A Misunderstood Keyword Cui Zhiyuan on the True Cost and Way Out of Involution

A Misunderstood Keyword: Cui Zhiyuan on the True Cost and Way Out of "Involution"

Cui Zhiyuan | School of Public Policy and Management, Tsinghua University

Zheng Tao (Interview) | Editorial Department, Beijing Cultural Review

Recently, the National Development and Reform Commission and the State Administration for Market Regulation issued the “Announcement on Regulating Disorderly Price Competition and Maintaining a Good Market Price Order,” pointing out that disorderly competition can cause various negative impacts and is detrimental to the healthy development of the national economy. Since the second half of last year, preventing and breaking the “involution-style” competition has become an important task in China’s economic governance.

Recently, BCR interviewed Professor Cui Zhiyuan from the School of Public Policy and Management at Tsinghua University on key economic issues such as countering “involution” and boosting domestic demand. Cui Zhiyuan believes that the essence of “involution” is overcapacity, and while China has made significant achievements in the field of “new quality productive forces,” it has also witnessed phenomena of overcapacity and “involution-style” competition. Recent economic data shows that anti-”involution” policies have begun to show initial results. On the other hand, in the long run, boosting domestic demand and returning to a trajectory of high-speed growth are even more important tasks for China’s economic governance. Regarding this, Cui Zhiyuan pointed out that the recent debate over whether growth should be driven by investment or consumption is misguided, as the relationship between the two is complementary. The “supply-side structural reform” and “building a complete domestic demand system” promoted by the Chinese government in recent years are not mutually exclusive either, but rather require continuous institutional and technological innovation to break through supply and demand constraints. Currently, our main policies for “expanding domestic demand” are “trade-in programs” and “consumption vouchers,” but neither is as effective as increasing residents’ income. To this end, Cui Zhiyuan suggests promoting employee stock ownership and profit-sharing plans like Huawei’s in the area of primary distribution; in the area of redistribution, efforts should be intensified to build and improve the social welfare system.

BCR: In the past two years, “involution” has increasingly become a popular term for describing problems in China’s economy. Do you believe some Chinese industries have fallen into so-called “involution”? From historical and comparative perspectives, have similar phenomena of “involution” occurred in other countries during their industrialization processes?

Cui Zhiyuan: The September 16, 2025, issue of the magazine Qiushi published an important article by President Xi Jinping titled “Advancing the Development of a Nationwide Unified Market,” which identifies overcoming “involution” as a top priority for establishing a large domestic market: “First, focus on rectifying the disorderly and low-price competition among enterprises. In sectors severely affected by involution, governance should be effectively carried out in accordance with laws and regulations. Better leverage the self-regulatory role of industry associations to guide enterprises in improving product quality. Promote the orderly exit of outdated production capacity.” I believe the essence of “involution” is overcapacity because, in a scenario where demand outstrips supply, it is difficult to imagine enterprises engaging in price-cutting wars and vicious competition. President Xi clearly pointed out the need to “leverage the self-regulatory role of industry associations” and “promote the orderly exit of outdated production capacity.” This helps us understand the measures taken by some industries since August this year to overcome “involution.” For example, polysilicon (a key raw material for solar panels) companies in China decided to establish an industry fund to cut one-third of production capacity, as the current capacity utilization rate in this sector is only 40%, with existing capacity already double the global demand. Recently, the National Development and Reform Commission and the State Administration for Market Regulation issued the “Announcement on Addressing Disorderly Price Competition and Maintaining Good Market Price Order,” which states: “For key industries with prominent disorderly price competition, industry associations and other relevant organizations, under the guidance of the National Development and Reform Commission, the State Administration for Market Regulation, and industry regulatory authorities, may conduct research and evaluate the average industry costs to provide references for reasonable pricing by operators.”

