Commentary: China’s New Cure for Price Wars

China’s economy is currently grappling with weak aggregate demand, sluggish prices, and sector-specific supply-demand mismatches that have sharply eroded corporate profitability, a condition now described by policymakers as “excessive competition.” Unlike the last wave of supply-side structural reforms targeting upstream, capital-intensive state-dominated industries like steel, cement, and coal, today’s problems are concentrated mid- and downstream, in sectors such as solar power, new-energy vehicles, logistics, and e-commerce, which have higher private sector participation[para. 1][para. 3][para. 4][para. 5].

This shift is evidenced by data showing that, while nearly half of state-dominated industries saw improving returns between 2022 and 2024, the proportion of such improvement dropped in industries with lower state ownership. This signifies that today’s glut is primarily afflicting sectors where private firms are more active, and traditional state-dominated sectors are relatively less exposed[para. 6].

The roots of the current overcapacity differ from the previous one. The earlier episode resulted from waves of domestic investment booms—driven by WTO accession and a 4 trillion yuan ($586 billion) post-2008 stimulus—followed by demand cooling and supply chain rigidity, leading to upstream excess and low inflation[para. 7]. Now, overcapacity reflects a pandemic-era export surge—spurred by expanded foreign fiscal stimulus and China’s competitive gains—which petered out as global demand normalized. The result is margin-sapping price wars downstream, not upstream[para. 8].

The role of government has also evolved. Previously, both state firms and local governments bankrolled expansion, mainly in heavy industries[para. 9]. Recently, private enterprises spearheaded growth in emerging industries, but local governments exacerbated the glut by luring investment in “hot” sectors through indiscriminate subsidies and support, contributing to redundant projects, chaotic low-price competition, and profit erosion[para. 10].

Correspondingly, the government’s toolkit is different. Earlier reforms relied on direct administrative capacity cuts—setting reduction quotas and shutting outdated facilities. Now, with most overcapacity in the private sector, policymakers prefer market-based measures. Rather than closing factories, the focus is on rationalizing market behavior by revising laws to prohibit below-cost sales, discouraging “lowest-bid-wins” procurement, and supporting consolidation and upgrading[para. 11][para. 12].

Whether these new policies will succeed depends less on domestic demand, which remains weak, and more on a revival in global demand. Unlike the prior era—when major domestic stimulus cushioned industry restructuring—the current approach requires buyers from abroad to return. Prospects for 2026 are promising due to anticipated fiscal and monetary expansion in the US and EU, and larger capital outlays from emerging economies benefitting from global supply chain shifts. A world demand rebound could thus underpin the success of China’s new strategy[para. 13][para. 14].

In terms of implementation, state-heavy sectors like steel and coal will see gentler capacity reductions, targeting only outdated facilities. In petrochemicals, policies will modernize old plants. The most aggressive anti-excessive competition interventions are in private sectors: the solar industry uses price limits and shared inventory platforms, wind power has applied successful price controls, logistics has seen effective industry association initiatives, and the auto sector is collectively resisting price wars and enforcing fairer supplier payment rules—moves already improving profitability in 2025[para. 15][para. 16].

These reforms, authored in analysis by Zhou Junzhi, aim to address China's unique present-day challenges in a rapidly changing global environment[para. 17][para. 18].