China's crazy 'race to the bottom' in the EV market is actually just a side effect of the government's obsession with cutting debt.
March 25, 2026
Original Paper
China's Economic Involution: State and Business Strategies
SSRN · 6338019
The Takeaway
While cutthroat competition is usually seen as a market failure, this study shows that Chinese government pressure to reduce debt while hitting growth targets forces local officials to over-invest in favored industries. This creates an endless cycle of oversupply where companies must lower prices and lose money just to stay in the game.
From the abstract
China's economic involution, characterized by cutthroat, race-to-the-bottom competition, is a symptom rooted in its political and fiscal structure. During the recent economic downturn, the central government, local governments, and businesses entered a self-reinforcing cycle. The central growth targets and debtreduction pressures pushed local governments to expand investment in statefavored industries, creating low-profit competition and oversupply. The declining revenues further reduced demand,