China's "Anti-Involution" Campaign: Global Implications

Slashing excessive investment seems to be easier than ramping up domestic consumption. Net exports, supported by FX management, seem to be making up the difference.

China’s economy has slowed sharply in 2025 as domestic investment stagnates and consumer spending remains persistently weak, as it has ever since the imposition of “Covid Zero”.

The investment slowdown is a recent choice, and while the motivations for it are understandable, the danger—for China and for the world as a whole—is that it is much easier for the party-state to cut excessive spending in one part of the economy than it is to raise spending where it is most needed by enough to make up the difference.

So far, the impact of the domestic slowdown has been partly offset by soaring net exports. In 2024 the increase in China’s trade surplus contributed more to the reported growth rate than in any year since 1997¹. So far in 2025, the dollar value of China’s goods exports is rising about 6% a year, which is about the same as the full-year growth rate in 2024. But unlike last year, when spending on imports rose by 2.5% in January-August, or by 1.1% for the full year, so far in 2025, the dollar value of Chinese imports is down by 2.2%. China’s internal problems are therefore being dumped on the rest of the world. Businesses and workers elsewhere are earning less income because spending in China is too low.

That is a choice, and Chinese policymakers seem to be deliberately shifting at least some of the cost of that spending shortfall abroad through currency intervention. The Chinese banking system has increased its net foreign asset position by $360 billion since the end of 2023, leaning against pressure for the yuan to appreciate, and thereby reducing the international spending power of Chinese consumers while making Chinese exports look cheaper in foreign markets. In the short-term, that might be helpful in moderating inflationary pressures in manufactured goods, but the longer-term implication is deeply negative.

To see why, just consider what China’s top policymakers are saying about their domestic objectives. Besides increasing consumer spending—a longstanding official priority that has not yet translated into meaningful policy action—the focus is on getting companies to stop “excessive” competition for market share by slashing prices below cost. The official view is that this behavior, which has ostensibly been encouraged by local government production subsidies and an over-eager banking sector, deprives businesses of the ability to invest in research, technological upgrading, and quality control. The feared result is less innovation and lower incomes.

But if that is a problem for Chinese businesses competing with each other, it is also, presumably, a problem for non-Chinese businesses competing with Chinese ones—especially if they lack the subsidies and other supports needed to sustain production in the face of “irrational” price competition. From this perspective, the problem currently vexing China’s officials is simply the latest manifestation of the longstanding imbalances that for decades have plagued both China’s economy, and, by extension, the rest of the world.

What follows is a closer look at the motivations for the investment crunch, the state of the Chinese consumer, and how all of this is flowing through to the Chinese financial system and the rest of the world.

“Involution” and the Implications for Investment

On July 30, 2024, the top officials of the Communist Party of China had a meeting to discuss the economy and their goals for the second half of that year. As far as I can tell, this was the first use of the term 内卷竞争, which is usually translated as “involution competition” or “involutionary competition”.² This was the context, according to Xinhua’s official summary of the meeting:

The unfavorable conditions brought about by changes in the external environment have increased. There is a lack of effective domestic demand, economic growth shows signs of disparities, and there are still risks and hidden dangers in key areas, and difficulties in the transformation from old growth drivers to new ones…It is a must to reinforce industry self-discipline to prevent vicious “involution” competition. Market competition mechanism must be strengthened to ensure smooth channels for the exit of outdated and inefficient production capacities.

That was not particularly detailed, so a few days later, China Daily published an unsigned editorial explaining the problem, although it was vaguer on what needed to be done:

Such competition does not result in growth in productivity or a more advanced economic model…In the absence of innovation and increasingly serious product homogeneity, if enterprises only have the lowest price card to play, it is not conducive to the long-term development of the industry. Fundamentally, the reason why the “involutionary” competition is intensifying in some industries is because the cake is limited.

If the market demand lacks growth and there are not many options left for enterprises, then it is highly likely that they will turn to vicious competition at a low level…It is innovation that makes the pie bigger. How to more reasonably balance the allocation of factor resource endowments in terms of market access, factor acquisition, government procurement, bidding, rewards and subsidies, how to allow market players to let go more calmly, and how to avoid the industry from passively falling into the vicious cycle of the bad driving out the good are all important issues related to building an innovation ecosystem.

Not much more came of this until December 2024, when the party held its Central Economic Work Conference. While the official readout from Xinhua does not use the term “involution”, it does mention that “the meeting also underscored addressing rat-race irrational competition and regulating behaviors of local governments and enterprises.” Fixing this was considered necessary for “the development of new quality productive forces through scientific and technological innovation”. Then in March, the government published its 2025 work report, which mentioned the need for “comprehensive steps to address rat race competition” as part of developing a “unified national market”.

Over the past few months, the rhetoric has ratcheted up, with articles in China’s flagship news organs highlighting the problems with “involution” across a range of sectors from auto manufacturing to food delivery to banking. These articles have provided more of a rationale for the government’s concerns, such as the fear that “disorderly price cuts undermine research and development investment, erode product and service quality, and may even lead to safety issues that harm consumer rights.” I also found this framing helpful for understanding the party-state’s position:

Unlike healthy competition that drives innovation and efficiency, involution leads to nowhere and erodes industry health, analysts said. Mao Zhenhua, an economics professor of Renmin University of China, said such vicious competition is doing real damage to domestic industries. “It has driven down commodity prices, squeezing corporate profits and ultimately depressing household wages and consumption power.”

Besides telling companies to stop, the solution seems to be to “facilitate the orderly exit of outdated production capacities.” That can be interpreted in multiple ways, but the practical impact seems to be massive cuts to investment spending across the economy.

So far in 2025, total fixed asset investment (excluding rural areas) is just 0.5% higher than it was in January-August 2024. That is meaningfully slower than the full-year growth rate of fixed asset investment growth in 2024 (3.2%) or 2023 (3.0%), and much slower than the 5.4% growth recorded in 2019, the last full year before the pandemic. While it would be easy to pin this deceleration on the collapse in the housing market that began in mid-2021—growth swung from +10% in 2019 to negative 10% in 2022, 2023, and 2024—that is not the main explanation for what has happened in 2025, even if the pace of the real estate contraction has picked up to 13% so far this year.