I have carefully studied Chairman Song Zhiping's book "Anti-Involution" and gained many insights. Below, I share my reflections and thoughts on the work.
"Anti-Involution" serves as a model for enterprises seeking to break free from the predicament of "involution" and transform challenges into opportunities. The fundamental nature of the market is competition, where the fittest survive. However, "involution" represents improper, vicious competition akin to "bad money driving out good." Reform and opening-up policies activated the vitality of various market entities through market mechanisms, leading to decades of rapid economic growth in China. Yet, the inherent blindness, irrationality, and speculative nature of markets inevitably lead to severe overcapacity, with "involution" being the malignant competition that arises in such conditions.
Capitalism relies on periodic crises to forcibly adjust supply-demand imbalances. However, relying solely on market mechanisms to clear excess capacity is often a slow process, giving rise to calls for government intervention to stimulate demand and restore balance, a theory epitomized by Keynesianism. China practices a socialist market economy, where the government's "visible hand" has helped avoid major economic fluctuations. Nevertheless, factors such as the ongoing process of legal system maturation, low concentration in most industries, and local protectionism have allowed "involution" to inflict prolonged and serious damage on China's economy, enterprises, and people's livelihoods. "Involution" indicates a degree of failure in the self-regulating and constraining functions of China's market economy, representing a significant negative factor hindering economic development.
Drawing from his experience successfully managing two central state-owned enterprises into the Fortune Global 500, and leveraging profound insights gained from researching over 600 listed companies and 100 non-listed companies during his tenure as Chairman of the China Association for Public Companies, along with his extensive theoretical and knowledge accumulation, Chairman Song Zhiping provides an in-depth analysis of the causes of "involution" in the Chinese economy in his book. He specifically examines reasons such as overcapacity and homogeneous competition, distorted market mechanisms, unfair competition, low industrial concentration, short-term corporate strategy and scale worship, inadequate intellectual property protection, and insufficient innovation investment. Based on this analysis, he systematically proposes measures, from both macro and micro perspectives, for the Chinese economy and its enterprises to escape the "involution" dilemma. The book cites over a hundred corporate examples, focusing on ten detailed case studies of industries and excellent companies that successfully overcame "involution," summarizing the lessons learned. It stands as a template for businesses to break through the "involution"困境 and turn adversity into opportunity.
Key Understandings on Combating "Involution"
1. The crucial role of strict government regulations and policy guidance. China's socialist market economy system has advantages in comprehensively utilizing government regulations, policy guidance, and market selection mechanisms to balance supply-demand contradictions, contributing to efficient and sustained national economic and enterprise growth. However, this system requires continuous improvement. The widespread "involution" phenomenon in recent years has deepened our understanding of how to leverage the market's decisive role in resource allocation while minimizing blindness, irrationality, and speculation by market entities. The successful case of the entire aluminum electrolysis industry combating "involution," analyzed by Chairman Song, highlights the indispensable role of government. Issues of "involution" in China's economy began emerging in some industries after China joined the WTO in the early 2000s, with the aluminum electrolysis industry being a prime example. Many local governments competed to launch projects, offering low electricity prices, land, and tax incentives, attracting a surge of social capital. This led to widespread low-level redundant construction and severe oversupply. Between 2002 and 2016, the government implemented six rounds of adjustments to address overcapacity, yet by 2015, the entire industry was loss-making, with over 40% of companies incurring losses. Even industry leaders were mostly marginally profitable or on the brink of losses. In 2017, a rectification action plan jointly issued by four ministries, including the National Development and Reform Commission, reversed the industry-wide losses and set it on a healthy development path. The success of this round, unlike the previous six, was characterized by: strict enforcement of a ban on new capacity and the principle of equivalent or reduced replacement; using policy to leverage market mechanisms, such as tiered electricity pricing; optimizing resource layout under energy advantages and environmental pressures, shifting capacity to regions with cheap, clean hydropower; promoting mergers and acquisitions to significantly increase industry concentration; and encouraging technological innovation and high-end product development. This case demonstrates that rectifying overcapacity and "involution" in capital-intensive raw material industries requires strict enforcement of government regulations, sufficient market pressure for selection, well-guided policies for concentration and transfer, and precise application of the "visible hand."
