SHANGHAI, Sept 15 (Reuters) - China's leaders have

pledged to put an end to aggressive price cuts by some Chinese

companies which regulators say are spurring excessive

competition that is damaging the economy.

The so-called "anti-involution" campaign has been sparked by

overcapacity among Chinese manufacturers - a legacy of past

government efforts to stimulate the economy - and price cuts

made to clear stock or spur consumption. Those cuts have

prompted price wars across various sectors that are raising

concerns deflation may become entrenched and hinder efforts to

stabilise China's $19 trillion economy.

WHAT IS INVOLUTION?

The Chinese term for involution, "neijuan", began trending

online in 2020 and was initially used by young people to

describe the hypercompetitive and often self-defeating pursuit

of traditional markers of success.

Some of the contexts they used it in included questioning

what was the point of working hard to get into a good school if

the reward was working 996 hours (9 a.m. to 9 p.m., six days per

week) in a tech company? If you were lucky enough to land a job,

that is, in an era of high graduate unemployment.

Though the term is far less commonly used in English,

involution comes from a latin term which means "to roll or turn

inwards". It was popularised by American cultural anthropologist

Clifford Geertz in the 1960s - in relation to his studies of

Javanese agriculture - to describe economic or cultural

stagnation despite increasing complexity or effort.

More recently, neijuan has become shorthand in China for the

exhausting but also often futile and sometimes self-destructive

grind of hyper-competition more broadly.

The concept is now also linked to the country's pivot from

property-driven growth to an industrial complex encompassing a

third of global manufacturing, which has seen more recources

invested without any accompanying increase in returns. It's a

race to the bottom.

WHY IS COMPETITION A BAD THING?

On social media in China there is an oft-repeated joke that

goes something like this: In other countries, governments

intervene to prevent anti-competitive behaviour; here (in

China), they intervene to curb competition.

The issue is that the level of competition has reached a

point where the returns are not only diminishing, they are

threatening economic stability.

Beijing is facing decisions to take action against

overcapacity, excessive competition and brutal price wars

because deflationary pressures have been mounting in the world's

second-largest economy.

Consumer behaviour is changing in ways that could lead to

further downward pressure on prices, economists say, raising

concerns that deflation could become entrenched, and posing more

headaches for China's policymakers.

The fight against deflation is a complicated one that poses

risks to employment and growth. It comes as an unresolved trade

spat with the U.S. intensifies the squeeze on factory profits.

Beijing sees employment as key to social stability.

Exporters and even the state sector are already shedding jobs

and cutting wages, while youth unemployment runs at 17.8%.

WHICH INDUSTRIES ARE MOST EXPOSED?

Excessive competition has led to shrinking corporate profit

margins across multiple sectors, including electric vehicles

(EVs), solar panels, lithium batteries, steel, cement and food

delivery.

In the EV sector, a brutal price war erupted in the world's

largest auto market in 2023 between dozens of brands including

BYD and Tesla. In May, Chinese regulators

ordered the sector to stop its incessant price cuts.

According to data from LSEG covering 33 listed automakers

headquartered in China, the sector's median net profit margin

fell to just 0.83% in 2024 from 2.7% in 2019.

China's solar industry has also been in the cross-hairs of

the anti-involution drive as massive levels of overcapacity and

price wars have led to losses in the photovoltaic manufacturing

value chain reaching $40 billion last year, according to Trina

Solar Chairman Gao Jifan.

Even though restructuring to cut oversupply has begun, there

is a long way to go before China's solar output matches demand.

Analysts estimated that China's 2024 wafer, cell and module

capacity alone is sufficient to meet annual global demand

through to 2032.

Some industries remain embroiled in the policy change.

In the food delivery sector, tech giants Alibaba ( BABA ),

JD.com ( JD ) and Meituan ( MPNGF ) have poured billions of

dollars into a subsidy-driven battle for "instant retail" market

share in an expensive bet that the fast-growing one-hour

delivery segment will be vital to the future of China's

e-commerce market as a whole.

Analysts at Nomura estimate industry-wide cash burn exceeded

$4 billion in the second quarter alone, investment expected to

further depress their short- to medium-term profits.