The next step of "anti-involution"

This July marks the one-year anniversary of the central government's first mention of "anti-involution." From the recently held Central Financial Committee meeting to the upcoming Politburo meeting in July, "anti-involution" may have entered a new stage. From a year ago's "strengthen industry self-discipline and smooth the exit channels for backward and inefficient production capacity" to today's "focus on key difficulties and promote the orderly exit of backward production capacity," the framework for the top-level design of "anti-involution" is becoming increasingly clear. On one hand, it implicitly reflects the policy demand to move out of the "sustained low price operation," and on the other hand, it is likely to be incorporated into the strategic considerations of the 14th Five-Year Plan.

How to understand that "anti-involution" may enter a new stage? This year's mid-year economic review is particularly significant, on one hand, it is a "routine" examination by decision-makers of the problems arising in the economic operation in the first half of the year, and on the other hand, it is to better connect with the 14th Five-Year Plan. It is expected that the "14th Five-Year Plan" recommendations will be published in the second half of the year, and the strategic move of the "14th Five-Year Plan" is to strengthen the domestic large cycle, which inherently requires accelerating the construction of a unified national market. Naturally, "anti-involution" has become an important topic embedded within this.

In the past year, what are the "gains and losses" of anti-involution? The "gains" lie in that "anti-involution" has gradually stabilized at the height of top-level design, and its presence has repeatedly appeared in important national meetings (such as Politburo meetings, Central Economic Work Conferences, the Two Sessions, Financial Committee meetings, etc.). "Anti-involution" is very likely to become one of the important main lines during the "14th Five-Year Plan" period, in order to better connect with "strengthening the domestic large cycle."

The "loss" lies in that the problems of "involutionary" competition still need to be further resolved. On one hand, the industrial capacity utilization rate has not escaped the state of low operation, experiencing a significant decline in the first quarter of this year. In the context of "oversupply" of industrial products (specifically manifested as the growth rate of industrial added value and capital expenditure of industrial enterprises being higher than their profit growth rate for some time), the year-on-year decline of PPI has further deepened. On the other hand, "involutionary" competition has had a negative impact on the operational efficiency of enterprises, with the operating profit margin of industrial enterprises running at a low level, further dropping to 5.3% in May this year.

According to the latest requirements from the Financial Committee meeting, what key difficulties does the current "anti-involution" need to focus on? The focus is on deeply governing the supply-demand imbalance issues at the macroeconomic level, while the difficulties lie in the fields mentioned by officials, such as new energy vehicles, photovoltaic components, energy storage systems, and e-commerce platforms.

Whether it is from the subtle insights gained from important leadership statements and public documents, or by examining indicators such as capacity utilization rates, it can be observed that the current "problems" in the manufacturing sector are relatively more prominent, particularly in the sub-industries of electrical machinery, computer communications, and automobiles, which correspond to the areas of focus highlighted by the authorities. It is expected that the upcoming "anti-involution" efforts will first target these key industries.

Looking ahead, how will the next steps of "anti-involution" be advanced? Currently, "anti-involution" relies more on industry self-regulation mechanisms, but progress may be relatively slow. As early as March this year, the Director of the National Development and Reform Commission proposed to "issue specific plans to resolve structural contradictions in key industries by sector." We anticipate that after the policy orientation set at the Politburo meeting in July, the National Development and Reform Commission may lead the way, primarily through a "ministry-led, industry self-regulation" approach to deeply govern industry "involution."

Referring to the experiences during the "supply-side reform" period, key industries have introduced quantitative "KPIs" for capacity reduction. For example, starting in 2016, the central government adopted administrative measures to set specific targets for reducing capacity in industries such as steel and coal. If capacity "clearing" is guided by environmental measures and market mechanisms, quantitative targets such as "controlling output" or raising energy consumption standards will also be proposed. In hindsight, fields represented by coal mining and non-ferrous processing have achieved good capacity reduction results after being "ministry-led."

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