China Moves To Stop Price Wars In 'Anti-Involution' Push

In the first five months of this year, company profits showed different trends in the coal mining (-50.6% year-on-year), oil and gas (-10.4%), processing of agricultural products (+38%), wine and beverage (+4.3%), textile (-1.8%), leather and fur (-1.6%), wood (-8.8%), paper (-22%), chemical raw materials (-4.7%), rubber and plastic products (+1.4%), and non-metal products (+0.6%) sectors.

However, in June, company profits fell significantly in the coal mining (-63% year-on-year), oil and gas (-17%), processing of agricultural products (-23%), wine and beverage (-21.6%), textile (-31.9%), leather and fur (-36%), wood (-17.4%), paper (-16.5%), chemical raw materials (-25.9%), rubber and plastic products (-21.4%), and non-metal products (-26.7%) sectors.

Some economists suggested that the figures for the first five months could be attributed to weak domestic consumption and a sluggish property market, while the sharp decrease in June reflected the negative impact of the US-China tariff wars on Chinese firms between April and June.

On August 1, China Shenhua Energy, the largest coal mining enterprise in China, suspended the trading of its shares ahead of a significant asset acquisition that seeks to reform China's coal industry's supply chain.

The company said it will acquire coal, pithead power generation, coal-to-oil, coal-to-gas, and coal chemical-related assets from 13 subsidiaries of its controlling shareholder, China Energy Investment Corp, including Xinjiang Energy Group, Wuhai Energy and Shaanxi Shenyan Coal.

In an article on Tuesday, China Energy News, a state-owned media outlet, said that the merger between Shenhua Energy and its sister companies is a good example of the central government's“anti-involution” plan.

Analysts said the deal can help Shenhua lower operational costs, strengthen its ability to resist risks and improve short-term business performance.

Luo Zhiheng, chief economist at Yuekai Securities, said the government needs to employ different methods to achieve its“anti-involution” goal, as it encompasses many sectors, ranging from upstream industries such as steel and coal to downstream ones like photovoltaics, lithium batteries and new energy vehicles.

“For traditional industries, new production capacity should be strictly controlled. Enterprises should be encouraged to carry out staggered production or voluntarily reduce output,” Luo said.

“For those in the emerging sectors, it is not appropriate to over-intervene in their businesses due to their rapid technological iteration,” he said.“The government should support companies' product innovation, as well as their mergers and acquisitions, and restructuring. It should also smooth the market-based exit mechanism.”

Zhang Lin, chief macro analyst at Shanghai Far East Zixin Assessment Ltd Co, said that, due to the“neijuan” in the photovoltaics, lithium batteries, and new energy cars sectors, the Politburo's latest meeting emphasized that the development of“new quality productive forces” must also comply with market order, primarily through the construction of a unified national market to reduce price competition and avoid over-investment.

Wen Ge, a Shandong-based columnist, writes in an article that local governments will no longer provide tax credits and free land to new energy car makers. He says the China Association of Automobile Manufacturers will stop releasing charts that rank automakers by their monthly sales. At the same time, many auto parts suppliers signed a pact to promise they won't initiate vicious price wars.

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Job losses

Some Chinese pundits have expressed concern that Beijing's anti-involution campaign will lead to job cuts.

An article by a Henan-based writer using the pseudonym“Haibo Design” states that China has entered a new era in which people compete for survival, rather than for increased income.

“Now, the cake (economy) no longer grows rapidly, but the number of people who want a piece of cake keeps growing,” the writer says.“People's focus is not to make a bigger cake, but to fight for the existing one. This is involution.”

He says that due to“neijuan,” companies cut their product prices while workers work overtime voluntarily. He adds that, when local governments eliminate obsolete capacity, many factories will be shut down and many people will lose their jobs.

He hopes the local government will help ensure labor rights and strengthen the social security net during this anti-involution campaign.

The NBS announced on July 17 that China's official unemployment rate in urban areas stood at 5% in June. It said the unemployment rate for the 15-24 age group was 14.5% in June, compared with 14.9% in May.

Some observers argue that the official unemployment figures do not accurately reflect the real situation in China, as anyone who works more than an hour per week is classified as employed.

Read: To drink or not to drink – the Party decides in China

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