China stocks rise after price war promises

Chinese financial markets have reacted with a surge in recent sessions after Beijing promised to halt the price wars that have hurt corporate profits and exacerbated trade tensions with partners such as the United States and the European Union.

The dominant expression among authorities and analysts is “devolution” – a reference to the effort to curb excessive competition and overcapacity in sectors such as solar panels, steel and electric vehicles.

With domestic demand still weak and foreign trade barriers rising—including higher tariffs in the US under President Donald Trump—many Chinese manufacturers have opted to cut prices, reducing profit margins and driving several companies into bankruptcy.

The producer price index, which measures factory-gate prices, has been falling for almost three years in China, amid a prolonged cycle of deflation. This trend has already been reflected in global markets, with low-priced Chinese exports generating trade frictions with partners like Washington, Brussels, and several developing countries.

Faced with pressure, the Chinese government and several industry associations recently signaled a change of course. On June 30, the 10 largest solar panel glass manufacturers agreed to reduce production by 30%.

Authorities have also launched a car safety inspection campaign to curb cost-cutting practices that compromise quality.

The measures boosted stocks in pressured sectors. Liuzhou Iron & Steel rose 10% on Friday, accumulating gains of over 70% since the end of June.

Solar panel glass producer Changzhou Almaden rose about 50% in the same period. Listed funds for steel and solar panels rose about 10%.

However, the performance of electric vehicle manufacturers has been uneven: Li Auto and Nio posted double-digit gains, while industry leader BYD retreated.

Although foreign investors cannot directly buy Chinese stocks, they have access to approximately 2,700 securities and 250 funds through the Hong Kong Stock Exchange.

The measures follow high-level statements against so-called "disorderly competition." On June 29, the People's Daily, the official newspaper of the Chinese Communist Party, published a lengthy front-page editorial condemning the phenomenon of "involution" as contrary to the country's "high-quality" economic development goals.

Chinese President Xi Jinping advocated at an internal meeting for greater regulation on local incentives for the establishment of factories, which are considered the cause of overcapacity in strategic sectors.

Government rhetoric hardened in May, with a particular focus on the automotive sector, where price wars between electric vehicle manufacturers have been ongoing for more than three years. Investment bank UBS considered the change in tone "good news" for the sector's profits, admitting a "short-term respite" in aggressive price cuts.

After a new round of reductions led by BYD on May 23, competitors, industry associations, and the government called for fairer and more sustainable competition. Sectors such as batteries, cement, and construction also issued calls for this.

Originally used to describe the exhausting competition between students and young workers in a stagnant labor market, the term "involution" has come to designate, at the industrial level, the fierce rivalry in sectors with an excess of companies and limited demand.

The Communist Party's official magazine, Qiushi, highlighted that the discrepancy between production capacity and actual demand is forcing companies to fight for survival in a saturated market.

Despite the announced intentions, obstacles remain. Sectors such as steel and cement suffer from chronic overcapacity. The government's push for green industries has generated similar problems in the areas of solar panels, wind turbines, and electric vehicles.

Economists argue that it will be necessary to consolidate sectors through mergers and bankruptcies, but they acknowledge that the process will be slow, especially due to resistance from local governments, committed to protecting regional businesses and jobs.