2. The focus on maintaining market order and building a unified national market. The basic contradiction of a market economy is between supply and demand. Market mechanisms adjust imbalances through price signals. Therefore, a certain degree of price competition and survival of the fittest is inevitable, especially after prolonged industry expansion, and represents a necessary stage for the overall progress of China's market economy and enterprises. However, "involution" is not inevitable. Its causes are manifold, including limited market space, severe overcapacity, lax market regulations, low entry barriers, severe product homogenization, convergent business models, and insufficient core corporate competitiveness. In essence, "involution" is precisely the type of issue that China's socialist market economy system must standardize during its continuous improvement. Overcapacity does not necessarily lead to "involution" – vicious competition on price and marketing tactics. A classic example is Japan's passenger car industry, analyzed by Michael Porter. Japan's annual demand is around 4.3 million vehicles, yet it has at least seven major manufacturers, each with capacity sufficient to meet the entire domestic demand. While severely overcapacitated from a domestic demand perspective, the industry did not experience "involution" fundamentally due to well-maintained market order by the government. Under good order, competition is fierce but rule-based, strengthening quality awareness, honing competitiveness, and driving firms onto the global stage. Porter concluded that international competitiveness is cultivated domestically. Thus, enhancing enterprise competitiveness is more fundamental than simply cutting excess capacity, and this requires a well-regulated market environment. In contrast, many Chinese industries suffering from severe "involution" often have chaotic market秩序, characterized by lax regulations, weak law enforcement, low costs for violations, inadequate crackdowns on counterfeiting, poor IP protection, and lenient bankruptcy law implementation. A market economy is a rule-of-law economy; markets without rules or with deficient rules inevitably lead to bad money driving out good. Therefore, combating "involution" requires the government to fulfill its role in strictly enforcing market laws, standardizing market order, and increasing the cost of violations. The socialist market economy is not a laissez-faire market economy; it requires the government to address deep-seated, persistent issues that markets alone struggle to resolve. Chairman Song's book deeply analyzes the roles of anti-unfair competition, strengthened IP protection, phasing out backward capacity, and building a unified national market in fighting "involution," offering effective suggestions for government action. Industries plagued by "involution" are typically those with low entry barriers, inefficient resource allocation, and fragmented structures. Thus, promoting industry concentration through market mechanisms and capital markets is a key measure. Chairman Song dedicates significant space, drawing from his M&A practices at China National Building Material Group and Sinopharm Group, to discuss the important role of mergers and acquisitions in combating "involution."
3. Promoting industrial concentration to create scale and competitive advantages. Where economies of scale exist, the general trend of market competition is towards concentration. Chairman Song concludes that industries with low concentration suffer more severely from "involution." This is both a common phenomenon and a guidepost for moving from "involution" towards concentration. The book extensively covers the logic, principles, strategic value, post-merger integration, and use of capital markets in M&A, drawing from his hands-on experience at CNBM and Sinopharm, the practices of China Baowu Steel Group, and international successful cases. Chairman Song argues that in highly fragmented markets, leading enterprises with strategic vision and resource integration capability must step up as consolidators. The responsibility of a consolidator is to achieve world-leading scale and competitiveness in strategic choices, R&D investment, advanced management, and market position, thereby creating greater value for the enterprise, society, employees, and their families. The merger of CNBM and China National Materials Group formed three main sectors, achieving world-leading scale and competitiveness in seven business areas including cement and glass fiber. Thus, M&A is a means, while leadership and value creation are the ends. Promoting optimized and concentrated industrial structures, channeling resources to excellent enterprises through M&A, establishing a unified domestic market, and fostering industry ecosystems centered on high-quality firms are crucial measures against "involution."
4. Expanding into international markets to enlarge market space. In the face of severe industry "involution," the supply side exhibits overcapacity, while the demand side shows insufficient demand. John Maynard Keynes's theory of effective demand and advocacy for state intervention, presented in 1936, challenged economic liberalism. Combating "involution" requires efforts on both supply and demand sides. The central government's dual-circulation strategy, emphasizing both domestic and international cycles, is a strategic move to expand domestic demand on the demand side. Large enterprises and SME "hidden champions" have an undeniable responsibility to actively explore international markets and expand effective demand. The industrial structure resulting from M&A often features an oligopolistic landscape with a surrounding industry ecosystem. The internationalization experience of Japanese oligopolistic companies shows they can lead component and raw material suppliers abroad, forming a flying geese pattern of development.
Conclusion: Anti-"involution" is essentially a transformation of the economic development model and a restructuring of industrial organization. "Involution" reveals institutional and fundamental problems within China's economy. Its prevalence across nearly all industries – from building materials and basic chemicals to e-commerce, autos, manufacturing, logistics, catering, services, internet/tech services, and even chips and cloud computing – results from severe overcapacity and product homogeneity accumulated during decades of rapid growth. This is a problem that must be solved during China's economic system transition. Why do many loss-making enterprises persist? Why is the process of anti-"involution" and industry concentration slow? Reasons include local protectionism and market fragmentation, which delay the short-term pain of bankruptcy and unemployment but accumulate long-term, systemic issues; the absence of a fully unified national market; and the incomplete legal and market-oriented reforms of China's socialist market economy system. Therefore, anti-"involution" is fundamentally about transforming the economic development model, restructuring industrial organization from fragmentation to concentration, perfecting the marketization and legalization of the socialist market economy system, and steering the economy from chaos towards order. Chairman Song Zhiping's "Anti-Involution" explains the roots of "involution" from a theoretical and practical perspective and points the way forward with specific measures. It is a valuable book worthy of extensive study, careful questioning, prudent thought, clear discernment, and dedicated practice.
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