For strategists at JPMorgan Chase & Co and Goldman Sachs Group Inc as well as money managers in Hong Kong and Singapore, an opaque term has suddenly emerged as the catchphrase for deciphering Chinese policy intentions and navigating the stock market.
The term “anti-involution” has cropped up in government documents over the past year, but gained prominence earlier this month when President Xi Jinping chaired a high-level meeting that pledged to regulate “disorderly” price competition. It refers to efforts to root out China’s industrial malaise, marked by cutthroat price wars and overcapacity that have hurt profitability in sectors ranging from solar, new energy vehicles to steel.
Investors are hopeful that a more coordinated policy response to tackle the drivers of deflation is on its way, though Beijing hasn’t yet released any plan. Analyst reports on the theme have flooded the market, while solar and steel stocks have rallied in July. Morgan Stanley strategists changed their preference to onshore shares from those in Hong Kong last week.
“One of the biggest issues that investors have investing in China is that of excessive competition,” said Min Lan Tan, head of the Asia Pacific chief investment office at UBS AG. “It’s actually a very positive development that top down the government is now recognizing it and directly saying that destructive competition has to stop. It’s a powerful policy signal.”
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The Chinese term for involution, 内卷 (neijuan), literally means rolling inwards. In practice, it’s used to describe a system of intense competition that yields little meaningful progress.
Huge spending on building capacity has helped Chinese firms enhance their global standing. The nation’s companies now dominate every step of the solar supply chain, while its EV makers have toppled Tesla’s dominance. Yet, ending destructive competition has rarely been more important. Producer deflation is worsening, and trade tensions mean China can no longer unleash some of its overcapacity to other countries.
“With foreign markets closing off Chinese trade routes, part of the competition is forced to return to the domestic market,” said Jasmine Duan, senior investment strategist at RBC Wealth Management Asia.
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The campaign seems to be helping improve investor sentiment for the mainland market, where policy drivers have a stronger sway and industrial stocks have bigger weighting. The onshore CSI 300 Index has risen 2% so far in July, outperforming the Hang Seng China Enterprises Index after lagging it for most of the year.
Solar stocks Xinjiang Daqo New Energy Co and Tongwei Co have advanced at least 19% this month. Liuzhou Iron & Steel Co has surged more than 50% while Angang Steel Co has gained about 16%. Glass, cement and chemicals shares have also jumped.
It’s still early stages but if the reforms pan out, “there’ll be consolidation in China and there’ll be slightly better pricing and margins, and there’ll be better valuation,” said Wendy Liu, head of China and Hong Kong equity strategist at JPMorgan. Sectors that are likely to benefit include autos, battery, solar, cement, steel, aluminum and chemicals, she said.
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To seasoned China watchers, the current rhetoric recalls the supply-side reforms of 2015-2018, when a government-led push to cut outdated capacity in sectors such as coal and steel helped drive up prices in the following years.
This time, however, key differences may limit the campaign’s effectiveness. A decade ago, oversupply was mostly concentrated in upstream and construction-related sectors. It’s become more pervasive today, encompassing the most promising industries of solar, EV and battery to downstream consumer sectors such healthcare and food.
That point is illustrated by the intensifying price war among technology giants listed in Hong Kong — China’s private sector leaders. Shares in Meituan, Alibaba Group Holding and JD.com Inc have slumped more than 20% from their March highs as they jostle for delivery market expansion.
“This time the overcapacity is concentrated in industries mostly dominated by private firms, so the challenges are going to be greater than when SOEs ruled and could just buy up the private firms and shut them down,” said Li Shouqiang, a fund manager at Shenzhen JM Investment Management.
Addressing the supply-demand imbalance will also require measures to reflate the economy by boosting consumption — a tall order the government has struggled to deliver on.
For now, investors seem hopeful that a bigger supply-side reform is in the offing. Morgan Stanley strategists said sentiment has improved with the government’s message, and added they now prefer A-shares over offshore ones.
“When senior policymakers change some policy tone, there should be some actionable items or something to follow through,” said Louisa Fok, China equity strategist with Bank of Singapore. It won’t be a quick overnight fix, but it’s “definitely positive” that the government is aware of the problems, she added.
