A New Word for the Chinese Economy: Involution

A panel of experts examines China's economic health. But we already know what one of its products - overcapacity - has meant for American industries.

"The word involution is the word of the year in China."

That was the message from Scott Kennedy, Senior Adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic & International Studies (CSIS). Kennedy moderated a roundtable discussion webcast for CSIS this week that explored recent economic changes in China. Involution, he explained, is "mindless production for which there is no demand." As the Chinese economy leans heavily on expanding manufacturing, the thinking goes, involution will lead to stagnation and make resolutions more complicated. And the overcapacity is produces will have direct repercussions on American manufacturing.

When asked to rank the country's current economic health on a scale of one to 10, responses from the assembled experts fell between four to six, with each panelist offering an answer as to why involution is occurring. "[China has] a significant problem of persistent deflation, excess capacity in industry, declining profits, weak job market and a property market that's in very poor shape," suggested Gavekal Dragonomics founder Arthur Kroeber.

But there are roadblocks for external analyses. Unlike other major economies, China does not release quarterly economic reports, and current released data has consistent inaccuracies. These inaccuracies come from both intentional falsification and technical issues.

Tianlei Huang of the Peterson Institute for International Economics said those issues are slowly moving towards resolution.

"Parts of the economy do look amazingly resilient. Manufacturing investment has grown nearly 10% in the last year," Huang said. "Of course, that strong investment in manufacturing is leading to rapidly growing manufacturing capacity, which has created all kinds of buzzer problems including overcapacity."

Manufacturing overcapacity, however, isn't new for China. And its over-reliance on manufacturing to push its economy forward has implications for China's trading partners. In fact, the Alliance for American Manufacturing published a report on this topic just last year.

From that report:

Overcapacity and overproduction are problems across China's vast manufacturing sector, where dedicated state support combines with low rates of household consumption to create an environment where many industries produce far more than the Chinese market will absorb. And it's not a new phenomenon. Examples of Chinese industrial overcapacity can be found over the years in sectors from paper and steel to car tires.

But the result is almost always the same: The excess is exported, often at a loss. It is manufacturers and workers in market economies around the world that receive the sharp end of this largesse.

China has taken the lead in a number of emerging industries. Should the Chinese state continue to depend heavily on its manufacturing sector and export markets for growth, manufacturers elsewhere - including our own industrial ecosystems and supply chains - will be put at risk.

You can read AAM's 2024 overcapacity report here, and watch the CSIS event below: