China’s most important political meetings of the year, the Two Sessions, began this week.
At their outset, Premier Li Qiang signalled a shift in economic policy as he presented the government work report which sets annual goals and directions.
Li emphasised the need to: curb excessive competition, often referred to as “involution” (内卷) in Chinese; break down local protectionism; and address market fragmentation.
The government plans to tighten up standards for companies entering “emerging industry” markets, which include electric vehicle (EV) production, renewables, high-end equipment manufacturing, and next-gen IT. It also plans to introduce a list of companies barred from the market.
Signs of government intervention in overcapacity had already emerged before the Two Sessions. On 25 February, the State Administration for Market Regulation (SAMR) held a fair competition roundtable, inviting business executives to discuss excessive competition.
China’s “new three” of EVs, wind power and solar photovoltaics have seen increasing competition and falling prices. According to Nanfang Daily, in the first ten months of 2024, solar prices dropped sharply: polysilicon by 38%, wafers by 49%, solar cells by 30.4%, and modules by 28.8%; the overall output value of solar manufacturing (excluding inverters) plunged 43.17% year-on-year.
The auto industry is also in a price war. In 2024, profits in the sector declined by 8%, marking the third consecutive year that its profit margins were lower than that of China’s industrial enterprises as a whole.
Legal measures are needed to tackle cutthroat price competition, stated Qin Haiyan, secretary-general of the China Renewable Energy Society’s Wind Power Committee, at an industry forum.
The rapid rise, and now excessive competition, of China’s EV, solar and wind industries is linked to local governments racing to attract investment. Encouraged by central policies on carbon neutrality, they have developed similar renewable-energy industries, leading to overcapacity.
Some local governments, in pursuit of GDP growth, engage in cutthroat competition to attract investment, noted Lu Ming, executive dean of the China Institute for Development at Shanghai Jiao Tong University, in an interview.
“This includes practices such as offering illegal tax breaks, providing financial subsidies, and lowering land prices, which in turn fuel industry expansion and drive down prices,” he said.
Read Dialogue Earth’s previous analysis on China’s local protectionism.