China’s intensified fight against cutthroat, low-quality price competition – known as involution – is unlikely to result in supply-side reform of the same magnitude as such reform in 2015, as the world’s second-largest economy lacks the mettle to cut production capacity or add consumption stimulus, according to an economic research firm.
Investors have been quick to draw parallels between recent and earlier meetings of the Central Committee of Financial and Economic Affairs (CCFEA) that became “turning points” and raised hopes of a more sweeping supply-side campaign, said a note authored by Louise Loo, the Asia economics head for UK-based advisory firm Oxford Economics.
“Our view is that these expectations are misplaced,” the note said. “The path towards a decisive resolution of China’s supply-demand imbalances looks far less direct than in the past.”
A July 1 meeting of the CCFEA suggested that prices would reflate because President Xi Jinping used the event to criticise price competition as a lever for “destructive discounting” and “unproductive outcomes”, according to the note, published on Thursday.
A mixture of capacity cuts and “meaningful” demand stimulus “is far more difficult to deliver in the current environment”, it added.
Sweeping capacity shutdowns of the type ordered in coal and steel a decade ago would risk a destabilising supply-side contraction
