China's economic policy is undergoing a significant reorientation in 2025, centred on a new initiative: "anti-involution". This strategy directly confronts the issue of excessive, self-defeating competition within key industries, a phenomenon termed "involution." The “anti-involution” policy push is set to reshape China's economic landscape, with critical implications for China and Europe. While potentially leading to a near-term slowdown in China's headline growth as capacity is rationalized, successful "anti-involution" could alleviate persistent deflationary pressures and reduce China’s trade imbalances in the long run. Success in reflating China’s economy could also lead to a stronger Renminbi. Involution means growth without evolution. This concept represents Beijing's ambitious attempt to break free from self-destructive economic cycles that have plagued several key industries. Since end-June this year, the tone on “anti-involution” has been significantly raised, laws have been amended, several industrial meetings have been held for price coordination, and enforcement has been greatly stepped up. Some commodity prices have risen sharply in expectation of output cuts, stock prices of certain beneficiary companies have jumped, and markets seem to believe that Beijing’s intervention will finally end deflation, restore corporate profitability, and reflate the economy. We believe the recent spike in spot prices is primarily fueled by market speculation, is unsustainable in whole, and is likely to be confined to specific sectors such as chemicals, batteries, cement & semi conductors. Involution has also significantly inflicted pain on Chinese earnings. The nexus of overcapacity, intense competition, and disinflation has weighed on Chinese corporate earnings in recent years, deepening investor concerns about profitless growth in select industries and casting doubt on the broader investment case for the stock market. So once the anti involution drive picked up since end June, Chinese equities have been on a tear. The anti involution policy also has a foreign policy angle. Whilst consumers and households in the European Union & ASEAN countries have benefited greatly from the affordable sustainable goods supplied by China’s manufacturing juggernaut, the influx of high-quality, cheap renewable energy products has drawn the ire of many long-standing national champions and competitors in the market. Beijing is keen on redressing the impression that China is merely a powerful, impressive, and rapidly developing country; it is also a responsible stakeholder. Hence the need to reorient away from involution. The campaign against “involution” is the most plausible cause of both the recent rally in Chinese risk assets and the recent appreciation in CNH. We expect more CNH strength, still higher Chinese equities & uptick in base metals, semiconductors, batteries & chemical prices.
