“Involution” is the latest buzzword in commentary on China’s economy. It refers to excessive and self-defeating competition among Chinese companies for limited resources and opportunities. This has fueled overproduction, price wars, and stubborn deflation, extending the longest such spell since the 1990s. In July 2025, President Xi elevated the issue at the Central Financial and Economic Affairs Commission (CFEAC), marking “anti-involution” as a national priority. Since then, Beijing has introduced more than 50 measures across industries, from solar and EV batteries to cement and e-commerce, to curb excessive competition and encourage more rational supply discipline. The key question is whether this campaign can improve profits and bolster China’s growth.
There are reasons to be optimistic. A recent Goldman Sachs report estimates that every 1% rise in producer prices could lift profits by 2%. Additionally, in industries most affected by involution, normalized margins could drive profit growth by 53% by 2027 and contribute up to 14% to overall market earnings. Unlike past overcapacity crackdowns, today’s campaign benefits from stronger political backing, more precise cross-ministry coordination, and a focus on strategic sectors, increasing the likelihood of lasting impact. Recent market moves have been encouraging, with ‘anti-involution’ sectors, such as solar and steel, outperforming the benchmark MSCI China Index since July.
Despite initial successes, further measures are necessary for these reforms to reach their full potential. The 2016-2018 campaign was effective because supply cuts were paired with strong demand stimulus in housing and infrastructure. Today’s measures focus mainly on supply, but muted household confidence, subdued property demand, and 34 months of falling producer prices limit their effectiveness. Additional demand-side support would strengthen the impact of anti-involution, and policymakers’ clear commitment to addressing structural inefficiencies suggests this remains a possibility.
In conclusion, China’s anti-involution drive represents an important step toward improved profitability and a more stable price environment. While demand-side support will remain necessary, the campaign addresses one of the biggest drags on China’s earnings cycle by reducing excess supply and promoting rational competition. With valuations still undemanding (forward P/E of MSCI China is 13.5x, vs 24.4x for S&P 500) and room for more stimulus measures, the case for maintaining an overweight allocation to China remains intact.
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