China is facing growing deflationary pressure, with factory-gate prices recently marking one of the sharpest year-over-year declines in nearly two years. Export-driven industries—like electric vehicles, solar panels, electronics, and textiles—are locked in intense price competition as global demand softens and U.S. trade tensions persist.
Major manufacturers, such as leading EV maker BYD, have started squeezing suppliers with delayed payments and frequent demands for cost reductions to offer ultra-competitive pricing. This “race to the bottom” has not only eroded supplier margins but also triggered a broader ripple effect of involution—where everyone competes harder but gains little.
In response, Chinese leadership, including President Xi Jinping, and key policymakers are increasingly stepping in. They’ve condemned disorderly price-cutting and urged for tighter regulation on overcapacity. Initiatives under discussion include regulatory crackdowns, financial reform tools, and efforts to boost domestic demand—though structural change will take time.
While consumer prices have edged up slightly, the stark contrast between slipping factory prices and stagnant consumer demand highlights a troubling economic imbalance. China now faces a high-stakes challenge: rebalance supply and stimulate growth without triggering further contraction or mass factory closures.