China’s “anti-involution” policy to tackle deflation, announced in 2024, is still in its early stages. Some effects are already visible, but compared with China’s last deflation fight in 2014–2015, the policy may take longer to work, in our view. To understand why—and the implications for China’s overseas trade and bond issuance—it helps to consider the scale of the challenge, its causes and how policymakers aim to address them.
In English, involution means “shrinkage,” but the Chinese term suggests a process that curls inward and consumes itself—like a snake devouring its own tail. The metaphor aptly describes how China’s firms, caught in a low-growth and weak-demand cycle, compete relentlessly on price. In 2024, for example, a new-model sports utility vehicle (SUV) went on sale for the equivalent of US$33,000. Its price was soon slashed to US$7,000.
China’s current deflation stems from the property crisis triggered in 2021 by the default of Evergrande, then one of the country’s biggest developers.
Buffer for Economy Led to Overcapacity
Regulators responded with strict measures whose impact extended beyond property (which then accounted for about a quarter of the country’s GDP and a large share of household wealth). Home and land sales collapsed, dragging on growth and fueling the deflation spiral.
To offset the risk, regulators introduced policies to support the manufacturing sector. Because manufacturers are capital-intensive, banks played a key role in delivering credit support. Since 2021, manufacturing has outpaced real estate in growth in both fixed-asset investment and bank loans (Display).
