James Liang: How to Reduce Involution in China's Economy

James Liang: How to Reduce Involution in China's Economy ——Speech at the Opening Ceremony of HKU Business School Shanghai Center

Introduction: As "involution" becomes a widespread dilemma in Chinese society, how should we address this challenge? Recently, Dr. James Liang, Chairman of Trip.com Group Limited, shared his insights from both academic and entrepreneurial perspectives during a speech at the opening ceremony of HKU Business School Shanghai Center.

Below is an edited transcript of his speech.

Main Content: Today, I’d like to discuss China’s economic and corporate challenges from the perspective of both a scholar and an entrepreneur—specifically, how to reduce involution.

Involution, broadly defined, refers to ineffective competition. While competition should ideally drive efficiency and growth, involution creates lose-lose or multi-lose scenarios due to resource bottlenecks. No matter how much effort is invested, these bottlenecks constrain progress.

A classic example is the competition for limited university placements in China’s national college entrance exams (Gaokao). No matter how hard students study, the number of spots in top universities remains fixed. Without increasing supply, competition only leads to stagnation—a zero-sum or even negative-sum game economically.

Macroeconomic Challenge: Supply Outpacing Demand China’s economy currently faces a critical issue: demand growth lags behind supply expansion in many industries. Companies invest heavily in production, cut prices, or improve efficiency, yet fail to stimulate sufficient additional demand. Instead, prices keep falling, squeezing profitability—a key driver of involution.

Take the tourism sector as an example. Last year, Trip.com Group performed well overall, primarily due to rapid overseas growth and successful international investments. Domestically, however, the trend mirrors the broader industry: tourist numbers grew modestly, while supply—hotels, attractions—expanded by double digits. Consequently, prices dropped 7%-10% or more. While luxury hotels still attract guests and sales volumes rose 5%, revenue per hotel declined. Industry-wide, transaction value (price × volume) stagnated. This imbalance—slow demand versus fast supply—defines the dilemma.

Solutions: Stimulating Demand To overcome involution, China must boost demand, particularly consumer demand. Here are three actionable strategies:

1. Expand Inbound Tourism While China excels in goods exports, service trade—especially inbound tourism—holds untapped potential. Recent visa-free policies have spurred triple-digit growth, albeit from a low base. Trip.com actively promotes China’s tourism overseas through its platform and has invested in immersive experiences like a themed restaurant in Shanghai’s Huangpu District for international visitors. Inbound tourism contributes minimally to GDP now (versus 10% in Thailand or 2% in Western nations), but scaling it to 1%-2% could unlock hundreds of billions in growth.

2. Direct Cash Transfers to Consumers Deflationary pressures and job instability dampen spending. A straightforward solution is fiscal stimulus: distribute cash equivalent to 2%-3% of GDP directly to households, not businesses. While unconventional in China’s "hard work equals prosperity" ethos, current conditions—ample supply capacity and deflation—make this a rare opportunity to reflate the economy without triggering inflation.

3. Address Declining Birth Rates Young adults, burdened by low incomes and high costs for marriage/child-rearing, need support. China’s fertility collapse—from 18 million births in 2016 to 8 million projected this year—threatens long-term innovation and scale advantages in tech-driven sectors like AI and digital services. Cash incentives and parental leave policies can ease pressures.

Additional Measures: - Reduce working hours (currently 49 weekly) and add seasonal holidays to balance leisure and employment. - Education reform: Eliminate excessive academic filtering (e.g., canceling middle-school entrance exams) to reduce parental stress and boost fertility willingness.

In summary, combating involution requires "Four More, One Less": more international visitors, more cash support, more births, more holidays—and fewer exams.