The Phenomenon of Neijuan in the Chinese Economy
In its 2026 Article IV report, the IMF introduces a detailed analysis of “involution”—locally known as neijuan—a term describing a state of “backwards-looking” or “excessive” competition. This phenomenon occurs when firms and individuals engage in intense rivalry for diminishing returns, leading to extreme price wars and industrial inefficiency. Consequently, the Chinese authorities have identified the prevention of “vicious” competition as a top policy priority to protect the country’s long-term productive capacity and economic stability.
Origins and Structural Drivers of Oversupply
Originally, the drive for rapid industrial expansion and local government subsidies led to significant overcapacity in several key sectors, particularly in green technology and traditional manufacturing. Throughout 2025, this surplus of production, combined with sluggish domestic demand, forced companies to slash prices to maintain market share. Furthermore, the FMI notes that this environment of “involution” has been exacerbated by the real estate downturn, which has redirected capital toward manufacturing, further saturating domestic markets. This cycle of oversupply and price-cutting has created a deflationary environment that threatens the profitability of even the most efficient firms.
Structure of the Policy Response to Internal Rivalry
The government’s strategy to combat neijuan is organized around improving market-based exit mechanisms and enhancing quality-based competition. Specifically, the authorities are moving away from rewarding simple quantity or market share toward supporting “high-quality development” and innovation. Moreover, the report highlights efforts to strengthen anti-monopoly enforcement and fair-competition reviews to prevent predatory pricing strategies. By establishing clearer “rules of the game,” China seeks to ensure that competition leads to genuine technological breakthroughs rather than a “race to the bottom” that wastes national resources.
Innovation and the Shift Toward Consumption
In contrast to a strategy of exporting excess capacity, the 2026 roadmap emphasizes that the only sustainable solution to involution is the substantial strengthening of domestic consumption. For instance, if Chinese households felt more secure in their social safety nets, they would increase spending, thereby absorbing the current industrial oversupply. Therefore, the IMF suggests that rebalancing the economy toward services and consumption would naturally alleviate the pressures of neijuan. This shift would allow firms to focus on value-added innovation instead of survival-based price competition, fostering a more healthy and dynamic internal market.
Synthesis of Industrial Health and Regional Synergy
The successful mitigation of “involution” relies on a delicate balance between allowing market forces to weed out inefficient firms and providing state support for strategic sectors. This synergy is intended to transform the current “vicious” competition into a “virtuous” cycle of innovation-led growth. Simultaneously, there is a clear intent to align these internal adjustments with global trade expectations to reduce friction with international partners. Ultimately, overcoming the challenge of neijuan is essential for China to escape the middle-income trap and provide a stable, prosperous environment for its citizens and the broader global economy.
Source
International Monetary Fund. (2026, February). People’s Republic of China: 2025 Article IV Consultation-Press Release and Staff Report (IMF Country Report No. 26/44).