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.
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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.
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Sweeping capacity shutdowns of the type ordered in coal and steel a decade ago would risk a destabilising supply-side contraction
