Across the country, industries are locked in relentless price wars, triggered not by foreign pressure but by domestic overproduction. A new product enters the market, and Chinese firms flood the space, producing at scale, slashing prices, and burning through margins. What begins as innovation quickly turns into a self-defeating spiral—a cycle known in China as involution.
The term, borrowed from sociology, has taken on a new life in China’s economic policy circles. Rather than celebrating aggressive cost-cutting and market share battles, Beijing is now seeking to contain them. President Xi Jinping has pledged to combat “low-price and disorderly competition,” calling out local governments and companies for subsidizing unprofitable operations and accelerating industrial glut.
Nowhere is this more evident than in the electric vehicle sector. BYD, China’s largest EV maker, recently slashed prices on nearly two dozen models. The China Association of Automobile Manufacturers issued a rare rebuke, warning against a destructive race to the bottom. Other firms, like Xpeng, say they have little choice but to keep prices low, even as consumer demand slows and subsidies disappear.
China’s Producer Price Index, a measure of factory gate prices, fell in June by its sharpest margin in nearly two years. The broader GDP deflator has declined for eight straight quarters—a record-setting deflationary streak. These price drops are not just indicators of falling costs; they are signs of economic strain and weak demand.
As exports to the United States become less viable—partly due to tariffs under President Trump—Chinese firms are turning to domestic and alternative foreign markets. But the shift has intensified competition across the board. Industries from solar panels to strollers to fishing rods are all facing the same fate: overcapacity, thinning profits, and government-backed survivors chasing survival over sustainability.
At a national level, Chinese leaders are no longer encouraging provinces to charge headlong into trendy industries like artificial intelligence or green energy. The message has changed: bigger is not always better, and more players in the same field may hurt more than help.
In Part 2, we explore how this involution is playing out on the ground—in the towns, industrial parks, and factories of Hebei Province, where price slashing has become a way of life, and survival often means selling at a loss.