China initiates crackdown on price wars to stabilize industries

China is currently addressing significant issues in its economy related to price wars and overcapacity across various sectors. These problems have led to declining profits and rising global trade tensions. In recent months, the Chinese government has made a series of statements indicating a commitment to curbing intense competition, which is referred to as 'involution' or 'neijuan' in Chinese. Industries such as solar panels, steel, and electric vehicles have been particularly affected by overcapacity, prompting the state to take action. Notably, on June 30, the leading makers of glass for solar panels agreed to reduce production by 30%, hoping to ease competition and improve market conditions. The producer price index in China has been steadily falling for nearly three years, resulting in a prolonged period of deflation. This has sparked concerns about the need for consolidation, company mergers, and even bankruptcies to address excess capacity. Although economists point out that this process will require time, the recent remarks by Chinese officials suggest a growing recognition of the situation's seriousness. Local governments, however, often seek to protect jobs and companies, complicating efforts for reforms. The stock market has responded positively to these government promises, particularly in sectors under pressure. Stocks related to industries facing overcapacity have risen significantly; for example, shares of Liuzhou Iron & Steel Co. surged over 70% since the end of June. Additionally, exchange-traded funds specializing in solar panels and steel have increased by around 10%, reflecting a broader market rally. In contrast to the gains in other sectors, the performance of electric vehicle manufacturers has varied, with leaders like Li Auto and Nio seeing gains while BYD's stock declined. The government's renewed focus on regulating competition began with the electric vehicle sector in late May and has since spread to include various industries. The National Development and Reform Commission and the State Administration for Market Regulation have proposed amendments to existing price laws to address unfair pricing behaviors and competition issues. These include guidelines for identifying low-priced dumping and imposing stricter penalties for violations. Moreover, there are hopes that heightened scrutiny will replicate across other industries battling similar competitive pressures, such as food delivery services. Overall, analysts believe that while a sudden shift from cutthroat competition to orderly consolidation may not happen immediately, there is still potential for a near-term ceasefire in these vicious price wars, which have long plagued many businesses.