[World+] China Trapped in Overproduction "Neiquan," Xi Jinping Issues Warning

Criticism of Unproductive Excessive Competition: "Neiquan"
Infinite Price War Drives Electric Vehicle Crisis
Local AI Centers Neglected Due to Lack of Technical Expertise

Recently, Chinese President Xi Jinping reportedly issued a direct warning about excessive investment by local governments in artificial intelligence and electric vehicles during the Central Urban Work Conference. His remarks, expressing concern over unproductive excessive competition as investments are repeatedly made in the same direction, highlight fundamental structural problems in the Chinese economy. In recent times, the term "neiquan" (involution) has frequently appeared in China. Originally an anthropological term, it is now used in China to refer to "competition toward the bottom," meaning unproductive and excessive competition.

China's producer price index has remained in deflationary territory since September 2022. Factory gate prices have recorded negative growth for 33 consecutive months. China's deflation is a side effect of overproduction. Under normal circumstances, overproduction is resolved either by expanding demand through lower costs or by eliminating companies that lose out in price competition. However, Chinese consumers, anxious about the future, are reluctant to spend and are focused on saving, making demand expansion unlikely. Companies backed by local governments continue to remain in the market through more loans and subsidies rather than being forced out.

The electric vehicle market is the sector where this phenomenon is most evident. On May 23, 2025, BYD, the leading player in China's electric vehicle market, implemented a dramatic price cut of more than 30% on some models. In response, the China Association of Automobile Manufacturers took the unusual step of warning of a "new price war panic," stating that "certain automakers are leading massive price cuts and many companies are following suit."

The intensity of price competition in China's electric vehicle market can be seen in concrete numbers. According to Nomura Securities, over the past two years, the average retail price of automobiles in China has fallen by about 19%, now standing at around 165,000 yuan. With the GDP deflator declining for nine consecutive quarters, the price war in the electric vehicle industry is further deepening these structural problems. It is difficult to find a clear winner in a price war based on excessive production capacity. Even BYD, which holds nearly 30% market share, is under pressure as its growth rate slowed from 19% in April to 14% in May. The situation is even more serious for electric vehicle startups: Xiaopeng recorded a loss of about $90 million in the first quarter, and Nio, which focuses on the premium market, reported a massive loss of $949.6 million. This is the background behind concerns that, if this situation continues, everyone will be driven to ruin.

A similar problem is occurring in the AI sector. Local governments in sparsely populated regions such as Xinjiang Uygur Autonomous Region and Inner Mongolia are taking the lead in building data centers to capitalize on the AI boom, but many of these projects are facing difficulties due to a lack of technical know-how. According to industry insiders, the problem of chips being left unused in newly built data centers is becoming increasingly serious.

China's industrial strategy has involved the central government setting targets, with local governments and state-owned enterprises making large-scale investments. Through massive subsidies, the government encouraged the emergence of new market participants and simultaneously worked to create markets for their products through purchase subsidies and other measures. As competition among companies drove prices down, market demand increased and companies gained overwhelming competitiveness. However, not all companies are protected. Over time, the government encourages a few large corporations to dominate the market through natural mergers and acquisitions. Through this process, China's industrial competitiveness in areas such as solar panels, 5G networks, batteries, and electric vehicles has reached a world-class level. The problem is that excessive production capacity continues to accumulate in the process.

Compared to one year ago, when President Xi denied the existence of overcapacity in China during his visit to France, his recent remarks reflect the seriousness of the situation. By emphasizing the need to focus on debt levels and stating that responsibility should not be shifted or passed on to future generations, President Xi is raising not only economic policy issues but also the question of political responsibility.

However, since the origin of these problems lies with President Xi himself, solving them will not be easy. President Xi has refused to acknowledge the limitations of an economic growth model centered on investment and production, and has instead called for increased investment in more advanced high-tech manufacturing. China, with its population of 1.4 billion, has long served as the world's factory, leading to increased production capacity, but its level of consumption has not kept pace. While experts have considered the expansion of the domestic market to be rational and desirable, President Xi has not accepted this. In order to transition to a consumption-driven economic structure, it was necessary to strengthen welfare and foster the growth of various service industries. Bold measures were also needed to revive the real estate market, which had collapsed due to the bursting of the bubble, but the scope and scale of policies fell short.

If China were to embark on bold structural reforms to reduce overcapacity, many problems could be resolved, but the country fears the large-scale unemployment that would result from this process. With internal anxiety running high and facing various external pressures, including tariffs from the United States, it is difficult for the Chinese leadership to cope, leading to ongoing deliberation. Whether China will repeat the path taken by Japan in the 1990s or find a new path will determine many outcomes.

For us, who are struggling due to China's overproduction and low-priced exports, how China resolves its "neiquan" problem is a matter of great significance. More than ever, it is important to understand China as it is and to read the direction of its changes, rather than succumbing to vague fears or unconditional underestimation.

Choi Junyoung, Senior Expert at Yulchon LLC (Global Law and Policy)