China’s Anti-involution campaign isn’t supply-side reforms 2.0
With a weaker starting point than in 2015, China faces a more protracted adjustment path.
China’s latest “anti-involution” campaign, aimed at curbing excessive price competition, falls well short of the kind of meaningful supply-side reform that could trigger reflation. In our view, genuine reflation would require a combination of capacity cuts and meaningful demand stimulus. Yet, such a policy mix is far more difficult to deliver in the current environment.
Aggressive supply reductions would risk significant job losses and exacerbate strains on banks already managing rising credit losses from the housing sector. At the same time, political appetite for broad-based demand stimulus – particularly in housing – remains muted.
Comparisons with the 2015 reform drive are unflattering. Today’s policy approach is more fragmented and cautious, centred instead on sector-specific discipline rather than mandating sweeping capacity and output cuts.This limits the effectiveness of the policy response at a time when the underlying challenge is arguably more severe.
With a weaker starting point than in 2015, China faces a more protracted adjustment path. Any positive spillovers to global commodity markets are therefore likely to emerge only slowly and remain modest compared with the uplift seen during past supply-side reform cycles.