In fact, the July 30, 2024 Politburo meeting marked the first time the Central Committee included “guarding against ‘involution-style’ vicious competition” in its meeting communiqué. The Politburo meeting on July 30, 2025, which studied the formulation of the 15th Five-Year Plan, again mentioned “governing disorderly competition among enterprises according to law and regulations, and advancing capacity governance in key industries.” According to data released by the National Bureau of Statistics, from January to August 2025, national fixed-asset investment grew by only 0.5%. This indicates that the central government’s anti-“involution” policies are beginning to show results, as the full-year figure for 2024 was 3.2%.At first glance, it is somewhat surprising that in fields closely related or adjacent to “new quality productive forces,” the year-on-year growth of fixed-asset investment is either negative or only marginally positive. For example, growth in the “electrical machinery and equipment manufacturing” sector was -8.8%, in the “computer, communication, and other electronic equipment manufacturing” sector it was -0.1%, and even the positive growth in “specialized equipment manufacturing” was only 1.6%. However, upon closer consideration, this is not difficult to understand. The key is to recognize that the major achievements China has made in the field of “new quality productive forces” and the overcapacity created by governments at all levels encouraging the rapid development of related enterprises can coexist and are not mutually contradictory.

The decline trend shown in the “Statistical Report on the Stock of Social Financing Scale for August 2025” released by the People’s Bank of China is consistent with that indicated by the National Bureau of Statistics’ report on fixed asset investment: “At the end of August, the balance of RMB loans issued to the real economy accounted for 61.2% of the stock of social financing scale in the same period, 1.2 percentage points lower year-on-year; the balance of foreign currency loans issued to the real economy, converted to RMB, accounted for 0.3%, 0.1 percentage points lower year-on-year; the balance of entrusted loans accounted for 2.6%, 0.2 percentage points lower year-on-year; the balance of trust loans accounted for 1%, 0.1 percentage points lower year-on-year; the balance of undiscounted bankers’ acceptances accounted for 0.5%, 0.1 percentage points lower year-on-year; the balance of corporate bonds accounted for 7.7%, 0.4 percentage points lower year-on-year; the balance of government bonds accounted for 21.1%, 2.2 percentage points higher year-on-year; the balance of domestic stocks of non-financial enterprises accounted for 2.8%, 0.1 percentage points lower year-on-year.” In other words, except for government bonds, all other types of loans experienced negative growth.

From a historical and comparative perspective, similar instances of “involutionary vicious competition” have certainly occurred in other countries. One of the key focuses of the essays collected in Volume 19 of The Collected Writings of John Maynard Keynes is “anti-vicious competition,” particularly in response to the “involution” in the British traditional export industries of coal and cotton in the 1920s. In Marx’s time, when he was writing Das Kapital, the West had not yet established “welfare states,” and the consumption capacity of the working class was very low. Consequently, Marx placed extreme emphasis on “overproduction.” He even stated: “The greater the pauperized sections of the working class and the industrial reserve army, the larger the number of paupers officially recognized as such. This is the absolute general law of capitalist accumulation.”(Das Kapital, Volume 1)

BCR: In recent years, China’s economic growth has not met expectations, and there are differing views within academia on how to restore the economy to a rapid growth track. Among these, the debate between persisting with investment-driven growth versus shifting to consumption-driven growth is particularly intense. How do you view this debate?

Cui Zhiyuan: The dichotomy between investment-driven and consumption-driven as alternative policy choices is incorrect. Modern macroeconomics can be said to have been founded by Keynes. Although later figures like Lucas from the University of Chicago opposed Keynes, they did not negate his fundamental conceptual framework for macroeconomics. Opening any textbook, one can read “Aggregate Demand = Consumption + Investment + Government Spending + Net Exports.” This means that the “aggregate demand” corresponding to “expanding domestic demand” includes both consumption demand and investment demand. The two are not substitutes but rather complementary.

