China has recently shifted its focus to a policy known as “Anti-involution.” This aims to reduce intense and unproductive competition among industries. This term highlights excessive rivalries that don’t lead to real progress, which President Xi Jinping wants to regulate, especially in solar, electric vehicles (EVs), and steel sectors. Investors have responded positively to these changes. In July, mainland Chinese stocks, particularly the CSI 300 index, showed better performance. Morgan Stanley now prefers A-shares over those listed in Hong Kong. Companies in solar and steel are likely to profit from reforms that curb overcapacity and improve profit margins.

Challenges of Implementing Reforms

Implementing these reforms is harder than previous efforts from 2015 to 2018, which focused on state-owned sectors like coal and steel. Now, overcapacity issues affect competitive private-sector industries, leading to price wars among tech giants like Alibaba and JD.com. To correct the current imbalances, increasing consumer demand is essential, but this has been a struggle for Beijing. Analysts see the government’s policy shift as an early sign of more actions to tackle these economic challenges. Beijing is trying to control what is often termed destructive competition. In this environment, companies focus on undercutting each other instead of innovating or expanding markets. This issue is particularly present in high-tech and industrial sectors, where growth has significantly outpaced demand. Xi appears to be shifting the focus from growth at all costs to sustainable development. The markets quickly reacted to these signals, with capital flowing into inland, mainland-listed firms. This shift is not just noise; it shows strong support for reforms aimed at managing capacity in sensitive industries. As a result, indices like the CSI 300 have shown steady gains, suggesting that domestic firms could benefit once these capacity adjustments are made.

Complex Path of Economic Reforms

However, the road ahead is not straightforward. In earlier years, reforming large state-run coal and steel companies was tough but easier to manage since they had less real competition. Now, the landscape features nimble private companies that fiercely compete for short-term market share. We see more entrenched inefficiencies in parts of the economy, making them challenging to fix with just one policy. The pressure among platform businesses has led to price-cutting instead of innovation. Liu and his team noted a gap between production levels and actual consumption. Output continues to rise because companies are incentivized to expand, which brings them prestige and political support. However, domestic demand has been weak, creating additional challenges. Adjusting supply cannot be done in isolation; simply shutting factories won’t improve the overall business climate unless consumers feel confident enough to spend. In the short term, industry messaging will be crucial. Making it clear that over-investment won’t guarantee state support can help control expansion. Also, limiting speculative pricing in retail tech or commodity sectors may restore pricing discipline. Traders observing these changes have a unique opportunity. During times of policy transition, implied volatility typically stabilizes before new norms emerge. The government’s clear direction—that production should match actual demand—means we can expect continued sector rotations. We have already seen how Hong Kong-listed and Shanghai-listed companies have responded. Traders should analyze how earnings are sensitive to volume and price changes. Sectors that rely mainly on low costs and aggressive sales might be vulnerable. Conversely, firms that are well-managed and have disciplined capital processes are likely to do well once the oversupply issues are resolved. When strategizing, a conditional approach may be better than blanket investments in entire sectors. Remember, market sentiment still hinges on Beijing’s ability to stimulate domestic demand. Without that, simply having a good valuation won’t guarantee success in the next phase of rebalancing. We are also noticing a spread of regulatory themes. Terms like “rational growth” and “quality-led development” are appearing more frequently in guidance from both provincial and central agencies. If these initiatives impact financials or healthcare, those sectors may experience similar shifts—quick policy changes, short volatility, and then new stabilizing ranges. As we navigate this landscape, we’re tracking transaction volumes in futures linked to supply-restrained sectors and observing changes between short-term and long-term contracts. If near-term trends suggest tightening, it will indicate that production is starting to respond to new directives. Keep an eye on shifts in those patterns. So far, understanding Beijing’s messaging and noting where capital responds quickly has been key. In policy-driven markets, actions often precede confirmations. Create your live VT Markets account and start trading now.

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