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.
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.
China's Economic Involution: State and Business Strategies
SSRN · 6338019
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,