In the 2022 issue 3 of Tsinghua Financial Review, I published an article titled “The New Trinity: Supply-Side Structural Reforms, Dual Circulation, and Common Prosperity,” which primarily discussed the complementarity between investment-driven and consumption-driven growth, and understanding “common prosperity” from the perspective of income distribution reform. Roberto Unger, a professor at Harvard Law School (a Brazilian), (Roberto Unger, Brazilian), in his 2019 book The Knowledge Economy, offered insights for our understanding of China’s macroeconomic policy evolution from 2008 to 2025. During his tenure as Minister of Strategic Affairs under Brazilian President Lula, he collaborated with Chinese State Councilor Dai Bingguo in planning the first BRICS summit. Unger argues that economic growth requires continuously breaking through supply constraints and demand constraints. However, the process of overcoming these two types of constraints is both “discontinuous” (discontinuous) and “heteronomous” (heteronomous). “Discontinuous” means that breaking through one supply or demand constraint does not spontaneously guarantee the breakthrough of the next constraint. Taking demand constraints as an example: the expansion of household debt in the United States prior to the 2007-2008 subprime mortgage crisis was, in a sense, a method of breaking through demand constraints, but it did not automatically ensure the achievement of the next method for overcoming demand constraints (e.g., expanding demand through progressive income tax and public social expenditure). “Heteronomous” refers to the lack of a spontaneous correspondence between demand expansion and supply expansion. For instance, even if demand expansion shifts from household debt to progressive taxation and public social spending, it does not guarantee that supply can spontaneously transition from lacking technological innovation to possessing it.

Keynes had already noted that supply expansion does not automatically create demand expansion. In his seminal 1936 work, The General Theory of Employment, Interest and Money, Keynes profoundly critiqued the so-called “Say’s Law” that “supply creates its own demand.” In 1939, in the preface to the French translation of The General Theory, Keynes even summarized his own doctrine in one sentence: “A complete break with Say’s Law in the theory of production, and a return to Montesquieu in the theory of interest rates.”

However, Unger emphasizes that Keynes did not notice that demand expansion cannot automatically create supply expansion either, thus Keynes’s theory is not a “general theory” but remains a special case. From this perspective, we can understand the Chinese leadership’s 2015 proposal of “supply-side structural reforms” as recognizing that the demand expansion since 2008 (i.e., the 4 trillion stimulus plan launched in response to the 2008 financial crisis) could not automatically bring about supply expansion; while the “dual circulation” strategy introduced in 2020, which emphasized “making meeting domestic demand the starting point and foothold of development and accelerating the construction of a complete domestic demand system,” recognizes that the supply-side reforms since 2015 could not automatically bring about demand expansion either. Therefore, “supply-side structural reforms” and “building a complete domestic demand system” are not mutually opposed but require continuous institutional and technological innovation to break through supply constraints and demand constraints. Specifically regarding current macro policies, we can clearly see a dual approach of consumption-driven and investment-driven strategies. For example, in promoting consumption, the Chinese government recently announced that starting from January 1, 2025, children under 3 years old born will receive an annual allowance of 3,600 yuan, paid continuously until they reach 3 years old. At the same time, starting this July, as one of the three provincial pilot projects for elderly care subsidies nationwide, Shandong Province provides electronic consumption vouchers via the “Civil Affairs App” to moderately or severely disabled elderly people over 60 years old, with 500 yuan per month deductible for home-based services and 800 yuan per month deductible for institutional care. In promoting investment, the largest recent project launched by the Chinese government is the Yarlung Tsangpo River lower reach hydropower project in Nyingchi, Tibet, initiated on July 19, 2025.

BCR: Since the beginning of this year, there have been multiple heated discussions around social security issues in the domestic public opinion sphere. Considering China’s actual national conditions and the experiences and lessons of Western welfare states, how should China’s social welfare system develop in the future?

Cui Zhiyuan: Currently, our main policies for “expanding domestic demand” are “trade-in programs” and “consumer vouchers.” However, neither is as practical as increasing residents’ income. The report of the 17th National Congress of the Communist Party of China in 2007 already stated: “Increase the share of residents’ income in the distribution of national income and raise the proportion of labor compensation in primary distribution.” But according to recent research by Sheng Songcheng, former head of the Survey and Statistics Department of the People’s Bank of China, and others, the share of residents’ income in the distribution of national income is significantly lower in China than in developed countries, and even lower than in other large developing countries. In 2022, the disposable income of China’s resident sector was 60.8% of GDP, about 10 percentage points lower than Japan (70.3%) and Germany (69.5%), and more than 20 percentage points lower than the United States (84.9%).[In 2024, the disposable income of China’s resident sector accounted for 43.15% of GDP. This proportion differs significantly from the 60.8% in 2022 (based on the flow of funds table), due to different statistical standards. The 43.15% for 2024 is based on household survey standards, reflecting only the cash income portion.]

