China: A way out of the vicious circle?

The Middle Kingdom appears to be caught in a vortex of consumer reluctance, overcapacity, ruinous price declines and deflationary trends. According to experts, a fundamental structural change in the political economy would be required to break free from this so-called involution. Some doubt that this can be achieved, while others suspect that there is a calculated strategy behind it.

China is the world's factory. The world's second-largest economy produces and exports far more than any other country. To name just a few examples, the Middle Kingdom manufactures 55 per cent of the world's steel, 76 per cent of lithium-ion batteries, more than 60 per cent of electric vehicles and 80 per cent of solar modules.

However, like no other country, the Middle Kingdom is also caught in a vicious circle of overcapacity, falling prices, declining margins and the persistent threat of deflation. This state of affairs, known as ‘involution’ or ‘neijuan’, is characterised by a saturated domestic market that seems trapped in a self-destructive process of excessive production and significant market imbalances, fuelled by government investment. The result is not evolution or progress, but rather involution, a constantly intensifying competition in everyday life and in the world of work from which there seems to be no escape.

In an effort to reduce overproduction, China has been flooding international markets with industrial and consumer products at dumping prices for some time now. In 2025, the trade surplus exceeded US$1 trillion for the first time. This is prompting more and more countries to protect their markets and industries from Chinese imports with high tariff barriers. This merely shifts the externalised problem from one continent to another – currently from the US to Europe.

China can only bring about lasting change from within. President Xi recently announced his intention to take decisive action against the ruinous price war. The aim is to move away from inefficient domestic competition towards qualitative growth characterised by innovation, brand strength and entrepreneurial spirit.

However, this change cannot be achieved at the push of a button, and its long-term effectiveness is doubtful. Xi made the same promise when he took office in 2012. So far, he has not succeeded in breaking the vicious circle. This is also evident from the fact that economic growth has been in constant decline since 2007 (see chart). Forecasts up to 2030 do not indicate any turnaround. The International Monetary Fund recently stated that China is too big to generate much growth from exports and called on the Chinese government to resolve economic imbalances more quickly in order to avoid further trade disputes.

China's economic growth in decline

Prognose Quelle: Statista, 2025

The economic downturn has been exacerbated by consumer reluctance, which is not solely attributable to the oversaturation of the domestic market. Chinese households are suffering from the sharp decline in the value of their properties, for which they had taken on high levels of debt. The severe property crisis in spring 2024 also led to panic on the Chinese stock market, dampened investors' appetite for property and, last but not least, caused a loss of confidence among private companies.

Various experts identify the fundamental problem in China as being its political economy, which encourages involution. In the Chinese system, the Central Commission retains control over political, personnel and strategic decisions – the latter in the form of five-year plans – but at the same time grants regional officials extensive economic freedom. It deliberately stokes rivalry among them, as it rewards or punishes not only absolute success, but also relative performance compared to other officials. This results in a bitter struggle for state investment programmes, growth rates and industrialisation, which creates severe market imbalances. Key industries from steel to logistics are left behind with razor-thin margins and unsustainable growth models. The five-year plans are only able to alleviate the negative effects in isolated cases.

The next five-year plan shifts the focus back to another weak point – currently domestic consumption. Whether the Middle Kingdom will succeed in implementing the urgently needed structural change is strongly doubted by various parties. However, there are also those who see this as a deliberate strategy on China's part to use its overcapacity to take over global dominance in industrial production.