Chen Jing: China's economy has reached a stage where it is appropriate to promote a reasonable increase in price levels. This year's Government Work Report set the inflation target at 2%, a figure some find puzzling amidst ongoing calls for increased public consumption. Chen Changsheng, Deputy Director of the State Council Research Office and a member of the drafting group for the Government Work Report, explained at a press briefing that while consumers naturally welcome lower prices, which allow limited income to purchase more goods, persistently low prices can lead to unsold inventory for businesses. This, in turn, causes companies to reduce investment and hiring, ultimately creating pressure on employment and income growth for consumers, who are also workers.
Echoing this sentiment, an article titled "Actively Promoting a Reasonable Rise in Prices" published in the Qiushi Journal on February 2nd, prior to the Two Sessions, stated that price levels are crucial to overall economic and social development and are closely linked to better employment and higher wages. The article argued for actively promoting a reasonable price increase. Addressing the recent period of low price levels in China, it highlighted the misconception that "lower prices are always better," pointing out that sustained price declines can create a vicious cycle: low prices lead to weak expectations, reduced consumption, lower corporate profits, decreased household income, further weak expectations, less consumption, and even lower prices. This cycle erodes corporate profits, increases real interest rates and debt burdens, dampens long-term investment, undermines the tax base, and can render conventional monetary policy ineffective. This aligns with the goal expressed by Deputy Director Chen: to implement measures that achieve the price target, thereby improving the "three pockets" – household employment and income, corporate profits, and government fiscal health.
The recent phenomenon of foreigners flocking to China as a "bargain paradise" further exposes the issue of insufficient domestic demand. The author has long pondered the future direction of China's uniquely low-price system globally.
**I. Infrastructure, Manufacturing, and Global Share**
Global economic shifts since 2020 have solidified the perception of China as a low-price society. While some previously argued that certain consumer goods were cheaper in developed nations, the recent global inflation wave has cemented the consensus: China offers the lowest cost of modern living globally. Some countries may have lower prices for specific subsidized items like flatbreads or fuel, but the quality of modern life there is significantly inferior. The cost of achieving a modern lifestyle anywhere else is far higher than in China, as evidenced by trends like US inflation pressures, Hong Kong residents shopping northbound, and visa-free tourism booms.
The underlying economic principles for China's low modern living costs are profound and not fully appreciated. While low average wages are often cited, many countries with lower wages have much higher costs for modern goods like smartphones, appliances, cars, electricity, and daily necessities. China is a unique exception among developing nations, combining the lowest modern living costs with relatively high incomes. The common scenario elsewhere is "the poorer, the more expensive" due to lack of industrial base, high logistics costs, and import dependency.
China's infrastructure supporting modern life is extensive, with several areas surpassing developed countries on a per capita basis. Key 2025 data includes: - High-speed rail: 50,400 km, 70% of global total. - Expressways: 184,000 km, 40% global share. - Urban rail transit: 11,000 km, 40% share. - Tunnels: ~71,000 km, 40-50% share. - Public charging points: 4.717 million; private: 15.375 million, 75-80% share. - 4G base stations: 7.192 million; 5G: 4.838 million, 60-70% share. - Port cargo throughput: 183.4 billion tons, 50% share. - Inland waterway freight: 51 billion tons, 70% share.
This infrastructure supports massive consumption data: - Express delivery: 199 billion parcels in 2025, ~66% global share. - NEV domestic sales: 13.87 million units, 65% share. - Daily food delivery orders: stable at 15 million, 50-60% share.
Growth continues, with high-speed rail projected to reach 70,000 km by 2035, and major canal projects enhancing inland shipping, reducing costs. China's "infrastructure-logistics-consumption"闭环 is globally leading.
Correspondingly, China possesses the world's largest manufacturing sector. Key 2025 production data: - Mobile phones: 1.54 billion units, ~70% share. - NEVs: 16.64 million units, 70% share. - Air conditioners: 267 million, 80% share; Refrigerators: 109 million, 60%; Washing machines: 125 million, 42%; TVs: 203 million, 65%. - Solar cells: 832 GW, 90% share. - Lithium batteries: 1,755.6 GWh, 80% share. - Shipbuilding: 53.69 million dwt, 56% share. - E-bikes: 54.9 million, 66% share. - Toys: 30 billion units, 70-75% share.
This output is based on massive production of industrial inputs like steel, cement, coal, non-ferrous metals, and chemical fibers (50-95% global share), and industrial electricity consumption of 6.64 trillion kWh (50% share). China's manufacturing prowess serves global demand, not just domestic consumption, evidenced by a 2025 manufacturing trade surplus of approximately $2 trillion (though goods trade surplus was $1.19 trillion due to large imports of raw materials). China is the dominant importer for many commodities: - Crude oil: 578 million tons, 25-27% share. - Natural gas: 128 million tons, 25-30%. - Iron ore: 1.295 billion tons, 75-80%. - Soybeans: 111.83 million tons, 60-65%. - Copper ore: 30.31 million tons, 55-60%. - Bauxite: 201 million tons, 75-80%. - Lithium concentrate: 7.7515 million tons, 75-80%. - Rare earth ore: 100,000 tons, 55-60%.
