China deflation risk from industrial oversupply

Added: 2026-05-26

[00:00:00]China's economy is facing a new threat.

[00:00:01]In most countries, governments complain when prices are too high, but in China, the government's angry that prices are too low. This has come about due to a phenomenon called involution. Companies are cutting prices to gain market share, and that's forcing everyone else to do the same. As a result, profits have plummeted, and no one's market share is any higher. This fight for survival has gone beyond normal market competition.

[00:00:21]Many of the firms have been nurtured by China's local governments.

[00:00:24]>> [music] >> Industries like solar panels and lithium batteries have become world-leading, but this has resulted in an oversupply of these goods and not enough customers to meet the demand. [music] One example is the car industry. There are now 130 domestic car companies battling for sales. Discounts are so steep that you can buy this electric car, the BYD Seagull, for less than $8,000. That might sound like a great deal, >> [music] >> but households should think twice before being too happy about cheap prices. As profits have come down, wage growth has stalled, and employment looks weak.

[00:00:51]China has been here before. A decade ago, it also suffered another long spell of falling industrial prices.

[00:00:56]>> [music] >> Back then, the government cut capacity in industries like steel and coal to limit production. It was a crude measure, but effective. Prices rose, and profit margins increased. But this time around, involution is more [music] widespread. The companies involved are often privately owned, so the government has less control over [music] them. They also operate in high-tech sectors with shiny new facilities, not like the dirty, outmoded plants that the government shut down last time. An alternative response to involution is just to flood foreign markets with goods, but trading partners are pushing back. Ultimately, the best response to falling prices is to boost demand, not to curb supply. China's leader, Xi Jinping, is wedded to his vision of China as a manufacturing powerhouse.

[00:01:32]Even if customers are hard to find, manufacturing is a big part of China's economy, and he doesn't want it getting any smaller. If that's the case, Mr. Xi won't solve involution without a bit of introspection.