Increasing residents’ income can start with the “popularization of the Huawei model.” In 1990, Huawei first proposed the concept of employee stock ownership, with employees purchasing shares at 10 yuan per share, and 15% of Huawei’s after-tax profit distributed as stock dividends. In 2001, Huawei introduced the reform of “virtual restricted shares,” where such “virtual stocks” enjoy certain dividend rights and stock price appreciation rights but cannot be transferred or sold and become invalid upon leaving the company. In 2008, Huawei further allocated shares to all employees with more than one year of service at 4.04 yuan per share. If employees lacked sufficient cash to purchase the shares, Huawei provided guarantees in the company’s name to banks, allowing employees to take out loans to buy the stock. In 2013, Huawei implemented the “Time-Based Unit Plan”(TUP), a profit-sharing plan applicable to both Chinese and foreign employees, with a cycle of five years. Huawei’s institutional arrangements fall under “primary distribution,” but they clearly cannot be explained simply by “relying on the market.” As an article in the Harvard Business Review suggests, Huawei’s choice of employee stock ownership and profit sharing stems from Ren Zhengfei’s belief in unifying fairness and efficiency.

In addition to the primary task of increasing the share of labor compensation in the primary distribution of national income, the second major task required to genuinely “expand domestic demand” is to enjoy the “free lunch of the welfare state” through “redistribution.”

The “welfare state” is a key theory of the “free lunch,” proposed by the renowned economist Peter Lindert from the University of California in his book (Growing Public). Peter Lindert’s multinational data research found that between 1880 and 2000, there was no significant negative correlation between a country’s social transfer payments (pensions, unemployment benefits, healthcare, housing subsidies, etc.) and its economic growth. The more developed a country, the more advanced its social welfare. This indicates that the “welfare state” is a potential “free lunch,” meaning that social transfer payments as high as 25%–35% of GDP did not reduce economic growth rates but instead promoted economic growth. Contrary to this trend, research by Sheng Songcheng and others found that “since 2000, the proportion of disposable income in China’s household sector has consistently been lower than its share in primary distribution income. This reflects the unreasonable adjustment of redistribution in China, where household sector transfer payment expenditures exceed income, resulting in the household sector’s income share being lower after redistribution than during primary distribution.”

Perhaps precisely because China’s process of establishing a “welfare state” has not been sufficiently synchronized with its process of becoming an economic power, recently, former People’s Bank of China Governor Zhou Xiaochuan and former China Securities Regulatory Commission Chairman Guo Shuqing both raised the issue of excessively low rural pensions (averaging 260 yuan per month). Guo Shuqing said: “Could we consider coordinating the reform of the basic pension system with the reform of state-owned assets and enterprises, and under the premise of establishing a professional and law-based transfer mechanism, allocate a higher proportion of state-owned capital to bolster the basic pension fund? According to the Constitution and laws, state-owned natural resources and assets of state-owned enterprises belong to the state, meaning they belong to all the people, and are primarily used to promote economic development, social construction, and people’s livelihood. The Party Central Committee and the State Council decided in the 1990s to use foreign exchange reserve earnings and allocate state-owned assets to supplement the basic pension fund, accumulating over 280 billion yuan as strategic reserve assets. In 2000, the National Council for Social Security Fund was established to manage and operate these assets. So far, the national social security fund’s strategic reserves have reached approximately 3 trillion yuan. In 2017, the State Council issued a document clarifying the transfer of 10% of state-owned equity from large and medium-sized state-owned and state-controlled enterprises and financial institutions at both central and local levels to the social security fund. By the end of last year, a total of 3.3 trillion yuan had been transferred. While establishing proper accounting and systems, it is recommended to further increase the proportion and scale of transfers in the future, implement them in phases and batches according to laws and regulations, and set up a dedicated national basic pension fund investment company to manage them professionally. Doing so could yield multiple significant benefits: demonstrating a strong determination for reform action; alleviating people’s concerns about their elderly life; achieving safe, stable, and relatively good returns; effectively addressing the vague property rights and empty ownership issues of state-owned enterprises; providing guidance and demonstration for the professional and efficient operation of state-owned capital, and so on.”

