Value Praya

As promised, the full writeup on Left Field Printing ($1540.hk) is now live on my new substack, link in bio. More writeups to come!

This chart is also one of the clearest visual representations of what Chinese policymakers increasingly describe as “involution” (内卷). Involution occurs when competition becomes so intense that participants work harder, invest more capital, build more capacity, and cut prices more aggressively, yet everyone earns lower returns. Activity increases, but value creation does not. That is exactly what this chart appears to show. China’s industrial sector continues to produce enormous volumes of goods, but profitability is collapsing. The share of loss-making industrial enterprises has surged to 30%, while the absolute number of loss-making firms has reached a record high. In other words, more companies are competing than ever before, but a growing percentage of them are failing to earn adequate returns. This is the classic involution dynamic. Instead of weaker players exiting the market, firms continue operating, often supported by local governments, state-owned banks, strategic objectives, or the simple need to maintain employment. As a result, excess capacity persists. Companies respond by cutting prices. Competitors then cut prices further. Market share becomes more important than profitability. Everyone runs faster, but few move ahead. The EV sector is perhaps the best example. China has built the world’s most competitive electric vehicle ecosystem, yet pricing pressure has become so severe that many manufacturers struggle to generate sustainable profits. Similar patterns can be observed across solar panels, batteries, chemicals, steel, industrial equipment, and numerous manufacturing sectors. From a macro perspective, involution is deeply deflationary. When companies are trapped in price wars, they lose pricing power. Falling margins suppress wages, reduce investment returns, weaken business confidence, and ultimately slow household income growth. The result is an economy where supply keeps expanding while demand struggles to keep pace. This also explains why China’s export push has intensified. Excess capacity that cannot earn adequate returns domestically naturally seeks demand abroad. What China experiences as involution internally is increasingly being exported to global markets through lower-priced goods and rising trade surpluses. The deeper issue is that involution is not merely a cyclical phenomenon. It is often the consequence of an economic system where capacity creation is rewarded more than profitability. Companies continue investing because competitors are investing. Local governments continue supporting industries because neighboring provinces are doing the same. Capital continues flowing into sectors despite falling returns because strategic priorities outweigh market signals. The result is an economy that becomes exceptionally efficient at producing things but increasingly struggles to generate acceptable returns on the capital invested. Viewed through that lens, the rise in loss-making industrial enterprises is not simply a profitability statistic. It may be one of the strongest pieces of evidence that China’s involution problem is becoming more severe. The country is producing more, investing more, and competing harder than ever, yet an increasing share of firms are losing money. That is almost the textbook definition of involution.

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