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| (Graphic: XJTLU) |
When the term “involution” was first introduced to the field of China studies by scholars Philip Huang and Prasenjit Duara, they respectively used the term to explain the dominance of family farming and describe the tax collection practices of rural governments, which in turn spurred excess, extreme, and potentially inefficient competition in parts of the country.
Since the late 2010s, the Chinese term for “involution” – neijuan – has taken off in online discourses becoming a go-to description of the vicious “race to the bottom” underpinning the job market. As an educator working with many bright Chinese youth, I hear my fair share of stories about how neijuan “works,” or not. Fresh college graduates anxious about their career prospects were resigned to viewing their employment odds through the lenses of a “dead loop in which people constantly force[d] themselves,” as renowned Xiang Biao observed.
Four years on, neijuan has found itself into official state discourse. Last December, the executive deputy director of the Central Financial and Economic Affairs Commission's general office Han Wenxiu flagged in People's Daily that “intensified involutionary competition in certain industries has driven down product prices, reducing profitability and putting some sectors in distress.”
In May this year, the State Administration for Market Regulation chief Luo Wen vowed to crack down on involution competition practices amongst food-delivery companies – which had experienced a significant reduction in their profit margins in recent months. Indeed, the disappointing earnings posted by select tech giants in August spoke to the urgency of remedial action.
In a meeting he chaired on July 1st, Chinese President Xi Jinping did not mince his words in criticising “disorderly low-price competition.” The ubiquity of companies competing relentlessly with one another in bolstering product quality whilst reducing margins, has culminated in two deeply deleterious consequences: firstly, pressures exerting serious drag on price growth, thereby suppressing domestic consumption, to the point where deflation is recognised as a distinct risk by the leadership; secondly, an over-concentration of resources in sectors where diminishing returns are increasingly apparent.
Deflation, diminishing returns, and – perhaps most concerningly – the routing of private sector and entrepreneurial confidence in virtue of the downright unsustainability of this modus operandi, have been cited by many China observers to be the motivation for the ongoing discussions over amending the Pricing Law, to include firmer prescriptions against free giveaway-style cash burns, and the introduction of tougher penalties for violations.
If one firm opts to cut its prices whilst offering comparable (if not better-in-quality) products, all other firms must follow suit, lest they cede market share to their competitor. Only a vocal and visible enforcer – in the form of the government – can put an end to such an unproductive spiral.
What Has “Anti-Involution” Got to Do with Foreign Policy?
It would be tempting, but erroneous, to view anti-involution through purely domestic economic and industrial lenses. Indeed, a comprehensive interpretation of the recent slew of policies would behoove grappling with the significant diplomatic push and pull factors shaping the government's macroeconomic policymaking.
China's tremendous successes and apparent strengths in advanced manufacturing – especially in relation to the “New Three Things” of solar panels, electric vehicles, and lithium batteries – have spurred significant consternation amongst certain markets. Whilst consumers and households in the European Union have benefited greatly from the affordable sustainable goods supplied by China's manufacturing juggernaut, the influx of high-quality, cheap renewable energy products has drawn the ire of many long-standing national champions and competitors in the market.
Given the presently fraught state of Sino-European relations – rooted in reasons beyond the purported “excess capacity” of Chinese manufacturers, including first and foremost Russia's ongoing war in Ukraine – Beijing views industrial and trade policy as amongst the few areas in which mutually agreeable compromises can be sought. Indeed, China's olive branch in reining in such production has not gone unnoticed - EU Commission President Ursula von der Leyen masked a tepid olive branch in heavily reserved language in her July speech this year, where she acknowledged the “serious debate within China on excessive production, disorderly price undercutting”, and that Beijing “[understood] that a domestic challenge cannot be solved at the expense of others.”
Whilst refraining from aggravating the EU and other trade partners may not be at the top of the leadership's mind in its pursuing the anti-involution crackdown, it certainly has played an instrumental role in nudging the Ministry of Foreign Affairs and National Development and Reform Commission in adopting more pro-regulatory rhetoric and signals.
