Growth without profits: how will ‘involution’ in China end?

This paper analyses China's economic 'involution' , a phenomenon characterised by intense competition in overcrowded markets such as electric vehicles (EVs), price wars, declining profit margins and ongoing resource misallocation via 'zombie firms' .Using data from Chinese listed companies, we decompose firm profits and find that, while firm-level total factor productivity (TFP) has risen since 2020, markups are falling.More granularly, firms across the productivity spectrum are compressing their profit margins to compete for market share.The fact that even companies without productivity gains are lowering prices has contributed to a growing share of lossmaking zombie firms, which survive on the back of bank support or government subsidies, hindering consolidation.China's policy efforts emphasise anti-involution measures including regulation of predatory pricing and promotion of orderly exits, but they have not yet solved the fundamental problem, as unproductive firms continue to operate.For Europe, this has heightened the concern that China's involution-driven growth model is fuelling export expansion through persistent low-price competition, increasing the likelihood that the EU will strengthen its trade-defence measures, alongside efforts to raise its own productivity.