编者按：本文发表于南华早报（South China Morning Post），南华早报是亚洲最具影响力的英文媒体之一。在本文《Anti-Involution Helps China Escape Low-Price Trap》（中文标题：反内卷政策帮助中国经济走出低价迷途）中，js3333官方网站研究院副院长、首席宏观研究员张林指出，中国经济并没有出现所谓“债务-通缩”危机，制造业领域的投资高增长以及较强的投融资需求，正在推动实体经济和金融体系正向循环。但是，中国强大的制造业能力和效率的确带来了供需不均衡，以及低价竞争的结构性问题，而持续全面的反内卷政策将帮助中国经济更好的应对低价风险，6月以来中国权益市场的高增长也受益于反内卷行情。

Anti-Involution Helps China Escape Low-Price Trap

The main challenge facing China’s economy is not a deflationary spiral, but a low-price trap. This may sound unusual, since low prices are typically a key feature of deflation.

Classic deflation often starts with wealth evaporation and credit contraction, it leads to collapsing demand: households stop consuming, firms halt investment, consumer and producer prices drop down. This process slows economic activity, amplifies debt burdens due to falling asset values, and crushes both money supply and financing demand, creating a vicious cycle between the financial system and the real economy.

If deflation strikes sharply, it can lead to severe economic adjustments, like those in the U.S. in 1929 or 2008. If it occurs gradually, it may result in a long-term balance sheet recession, as seen in Japan in the 1990s.

In China, as of July this year, CPI growth has hovered near zero for 29 consecutive months, while PPI has been negativing for 33 months. Meanwhile, asset values, financing demand, and debt leverage in the real estate market are also contracting significantly—these signs that seem to point toward deflation.

However, several aspects of China’s economy look very different from deflation.

For one, manufacturing investment remains strong: it grew 9.2% year-on-year in 2024, and although the growth rate slowed to 6.2% from January to July this year, it is still twice the level of 2019. Private investment accounts for about 90% of manufacturing investment, and it grew 6.7% in the first half of this year, indicating that the strength in manufacturing isn’t driven by state-owned enterprises.

Moreover, money supply and financing demand remain robust. As of July, China’s total social financing stock grew 9% year-on-year, and M2 grew 8.8%—compared to around 1% in Japan. While household mortgages and small business loans have indeed deleveraged, medium-to long-term corporate loans remain at historically high levels. Manufacturing firms have also significantly increased their debt-to-asset ratios.

In short, private manufacturers’ investment and borrowing have prevented a financial-real economy doom loop. Sectors like electrical machinery, equipment manufacturing, and new energy have seen particularly strong investment demand, supported in part by subsidies from special government bond programs, which covering products like Apple phones and Tesla EVs.

The approach of China's subsidies differs from that of the United States. For instance, during the pandemic, the U.S. provided extensive cash subsidies to households to stabilize consumption, whereas Beijing's strategy focused on stabilizing firm’s production. 

It’s not hard to understand Beijing’s ideology: cash subsidies will create fiscal pressure and debt burdens without tax return, most of the residents choose to save the cash or pay down debts rather than spending. But, as long as companies continued operating, employment and consumption would remain stable. 

Even though many scholars proposed large-scale cash subsidy programs, such suggestions were not adopted.

Beijing is issuing special government bonds to fund equipment upgrades and consumer trade-in programs. This ensures that household consumption can directly boost corporate production and efficiency.

China's GDP calculation primarily follows the production-based approach, which involves measuring the value-added of various industrial sectors. By consistently stabilizing corporate production, China has maintained its GDP growth at around 5%. 

For an economy growing at approximately 5%, it is hard to characterize it as being in a state of deflation. If the United States or Europe were to achieve 5% economic growth, it would likely be perceived as economic overheating rather than the opposite.

Thus, labeling China’s economy as stuck in a “debt-deflation spiral” may be misleading, especially from the corporate sector’s perspective. There isn’t a collapse in demand from the real economy to the financial system.

But China’s economy was trapped in something else: relentless price competition born of extraordinary industrial strength.

In recent years, fiscal policies supporting equipment upgrades and local governments’ push for emerging sector investments, have further boosted manufacturing efficiency, in sectors like consumer electronics, new energy, and shipbuilding, China’s manufacturing capacity and competitiveness are global leading. 

But when this elevated production efficiency meets household deleveraging, widespread low-price competition emerges—a phenomenon known in China as “involution”.

Involution is essentially a low-price trap: companies engage in cutthroat price competition, squeezing profit margins. Thin profits, in turn, push firms to expand production and sales volume further for more profits. At the same time, limited profits make it hard to raise wages, which further weakening demand.

In exports, good quality, low price, and high value are no longer advantages, it worsens the terms of trade (TOT), and triggers pushback from importing countries. The export price index of products such as pharmaceutical manufacturing, electrical machinery, apparel, and footwear is currently at the first quartile of historical data. What unnerves U.S. consumers is not that Chinese goods are expensive and inferior, but that they are cheap and excellent. 

Although the low-price trap and deflationary spiral both result in low prices, their causes and mechanisms differ. 

China’s current anti-involution policies and efforts to build a unified national market—which aims to curb redundant regional investment—can help mitigate the harm of the low-price trap. The key is to ensure that, after market rebalancing, price improvements translate into higher incomes.

Moreover, anti-involution will benefit China’s high-tech and emerging industries, for the market concentration increase and profit margins improvement. It will help China’s economy manage a transition from old to new economic drivers, balance sheet recession in traditional sectors like real estate might be offset by balance sheet expansion in advanced manufacturing and services.

This logic may already be understood and priced in by the market—partly explaining the strong performance of China’s equity market since June.

The views expressed are his own.