These figures refute narratives of "China turning to exports due to weak domestic demand." China acts as the "global producer" in manufacturing, requiring resource imports, similar to Germany or Japan in automotive, where discussing insufficient domestic demand misses the point.
**II. The "Learning Curve Effect" and Production Costs**
The data above, measured in volume, demonstrates the solid productivity foundation for China's low costs. Unprecedented scale and network effects across multiple manufacturing sectors, where China's output exceeds half the global total, drive this. This exemplifies the "learning curve" or "experience curve" effect: with each doubling of cumulative production, costs decrease by a constant percentage (10-30%).
China has achieved numerous "output doublings" in many sectors, reducing costs to levels competitors find difficult to match. Scale economies are the economic basis for China's low costs. In successful sectors, Chinese costs are often one-half to one-fifth of Western counterparts, with infrastructure costs even lower at one-tenth, primarily due to scale, not just labor costs.
However, technological gaps remain in some areas: - High-end semiconductors (EUV lithography, etc.) - Commercial aircraft (engines, avionics) - Reusable rockets - High-end medical equipment - High-end CNC machine tools - High-end scientific instruments - High-end industrial robots
The root issue often relates to "precision" and stems from limitations in high-end CNC machine tools. Breakthroughs in these areas, particularly semiconductors, could dramatically reduce prices for products like HBM and GPUs, similar to past trends. The current AI/chip-driven market optimism often assumes China cannot achieve these breakthroughs long-term, but comprehensive progress is expected within a decade.
Manufacturing is no longer low-tech; scale necessitates advanced technology and management. Developing nations often rely on assembling Chinese components for cost-effectiveness. Examples include Vietnam and Bangladesh in textiles, which use advanced machinery. Other developing nations show limited native R&D capabilities (e.g., India in generics, Brazil in aviation), but none pose a serious challenge to China's scale. India's manufacturing GDP share has stagnated or declined.
China's dominance (50% of global manufacturing output, 35% of output value, 30% of value-added) is a robust fortress. In sectors where China lacks control (e.g., high-end chips, energy), prices have surged. In sectors where China leads (e.g., solar, batteries, steel, appliances), prices have fallen significantly. Since 2020, while many countries experienced inflation, China faced deflationary pressures. This divergence highlights the opportunity for "promoting reasonable price increases."
The Qiushi article calls for curbing "involutionary" competition, removing market barriers, protecting workers' rights, optimizing market order, and shifting enterprise focus from "price competition" to "value competition." The China-global price divergence reveals the core logic of industrial competition: China transitions from "price taker" to "price setter" as it gains >50% market share, using capacity to regulate prices, eliminate monopolistic profits, and stabilize markets. Western tech封锁 spur Chinese innovation, eventually breaking monopolies. China's实体产能 can counter financial speculation in commodities.
Post-2020, prices for energy, metals, grains, chips, and logistics saw extreme spikes due to supply disruptions, geopolitics, and monetary easing. While prices retreated from peaks, they remain elevated. China's 50%+ capacity share in many sectors enabled sustained price declines through competition and scale, demonstrating significant price control capability.
**III. Scale Effect at a Turning Point**
Post-pandemic, the principle of continuously falling costs via the "learning curve" has reached a turning point. With capacity shares at 50-90% in many sectors, physical limits and global oversupply are evident. The historical logic of "output doubling reduces cost" becomes unsustainable if further expansion assumes implausible global demand growth. The solar industry is a prime example, with 2025 capacity far exceeding global installation demand, leading to industry-wide losses and steep stock declines.
Some industries, accustomed to cost reductions from scale, continue demanding price cuts from suppliers even when market growth slows, leading to "involution" – cost-cutting through means unrelated to scale or innovation, such as layoffs, longer hours, and payment delays. This type of deflation is detrimental. The strategy of gaining market share through "price competition" at the expense of labor conditions needs reevaluation. With massive capacity shares, further doubling is unrealistic; a shift in mindset is necessary.
Large capacity and market share remain advantageous for eliminating excessive profits and potentially improving worker returns, but new rules are needed. The key lever is "actively promoting reasonable price increases." This is arguably easier than achieving the manufacturing miracles of the past. Positive signs are emerging: - Increased statutory holidays in 2026, including a 9-day Spring Festival break. - After nine consecutive years of increase, the average weekly working hours for enterprise employees fell slightly in 2025 to 48.6 hours. - Government calls to curb "involutionary competition" have led many firms to reduce unnecessary overtime. - Policy adjustments, such as canceling or reducing export tax rebates for products like aluminum, copper, oils, petrochemicals, solar, and batteries.
The author believes progress in reducing working hours and countering involution will continue. Efforts to promote reasonable price increases are already yielding results, contributing to an improving social atmosphere.
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