Local govts must rein in 'involutionary' competition

The Central Economic Work Conference, which concluded last week, stressed the urgency of addressing "involutionary" competition.

The dog-eat-dog competition is mainly manifested in fierce homogeneous competition among enterprises. In the case of excessive consumption of resources without improving productivity, the competition leads to price competition, which continuously transmits cost pressure and profit loss to enterprises. If unchecked, the enterprises will have no energy to open new markets, seek innovation or enhance efficiency.

Such competition is emerging in the new energy vehicle, lithium battery and photovoltaic industries in particular. The lack of international competition has prompted enterprises to try and seize market share through price competition and then reduce costs through large-scale production.

That calls for the central authorities to standardize the enforcement of local investment promotion laws and regulations to avoid illegal policy support and subsidies, and improve the pricing mechanism that should be determined mainly by market supply and demand to prevent the local governments from improperly intervening in these industries.

Preventing local governments from intervening in market competition, optimizing the performance evaluation of local officials, and establishing a unified national market can all promote healthy competition.

Local protectionism is another reason for the overcapacity of some low-end and backward production and the formation of "involutionary" competition. Local governments usually pay more attention to expanding investment and production because they can quickly boost the local GDP, tax revenue and employment. This provides space for the survival of low-end and backward production capacity, which is easier to be expanded, and helps them reduce costs and gain advantages in price competition.

Apart from curbing the irrational support of local governments, the healthy development of platform enterprises is also conducive to addressing the issue. The algorithms of the platform companies are oriented toward the highest efficiency and lowest cost, and are reinforced by various scoring and penalty mechanisms, which exacerbate the "involutionary" competition on the sales side, generating a strong transmission effect on the production side. Therefore, platform companies have an important role to play to address the "involutionary" competition.

The government must thus create a rule-of-law business environment that runs on long-term investment, fair competition, stable policy expectations, and a clearly defined relationship between the government and market entities. In particular, intellectual property protection should be implemented so that enterprises can focus on improving their innovation and management rather than trying to lower their production costs to survive the cutthroat "involutionary" competition.

21ST CENTURY BUSINESS HERALD