China's de-involution: Economic logic, practical challenges, and global implications

Editor's note: Ge Lin is a journalist and an economic commentator with CGTN. The article reflects the author's opinions and not necessarily the views of CGTN.

In recent months, Chinese policy discourse has taken a new turn with a growing emphasis on "de-involution" – a term rooted in domestic internet slang but has now elevated to the level of national industrial strategy. At its core, "involution" refers to self-reinforcing cycles of destructive competition, especially among private enterprises. The de-involution campaign, then, is a policy-level response to such dynamics.

While the idea may sound abstract, its logic can be precisely framed through economic theory – particularly game theory – and its stakes are far from limited to the Chinese market. This piece outlines three interrelated dimensions of the anti-involution campaign: its theoretical foundation, its implementation challenges, and its international relevance.

Involution as a coordination failure: Game theory and the innovation imperative

China's "involution" is best understood as a classic case of non-cooperative game dynamics, where individual firms – in pursuit of survival or marginal advantage – engage in intense competition that ultimately harms all players. The most intuitive manifestation is the price war: As each firm lowers its price to capture market share, others follow suit, leading to compressed margins, reduced profits, and ultimately, an industry-wide erosion of capacity to invest in future development.

From a game-theory perspective, this mirrors the Prisoner's Dilemma. Each player knows that cooperation – such as maintaining fair pricing and focusing on quality – leads to better collective outcomes. Yet in the absence of coordination mechanisms, the rational individual choice is to undercut others. The equilibrium is stable but reflects a distorted notion of efficiency – a classic Nash equilibrium in a race to the bottom.

China's de-involution campaign seeks to break this equilibrium through policy signaling, regulatory guidance, and selective incentives. It does not call for rigid price controls, but rather for restructuring the expectations and behaviors that reinforce short-termism.

Importantly, this shift aims to preserve the diversity and long-term vitality of China's innovation ecosystem. When relentless price wars drive out all but the most cost-efficient giants, premature market concentration follows. With fewer players, the range of innovation directions narrows, and systemic resilience declines. Innovation – especially disruptive innovation – often emerges not from incumbents, but from mid-sized firms willing to experiment.

By halting involution, China is not protecting mediocrity but preserving optionality. A market where multiple firms can survive, invest in research and development, and pursue differentiated paths fosters the possibility of breakthrough innovation. In this regard, de-involution serves as a foundational policy to safeguard China's future technological competitiveness.

From state firms to private markets: The challenge of implementation

The call to "de-involute" industries, however, is easier said than done. Unlike China's previous supply-side structural reform, which primarily targeted state-owned enterprises, the current push largely involves private enterprises competing fiercely in open markets. This shift from state-led to market-driven dynamics has dramatically increased the complexity of policy execution.

Because of this structural shift, top-down administrative directives and output quotas – common in China's state-owned sector reforms – are no longer easily applicable. Instead, policy design must turn to incentive-based coordination, industry association self-discipline, and legal-institutional frameworks that can influence private behavior without coercion.

This evolving reality has prompted both domestic researchers and policy practitioners to look outward, exploring overseas institutional experiences that might offer adaptable insights for China's innovation-driven private economy. Through such comparative efforts, several core themes have emerged that merit closer attention.

Firstly, at the regulatory level: Raising industry-wide standards through rule-based pressure. Instead of directly mandating production cuts, governments can design policies that increase compliance costs or upgrade thresholds – thereby forcing low-end producers, especially those relying purely on cost-cutting, to either transform or exit. For instance, the EU's Carbon Border Adjustment Mechanism does not merely reflect environmental concerns; it effectively raises the baseline for participation in global trade, indirectly compelling firms to improve their production standards. In this way, higher standards become a tool to reduce low-end overcapacity and curb destructive price competition.

Secondly, at the ecosystem level: Building mesh-like inter-firm networks. Rather than viewing large firms and small and medium-sized enterprises (SMEs) as rivals, policy can promote industrial symbiosis – through mechanisms such as mutual equity holdings, profit-sharing arrangements, and long-term supply contracts – that lock participants into stable, collaborative relationships. Japanese automaker Toyota, for example, has offered a useful model: It not only guarantees a minimum profitability margin (often around 8 percent) for its parts suppliers, but also engages in cross-shareholding with key partners. This interdependence stabilizes expectations, aligns incentives, and breaks the transmission mechanism of price wars across the value chain.

Thirdly, at the SME finance level: Enabling non-capitalized survival. A deeper source of destructive competition lies in the pressure exerted by equity markets – where firms are often compelled to pursue aggressive growth trajectories. In contrast, many German SMEs, for instance, deliberately remain private, relying on bank financing and retained earnings. This shields them from the imperative to scale rapidly or maximize investor returns, and instead allows them to prioritize technological specialization and stable employment.

Fourthly, at the firm strategy level: Defeating price competition through differentiation. When homogeneity leads to price-cutting, the answer is not necessarily greater scale, but meaningful divergence. A compelling example comes from Japanese manufacturing. There, firms operate under stable employment and seniority-based pay systems which foster long-term employee loyalty. This stability enables companies to focus on highly specialized, niche technologies – building "one-meter-wide, kilometer-deep" expertise that shields them from direct price comparison.

Taken together, these international practices underscore a crucial insight: De-involution succeeds where institutions recalibrate incentives and expectations at scale. The goal is to redirect entrepreneurial energy away from zero-sum price battles and toward higher-value, more sustainable forms of innovation. For China, the challenge is not to transplant foreign models wholesale, but to adapt their underlying logic to domestic institutions.

Responding to international concern: Quality upgrade as economic diplomacy

While involution stems from domestic dynamics, China's de-involution push also carries important international signal value. For years, the country has been seen – especially in developed economies – as an exporter of ultra-low-cost goods, with its manufacturing advantage often attributed to cost containment.

In this context, the de-involution agenda can be understood as a subtle yet strategic response to global concerns. Domestically, it echoes China's pursuit of "high-quality development." Internationally, it helps recast China's industrial image – not as a provider of affordable goods, but as a generator of trustworthy and durable products.

This shift signals China's effort to align domestic reforms with international expectations, sending a clear message that it aims not to dominate markets through cost alone but to compete in a responsible and sustainable manner.

A new phase in China's pursuit of high-quality development

China's campaign against involution marks a new phase in its pursuit of high-quality development. While the broader goal of improving development quality has been emphasized for years, the current policy shift signals a more targeted approach – particularly within the private sector and fast-growing industries. Future progress will depend on the specific measures China ultimately adopts to implement this agenda.