Economic Watch: China moves to foster healthy market driven by innovation, not price wars

BEIJING, July 23 (Xinhua) -- China is strengthening oversight of what it describes as involution-style competition, aiming to foster a market that rewards quality and innovation while promoting healthier, more sustainable industrial development.

Authorities have recently taken steps to regulate the new energy vehicle (NEV) sector and food delivery platforms, where aggressive price wars dominated the market.

An array of measures from product pricing monitoring to quality inspections were announced at a meeting on market competition of the NEV sector held by the Ministry of Industry and Information Technology, the National Development and Reform Commission, and the State Administration for Market Regulation (SAMR).

Meanwhile, the SAMR has urged three major players in the food delivery market to revise their promotional activities and adopt a rational approach to competition. This follows a fierce discount competition where platforms attracted customers with massive and unsustainable "free meal" subsidies.

These moves reflect the country's broader campaign to address "involution," a concept gaining traction in recent years to describe cutthroat competition, where companies, vying for market share, engage in aggressive price cuts but only get trapped in a cycle of diminishing returns.

The 2025 government work report released in March vowed to "take comprehensive steps to address rat race competition." The focus was cemented at a meeting of the Central Commission for Financial and Economic Affairs on July 1, as policymakers pledged to tackle disorderly low-price competition, guide enterprises to improve product quality, and facilitate the orderly exit of outdated production capacities.

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."

In the NEV sector for instance, manufacturers have been engaged in relentless price undercutting in an effort to prop up sales, resulting in declining profitability and stoking concerns about deteriorating quality. In early 2025, over 60 car models slashed prices in China. Industry-wide net margins fell to 4.3 percent last year, according to the China Automobile Dealers Association.

The race to the bottom also strained supply chains, said Liu Zhibiao, an economist at Nanjing University. As downstream industry giants wage price wars, they often push costs and risks upstream, such as delaying payments to parts suppliers or forcing last-minute price cuts -- practices that imperil small and medium-sized enterprises.

China's parts and components industry, taking the major brunt of the clash of titans, saw its profit margin decline by 0.3 percentage points year on year in 2024, with liabilities up by 10.6 percent.

More importantly, analysts warned that the involution-triggered profit slip will lead to trimmed R&D budgets, sacrificing the long-term development potential not just for individual companies, but for the entire sector as a whole.

"If R&D is like building internal strength, then a price war drains that strength. If you cut R&D spending just to win a price war, you might gain the market today but lose the future," said Wang Xia, head of the automotive sub-council of the China Council for the Promotion of International Trade.

China's anti-involution campaign has won broad industry backing. Many automakers have pulled out of the pricing battle and promised to cap supplier payment terms at 60 days. The national cement business group rolled out anti-cutthroat competition guidelines, and 33 construction enterprises jointly launched an industry-wide pledge to reject involution.

The long-term influence could be transformative. With benign competition back on track, a healthier business environment will emerge, driving innovation and facilitating industrial upgrading.

By moving away from price wars and toward value-based competition, companies can focus more on enhancing innovation and improving product quality, according to a report by China International Capital Corporation, a leading investment bank, noting that this shift will ensure businesses continuously climb the technological value chain.

Tackling involution in essence is addressing growing pains in economic restructuring, analysts said, stressing that by doing so, China will be able to accelerate building a unified national market, foster policy and market ecosystems conducive to new quality productive forces, and cultivate new, sustainable growth drivers. ■