How much longer will the "involution" continue?

Core Viewpoints

1. It's not just competition. Whether in the commodity housing market or the new energy vehicle sector, many markets have recently shown a change from a pattern of 'exchanging price for volume' to 'volume and price both stabilizing', and the perceived degree of 'involution' among micro entities seems to be deepening. At the same time, the central government has clearly proposed a comprehensive overhaul of 'involution-style' competition. Why does 'involution' persist? How will it be alleviated in the future?

2. Historically, 'involution' means the continuous weakening of micro-enterprise profits, while on a macro level, it corresponds to a stage of negative growth in overall prices. If counter-cyclical policies are applied gently, they may promote actual economic growth in the short term, but are not sufficient to reverse price trends; once policies soften, actual growth will pulse back, and 'exchanging price for volume' will again shift to 'volume and price both stabilizing'.

3. Changing prices requires preemptive expectations. International experience shows that if prices continue to stabilize at low levels, expectations among micro entities can become rigid, which in turn reinforces price stickiness. To reverse these expectations, conventional policy measures may help but might not be enough. The key is to utilize unconventional policies to significantly lower real interest rates, thereby stimulating 'animal spirits'.

4. Looking ahead, addressing 'involution-style' competition, especially standardizing the actions of enterprises and local governments, may help alleviate price involution from the supply side; the subsequent acceleration of government bond issuance can also help from the demand side. However, historical evidence indicates that while supply optimization can improve price elasticity, changing 'involution' fundamentally still depends on the strength of demand.

Main text

Whether in the commodity housing market or the new energy vehicle sector, many markets have recently shown a change from a pattern of 'exchanging price for volume' to 'volume and price both stabilizing', and the perceived degree of 'involution' among micro entities seems to be deepening. At the same time, the central government has clearly proposed a comprehensive overhaul of 'involution-style' competition. Why does 'involution' persist? How will it be alleviated in the future?

Figure 1. Is the "involution" intensifying?

Source: WIND, Passenger Vehicle Association, compiled by the author.

Note: The volume is the ratio of the transaction area of commercial housing compared to the same period in 2018-2019, and the retail sales of New energy vehicles compared to the same period in 2022-2023; the price is the price Index of both.

1. Why does "involution" continue?

Historically, "involution" signifies a continuous weakening of micro enterprise profitability, while on a macro level, it corresponds to a phase of negative growth in overall prices. If counter-cyclical policies are implemented gently, they may promote short-term actual economic growth but are insufficient to reverse prices; once the policies cool, actual growth impulses retreat, and the strategy of "quantity for price" shifts back to "both quantity and price slackening."

Figure 2. "Involution" is actually quite stubborn.

Source: WIND, compiled by the author.

Changing prices leads to expectations. International experience shows that if prices continue to stabilize at low levels, the expectations of micro entities can easily become fixed, which in turn reinforces price rigidity. To overturn expectations, standard policy measures may help but may not be sufficient. The key is to use extraordinary policies to significantly lower real interest rates, thereby stimulating "animal spirits."

Figure 3. Changing prices, expectations lead the way.

Source: WIND, Bank of Japan, calculations by the author.

2. How to ease "involution"?

Since the second half of last year, fiscal policies have provided a pulse support to the economy, with various sectors exchanging price for volume. With external demand and real estate adjustments, the recent slowdown of both volume and price has become more pronounced. However, fiscal funds are expected to be expedited, especially the issuance of long-term special treasury bonds (approximately 60% remaining) that must be completed by the end of October. Additionally, the policy-based financial tool was proposed when the U.S. imposed a 145% tariff on China, and its use may be delayed to reserve policy space for the second half of the year.

Figure 4. Fiscal policies have not yet scaled back.

Source: WIND, calculations by the author. Note: Debt funding includes new local government debts, general treasury bonds, special treasury bonds, and policy-based financial tools, excluding debt restructuring and central financial institution capital injection.

Looking ahead, addressing "involution-style" competition, especially standardizing corporate and local government behavior, may help ease price involution from the supply side; subsequently, the accelerated issuance of government bonds may also provide some help from the demand side. However, historical facts indicate that while supply optimization can improve price elasticity, the determining factor for fundamentally changing 'involution' remains the intensity of demand.

This article is sourced from:Wu Ge's Economic Notes, Author: Wu Ge, Original title: "How Much Longer Will the 'Involution' Continue?"

Editor/Lee