According to Peter Lindert, the answer to the puzzle of “the welfare state as a free lunch” lies in the political combination of regressive consumption taxes (Value-Added Tax being one form of consumption tax) and universalist social public expenditure (with fewer means-tests for welfare recipients): the former enhances the government’s taxation efficiency, while the latter offsets the regressive nature of the former by increasing social expenditure across the board. The core reason why Value-Added Tax is regressive is that low-income individuals bear a higher proportion of tax burden relative to their income compared to high-income individuals. Although VAT is nominally a “uniform proportional tax rate” (with China’s standard rate at 13%), the share of consumption in income declines as income rises, resulting in an actual tax burden distribution that resembles an “inverted pyramid.” Therefore, the regressive nature of VAT requires universalized public expenditure to enhance its legitimacy. The Value-Added Tax Law, passed by the National People’s Congress in 2024 and set to take effect on January 1, 2026, could serve as a reform opportunity to inject legitimacy into regressive VAT through universal social public expenditure.

BCR:In addition to domestic factors, international factors also significantly impact China’s economic development. Among these, the most closely watched is undoubtedly the relationship between China and the United States. How do you view the development prospects of Sino-U.S. economic and trade relations? After Trump began his second term, four rounds of trade negotiations have been held between China and the United States, but the situation has been volatile and unpredictable. If the China-U.S. relationship cannot achieve significant breakthroughs in the short term, would expanding economic and trade relations with developing countries be a feasible alternative path?

Cui Zhiyuan:The current focus of public opinion both at home and abroad is on the negative impact that the Sino-US trade conflict has on the economic growth of both sides and the world. This is undeniable, and of course we must resolutely oppose US hegemonism and unilateralism. However, we should also see that the peaceful systemic competition between China and the US holds positive significance for human progress.

At the same time, in line with the long-standing “Kingly Way” tradition of the Chinese nation and the grand ideal of a “Community with a Shared Future for Mankind,” we recognize the necessity of allowing countries around the world, especially developing nations, to share in the benefits of China’s rapid development. Our recent establishment of the China International Import Expo (CIIE) specifically in Shanghai is an example of sharing these benefits with the world, indicating our understanding that prolonged large trade surpluses—particularly when accompanied by substantial export subsidies and tax rebates—are detrimental to the independent industrial development of other countries (especially developing ones).Research by Professor Lu Feng from the National School of Development at Peking University reveals that by 2024, the number of trade investigations initiated against China by developing countries has surpassed those by developed ones: China faced a total of 198 WTO trade remedy investigations in 2024, with 117, nearly 60%, initiated by developing countries, significantly exceeding the number initiated by developed nations. This trend overturns the widespread public perception that trade disputes targeting China primarily originate from developed countries. It demonstrates that China’s export surplus is rapidly increasing across mid-to-high-end, emerging industries, as well as traditional and lower-end sectors, thereby triggering broader trade tensions, including from developing nations. Fortunately, China is adjusting this development model, which has been overly reliant on exports.

On September 24, 2025, the Ministry of Commerce held a press briefing where Li Chenggang, China’s International Trade Representative and Vice Minister of Commerce, addressed China’s stance on the issue of Special and Differential Treatment (S&DT) within the WTO. Li Chenggang pointed out that on September 23 local time, while attending activities related to the 80th session of the United Nations General Assembly, Chinese Premier Li Qiang solemnly announced to the world that as a responsible major developing country, China will not seek new S&DT in current and future WTO negotiations. Although China has not relinquished its “developing country status” within the WTO, it has voluntarily forgone certain trade preferences accorded to developing countries. This reflects China’s principled stance of proactively opening its domestic market for the sake of the “Community with a Shared Future for Mankind.” In coordination with this, on September 26, 2025, four departments—the Ministry of Commerce, the Ministry of Industry and Information Technology, the General Administration of Customs, and the State Administration for Market Regulation—decided to implement export license management for pure electric passenger vehicles. This represents a significant measure by China to proactively restrict exports.