Up in March, Industrial Sector Records Highest Profit Margin in About Four Years  

■ While gradually emerging from deflation, managing "involutionary competition," a side effect of industrial policies and economic structural reforms, remains a challenge. 
 
China's Producer Price Index (PPI, up 2.8% year-on-year in April) turned up in March, the first positive month since September 2022; industrial enterprise profits (March: up 15.5% year-to-date) also recorded the highest growth rate since December 2021. Although the PPI increase was mainly driven by upstream sectors such as mining and raw materials, the overall performance of the industrial sector is also improving, indicating that China is gradually emerging from deflation, and the profitability of manufacturing and other industrial sectors continues to improve. One reason for this is the "anti-innovation" policy promoted by the Chinese government since last year. 

 
In Chinese, "involution" refers to a state where excessive competition leads to the depletion of all participants, resulting in inefficient and meaningless competition. It can be understood as the "fallacy of composition" phenomenon, where competition intensifies under limited resources and opportunities. From the perspective of corporate competition, this refers to price wars in a limited market that occur below marginal cost (i.e., the total cost increase for each additional unit of goods or services sold), or excessive investment in pursuit of economies of scale, leading to vicious competition phenomena such as a decline in overall industry profitability and debt accumulation. In China, the direction of industrial development is typically determined by the central government, while local governments responsible for implementation compete for industrial subsidies and preferential policies. This makes specific sectors prone to new entrants and concentrated investment, further leading to inefficient resource allocation problems such as redundant construction. Such industrial policies have become fertile ground for "involutionary competition," particularly evident in key industries such as new energy vehicles (NEV) and solar panels in recent years. Calculating the sales profit margins of major industries based on industrial enterprise profit data shows that the profit margin of the automotive manufacturing industry, which includes new energy vehicles, peaked in 2014, while the profit margin of the electrical machinery and equipment manufacturing industry, which includes solar panels, peaked in 2016, and both have shown a continuous downward trend until 2025. According to the latest data from 2026, although the overall industrial sector's sales profit margin has improved to its highest level in four years, the profit margins of the automobile manufacturing and electrical machinery and equipment manufacturing industries have further declined compared to last year, indicating that industry competition remains fierce.  

    The Central Economic Work Conference held in December 2024 listed correcting "involutionary competition" as a key issue, and began addressing it in 2025. From an overall economic perspective, indicators such as PPI and corporate profitability are improving, indicating that excessive price competition has eased and profit margins are gradually returning to reasonable levels. Except for some sectors, the risk of China falling into a deflationary spiral has significantly decreased. However, "involutionary competition" is essentially a side effect of the government-led rapid economic structural reforms, and similar problems may arise in other key industries besides those mentioned above in the future.