How to deal with involution in China

THE term “involution” or curling inward became a common slang in China in the 2020s, to reflect excessive competition in social and economic life, where students, workers and even business leaders felt overworked, stressed and being unable to get out of huge external and internal stresses.

The term was coined by sociologists and anthropologists to describe conditions in rural societies whereby increasing labour inputs did not seem to yield tangible benefits.

The term surfaced in Chinese social media in 2020, becoming one of the top 10 buzzwords, particularly relating to students who are pushed by eager parents to spend more time on preparing for competitive examinations.

Gig workers who operate 996 (9am to 9pm six days a week) felt the intense pressure of deliveries on time whilst not appearing to get more income also used this term to explain their dilemma.

The Chinese capacity to work hard and longer hours than everybody else has been attributed to the nation’s resurgence in competitiveness in export industries, notably in electronics, consumer products, electric vehicles, batteries and the like.

At roughly the same time, the slang phrase “Tang Ping” or “Lying Flat” emerged in social media amongst the youth, signalling a passive resistance movement to 996 or even worse 007 (midnight to midnight, seven days a week) working conditions.

After the Covid-19 pandemic, when China emerged even more competitive globally in manufacturing, the term involution became associated with capacity overproduction, price wars, and cut-throat competition.

Due to China’s unique characteristic of encouraging internal competition between cities and provinces to drive efficiency and productivity, including using innovation and raising product quality, involution has led to deflationary pressures, profit erosion and a race to the bottom in product pricing.

Whilst this is good for consumers in terms of product choice and pricing, there is concern over excessive investments in industries with overcapacity.

Thus, a degree of involution through exports could lead to importing countries complaining of excessive competition, product dumping and protectionist measures, such as tariffs and import quotas.

Even trading partners such as Asean, which has seen trade with China growing 17-fold between 2001 to 2022, is beginning to worry about rapid Chinese imports eroding small and medium manufacturers which cannot compete in terms of price and quality.

We can attribute the intense growth in internal domestic competition in China to several factors.

First, Gavekal economist Louis Vincent Gave has argued convincingly that after the real estate price decline, the financial regulatory shift away from real estate financing to banks funding domestic manufacturing and service industries created growth in manufacturing jobs and investment, especially in research and development and robotics, that uplifted productivity and saved labour.

One in two new industrial robots today is installed in China. That has compensated for the decline in the labour force due to decline in the birth rate.

Second, local governments also encouraged manufacturing to create jobs as construction in real estate and infrastructure slowed.

Some of the wealthier local governments created investment funds to take equity position in the high-tech sectors. Third, as domestic competition intensified, China manufacturers saw scale in exports to maintain margins and seek new profit centres.

Fourth, as the United States and her allies applied sanctions on Chinese tech companies and later punitive tariffs, Chinese manufacturers doubled down on exports and upgrading product quality and supply chains to become resilient to such sanctions.

Finally, the more domestic consumption got hurt by households feeling the pressure of decline in real estate prices and thus saving more, the more domestic firms try to compete by cutting prices, especially using eCommerce platforms.

In small economies, such growth in competition could be easily absorbed through global demand. For a manufacturing powerhouse like China, the largest manufacturer and trading nation and second largest economy, this would inevitably lead to pressures being felt by importing countries.

The Chinese authorities are providing anti-involution measures in several ways.

These include promoting domestic consumption and increasing social security.

In addition, the 15th Five-Year Plan (2026 to 2030) emphasises supply-side reforms, industrial modernisation and technological innovation. The plan particularly focuses on shifting from low-cost, quantity production to quality advanced manufacturing, innovation-led growth, and sustainable development.

In specific industries, the government will set lower output growth targets to prevent overcapacity by consolidating industries, rationalise production avoid ruthless, destructive price cutting. Being such a large country, changes to these structural issues will clearly take time.

Even though China’s trade surplus hit US$1 trillion in the first 11 months of this year, the fact that foreign exchange reserves remained around US$3.2 trillion to US$43.3 trillion meant that there were compensating capital outflows that is helping global liquidity and rebalancing.

Involution is a structural phenomenon that has both domestic and global implications.

If not handled properly, geopolitical and regional tensions could result in more protectionism and trade fragmentation.

That requires mutual understanding and co-operaton to maintain peace and prosperity, exactly the sentiments of this Christmas season.