On a different note, state-promulgated rhetoric suggests that China is precipitously inclined to position itself as a responsible pillar in global macroeconomic governance. Indeed, the newly unveiled concept paper on the Global Governance Initiative (GGI) speaks to the state's desire to frame itself as an upholder of “sovereign equality.” Whilst the GGI remains a heavily under-developed and fledgling concept, the intention is clear – Beijing is keen on redressing the impression that China is merely a powerful, impressive, and rapidly developing country; it is also a responsible stakeholder, albeit perhaps not in the same way as former Deputy US Secretary of State Bob Zoellick envisioned it.
In this light, the growing wariness of ASEAN capitals towards the surge in low-priced Chinese exports displacing domestic products, also renders this reorientation away from involution most welcome. Whilst Southeast Asian economies have become increasingly intertwined with China's supply chains, local manufacturers are concerned about their medium- to long-term competitiveness, and their governments the prospects for employment for locals, given the pre-eminence of their Chinese counterparts, which are largely staffed by Chinese nationals.
These concerns are indubitably shared – even if to a lesser degree – by other Global South countries, including member states of important multilateral organisations that China is keen to see grow, e.g. BRICS+ and the Shanghai Cooperation Organisation (SCO). Securing greater buy-in from them would hence require the demonstration that more trade with China need not entail greater strategic import dependence – especially in this era of highly instrumentalist and mistrustful geopolitics. Chinese firms – and by extension, the Chinese state – must more proactively leave room for foreign players to grow and get into a stride domestically. Joint ventures and partnerships with more egalitarian sharing of technology and training of personnel may be most desirable as a modus operandi here.
What Does This Tell Us About Critiquing Policies of the Chinese State?
The Chinese state had not always been averse to the usage of the term “excess capacity” – indeed, the term featured prominently in the “Guiding Opinion on Eliminating Severe Excess Capacities” issued by the State Council in October 2013, which pledged significant supply-side and state-owned enterprise reforms in an “industrial upgrading campaign” that was hailed by China Daily as the government's “get[ing] tough” on the problem.
Fast forward a decade later, the Chinese state apparatus has declared that the “so-called Chinese 'overcapacity' is completely untenable”. Such indignation is in part understandable, given the significant measures undertaken by Beijing to rein in on the kinds of excess capacity that had proliferated throughout the 2010s – mid-end manufacturing for chemicals, ferrous and non-ferrous metals (e.g. steel).
Ever since the term “excess capacity” entered into the lexicon of Sino-European (and, to a lesser extent, Sino-American) relations, the term has become – in the eyes of senior Chinese leaders – synonymous with “smear[s]” directed towards China, designed to discredit the country's stellar improvements in critical industries of the future. The more the issue is raised, the less likely it is that breakthroughs and compromises can be reasonably secured on the matter, for Chinese bureaucrats will view any concession on the matter as undue capitulation, which could well prove politically costly and career-threatening, given elite directives that favour “not yielding” to the US.
On the flipside, this episode also offers two insightful lessons about the nature of policymaking in China. Firstly, there is a clear cognisance and recognition of both domestic and foreign policy rationales for particular politico-economic policies – such understanding extends from the mid-management of state-owned enterprises and regulators, all the way through to senior leaders around the Central Committee.
Secondly, rather than couching the case for economic rebalancing in morally strident and unctuous rhetoric, which some have sought to do, those advocating China's rethinking of industrial policies – to the extent it in fact occurs – should appeal to and acknowledge, perhaps behind closed doors, the interests of the Chinese state; indeed, they should proceed to explain why it is in the government's interests to crack down on “involution”. The purpose of persuasion, after all, is about appealing to – not denying – the recipient's interests.
The central government's level of responsiveness and open-mindedness to foreign entrepreneurs clearly varies over time but is in part shaped by the attitudes and rhetoric adopted by those making their case to the relevant officials.
All in all, Beijing's decision to tackle involution, if indeed maintained over time, should indeed be commended as a piece of welcome news – by both private entrepreneurs in China and the world at large.
