Why China's tough rivalry requires the world's attention

[WORLD] When Joseph Schumpeter popularized the idea of creative destruction, he celebrated the dynamism that competition brings to economies. But in China today, competition has turned into a relentless grind — one that destroys value without creating enough new innovation or long-term gains. On Monday, People’s Daily, the Chinese Communist Party’s flagship newspaper, warned against neijuan, or involution — a term describing a self-defeating loop of escalating efforts with diminishing returns. This rare, high-level acknowledgment points to a deeper anxiety: that China’s domestic industries are cannibalizing themselves in ways that hurt not just local players, but also China’s standing in global markets.

Excessive Price Wars Are a Symptom, Not a Strategy

The recent aggressive price cuts by Chinese electric vehicle giant BYD, which slashed prices on 22 models (including its Seagull to just US$7,750), highlight how domestic players are locked in a cutthroat race to undercut one another. While consumers might temporarily benefit, such price wars erode profit margins, weaken brand value, and limit the funds available for sustained innovation. Other carmakers are now being forced to follow BYD’s lead just to stay in the game. This dynamic extends beyond EVs to sectors like solar panels, batteries, and consumer electronics, where Chinese firms engage in relentless underpricing. In the long term, this self-imposed race to the bottom threatens the financial health of entire industries.

Involution Risks Undermining China’s Global Playbook

China’s competitive overdrive also has external consequences. Global markets are already wary of Chinese overcapacity, with U.S. and European leaders accusing Beijing of dumping cheap goods abroad. As Chinese firms slash domestic prices to survive, they often look to offload surplus products internationally, stoking trade tensions and risking tariffs or sanctions. Meanwhile, if companies lack the capital to invest in advanced R&D, China’s ambitions to dominate next-generation technologies — from AI to biotech — could falter. Without strategic recalibration, China risks locking itself into a low-margin, volume-driven model at the expense of the quality and innovation edge it aspires to build.

Beijing’s Policy Dilemma: Managing Competition Without Killing Dynamism

The Chinese government now faces a delicate balancing act. On the one hand, it wants to encourage market dynamism and let private players compete; on the other, it recognizes that too much internal pressure leads to wasteful, zero-sum battles. Policymakers will likely intervene with sector-specific guidance, possibly using tools like price floors, innovation subsidies, or even corporate restructuring plans. But tightening control risks stifling entrepreneurial initiative, while loosening oversight could deepen the destructive cycle. China’s challenge is to transition from a quantity-driven growth model to one centered on quality, differentiation, and sustainable innovation.

What We Think

China’s public acknowledgment of involution is a striking admission that sheer scale and speed no longer guarantee long-term success. In our view, unless Beijing recalibrates its industrial policies and incentivizes firms to prioritize innovation over price wars, the country’s much-vaunted “economic miracle” may plateau. The global implications are significant: as China exports its domestic competitive pressures outward, trade partners may respond with defensive measures, reshaping global supply chains. More importantly, China’s own long-term competitiveness depends on escaping the involution trap — moving beyond just doing more, to doing better. The next phase of China’s economic story will hinge on whether it can break this cycle before it erodes the very gains it seeks to protect.