On January 7, the National Development and Reform Commission (NDRC), China’s top economic planner, released a guideline for building a unified national market. According to the guideline, regions must ensure the free cross-regional flow of goods and production factors. It stipulates that regions must not violate national regulations by implementing policies to attract investment that offer preferential treatment in areas such as finance, taxes, pricing, land and resources or environmental policies.
The NDRC emphasized that by ensuring the uniformity of fundamental systems and rules, boosting the high-standard connectivity of market infrastructure and fair and unified market regulation, it aims to eliminate local protectionism and market fragmentation.
The guideline marks China’s latest efforts to address the problem of excessive competition. What the Chinese government refers to as neijuan or irrational competition is known in the West as economic involution, or “rat race,” where companies or localities try to undercut their competitors by focusing on reducing the cost of production and services rather than investing in technical improvements to increase their market share or attract investment.
In the past few years, many sectors in China have witnessed this rat race and irrational competition, meaning that companies adopt cutthroat pricing strategies that drive down profit margins. While in the short term, this competition lowered the price of their products and increased their market share, in the long term, these practices not only hinder innovation and sound economic growth, but also undermine the well-being of people.
A major reason behind the intensified involution is competition between local governments, as each region is trying to undercut the other by offering huge subsidies to support whichever industry is the most popular at the moment. This leads to duplicated projects and a homogenized industrial structure. To protect these locally supported companies, local governments tend to adopt protectionist measures, leading to fragmented markets even within the country, which is already a big market.
The central government has become acutely aware of the problem. In a meeting on July 30, 2024, the Political Bureau of the Communist Party of China (CPC) Central Committee called for the need for industries to prevent “rat race and irrational competition” through self-discipline. This is the first time the term “rat race and irrational competition” appeared in the official language of the top leadership. The government highlighted the need to “strengthen the market mechanism” and keep smooth “exit channels for backward and inefficient production capacities.”
The resolution of the third plenary session of the 20th CPC Central Committee in July 2024 pledged to “enhance the binding force of fair competition review.” A regulation that took effect on August 1 mandates fair competition review on all policy measures and rules concerning business activities. Barring market access by local standards is prohibited. Foreign-funded enterprises in China have long been calling for a level playing field not only between Chinese and foreign companies, but also among different regions. The government realized that a unified national market will make China more attractive for foreign investment and further openness will in turn push forward the process of building a national unified market.
The latest guideline on establishing a unified national market indicates that curbing involution is among China’s top priorities in China. But whether the reform can be effectively implemented remains to be seen.
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