It has been a tumultuous couple of months for Alex Xu’s company – a solar panel manufacturer based in eastern China’s Zhejiang province – as product prices have surged by about 20 per cent.
Long plagued by severe oversupply, China’s photovoltaic industry is grappling with cutthroat price wars and even loss-making sales. From Xu’s perspective, nearly half of the industry’s capacity is excessive.
But a rebound in prices has followed recent calls from Chinese authorities to combat “involution”, or neijuan – a buzzword referring to destructive competition that is often characterised by the aggressive slashing of prices – across various economic sectors.
One significant government measure was the revision of the decades-old pricing law, which updated the definition of unfair pricing practices and strengthened measures to curb them.
The amendment to the pricing law, drafted by the National Development and Reform Commission and the State Administration for Market Regulation, is open for public feedback until Saturday. This marks the law’s first revision since its enactment in 1998 and has drawn widespread attention for targeting involution-style competition.
“Due to the nature of photovoltaic products, which lack significant differentiation in appearance and are highly homogenised, many customers focus solely on price rather than product details,” Xu said. “This has led to pure price competition, resulting in substantial industry losses.”
As his firm’s deputy general manager, Xu supports tightening regulations on pricing.
“Sustaining losses like this long-term is unsustainable for businesses. Without profits, there’s no room for future development,” he said.
Though not fully liberalised, the Chinese-style market economy has seen most goods and services priced by market forces.
“With the emergence of new economic models and industries, issues of disorderly low-price competition have become prominent,” the drafting authorities said in their note on the amendment.
The revision focuses on three areas: clarifying standards for identifying unfair pricing practices, strengthening legal accountability for price violations, and refining government pricing mechanisms.
A key provision addresses “low-price dumping”, expanding its scope from “goods” to include “services” and targeting not only operators but also those who “force others to engage in low-price dumping according to their pricing rules”. The threshold for defining low prices remains “below cost”.
The national association of China’s photovoltaic industry, a sector believed to have one of the worst price distortions, has called on member companies to provide feedback on the amended law based on their own circumstances.
With their grip on about 90 per cent of the world’s photovoltaic production and manufacturing, Chinese companies have seen the average price of solar modules plunge by up to 70 per cent from 2012 levels, when investors began betting big on the industry, Xu recalled.
Although there has been growth in international demand in recent years, the industry faces severe oversupply – there is more than 1,000 gigawatts of capacity in total, but the actual need is just 600 gigawatts, meaning nearly half of the capacity is lying idle, he noted.
Chen Bo, an economist and a senior research fellow at the East Asian Institute of the National University of Singapore (NUS), said the latest amendment was necessary to protect fair market competition amid China’s fiercely price-competitive environment.
“Good competition drives survival of the fittest, but we’re stuck in a low-end rivalry – a race to the bottom,” he said.
And that race to offer rock-bottom prices has intensified across various Chinese industries in recent years, from milk tea to ride-hailing.
In the electric vehicle industry, less than 10 per cent of the brands in China are expected to turn a profit by 2030 as a result of the fierce price war, consultancy firm AlixPartners said in a report on the global car industry last month.
Yuan Jia, an associate professor specialising in economic law at Sichuan University, said the revised law offered stronger, more practical guidance for regulating pricing behaviour across industries.
“It is enforceable from central to local levels, with legal penalties that are moderate – less severe than those under the anti-monopoly law – while covering a broad range of cases,” he said.
But the most critical issue in the revision is defining when product pricing falls below cost. “Cost is tied to a company’s procurement capabilities, technology and other factors, making it nearly impossible for regulators to obtain 100 per cent accurate cost data,” he noted.
“In practice, average marginal costs are typically used as benchmarks, ensuring that each additional unit produced and sold doesn’t result in a loss,” he said, adding that the law would need to be followed by more detailed directives and case studies from enforcement agencies.
The amendment came as part of Beijing’s efforts to combat involution, having identified this as a key task for policymakers and a critical barrier to high-quality economic development for the first time, as suggested by Premier Li Qiang’s work report delivered during the annual “two sessions” parliamentary gatherings in March.
In a meeting early last month, the Central Financial and Economic Affairs Commission, a top Communist Party organ overseeing economic issues, emphasised the need to curb involution and regulate low-price competition, vowing to help enterprises enhance product quality while phasing out outdated capacity.
Chen, the NUS researcher, said the crackdown, in reality, is a fight against overcapacity – an issue the government has been dealing with since the era of former premier Li Keqiang (2013-2023).
“But because of the deflation that China is facing at the moment, and the abuse of the word in Western narratives over the past couple of years, Chinese authorities tend to avoid using it,” he said.
After Beijing acknowledged in December 2023 that overcapacity in some industries posed a major risk to economic growth, officials began refuting Western claims of overcapacity.
“The economy has its own cycles, and excessive capacity emerges periodically,” Chen explained. “What China needs to do now is to curb the oversupply situation as soon as possible to minimise its socioeconomic impact.”
While he supported the tightening of legislation, Xu, the Zhejiang business executive, said it could not rectify all distorted prices, because businesses “always find workarounds”.
“The job should ultimately be done by the market,” he said, adding that a great deal of excessive capacity has yet to be eliminated because of local government support.
“Many photovoltaic companies have neither the technology nor the market, but they have land and equipment due to government policies,” he said. Tied to local government performance, this capacity, which he said may account for about 70 per cent of the industry, remains uncleared.
Jacob Gunter, a senior analyst specialising in “economy and industry” at the Berlin-based Mercator Institute for China Studies think tank, agreed that China’s neijuan issues were worsened by overinvestment, driven by its policy choices and the ensuing oversupply.
In principle, neijuan should be part of the standard business cycle where an excess of market entrants results in weak profits and fierce price competition, leading to the least efficient players exiting the market until consolidation achieves a sustainable equilibrium, he explained.
“However, neijuan becomes problematic if consolidation is too slow or isn’t proceeding at all – which is the core issue in China as vested interests, especially at the provincial and local levels, continue to feed loss-making firms to keep them alive and prevent market consolidation,” he added.
Neijuan-style competition is not unique to China, he noted, pointing to the tech industry in Silicon Valley, where companies often race to build scale while sustaining losses thanks to the backing of venture capitalists who tolerate such losses because the rewards – if companies succeed – can be very high.
But the scale of such phenomena in China is “unlike anything seen elsewhere”, happening across a wide range of sectors – primarily in asset-heavy manufacturing, where the scale of the costs and losses is much higher, he noted.
Beyond revising the pricing law, countermeasures that China has taken so far include government regulators holding talks with businesses, while industry associations roll out initiatives. These efforts have worked, to an extent, with some sectors seeing prices rebound.
Starting August 4, the base price for express delivery in Guangdong province increased by 0.4 yuan per shipment, and the new minimum price for a single shipment is now 1.4 yuan, the Southern Metropolis Daily reported. Authorities reportedly mandated that no company could charge less than this per-parcel rate, or they would face heavy penalties.
In the meantime, several leading paper manufacturers have issued price-increase notices amid tough government intervention and the rising cost of raw materials, announcing hikes for various products starting August 1.
For Xu’s company, price increases are not the end goal. The main strategy to avoid being eliminated by cutthroat competition is to invest in research and development to create new offerings and differentiated products, he said. - SOUTH CHINA MORNING POST
