Summary of the Key Points
The central argument of this article is that the Chinese economy is currently trapped in a vicious cycle of "involutionary competition" and "insufficient consumption." Insufficient consumption forces companies to compete for existing market share, leading to increased competition, which in turn reduces corporate profits and residents' incomes, further exacerbating the problem. To break this cycle, it is essential to transform economic growth into increased household income and shift corporate competition from price wars to innovation and value creation, ultimately fostering a new growth model driven by domestic demand and innovation.
I. Involution and Insufficient Consumption: Two Interconnecting Problems
You may often hear the term "involution," which refers to situations where companies engage in price-cutting competitions (for example, new energy car manufacturers) or where workers work long hours without wage increases. The article explains that these phenomena are closely linked to insufficient consumption:
- Step 1: Insufficient Consumption → Companies Compete for Existing Market Share: When people are reluctant to spend and market demand does not grow, companies cannot earn profits by expanding the market; they must compete for the existing customer base. For instance, in the past, the automotive market grew by 10% annually, allowing companies to profit by increasing production. Now that market growth has stagnated, they resort to lowering prices to attract customers, leading to involution.
- Step 2: Involution → Even Less Consumption: Price wars reduce corporate profits, making it difficult for companies to raise wages or even lay off employees. This creates more uncertainty about future income, leading people to save money as a precaution against risks, thus further reducing consumption.
This creates a self-perpetuating cycle: People avoid spending → Companies compete for business → Wages do not increase → People save even more.
II. Insufficient Consumption Is Not Due to Lack of Money, but Because Money Does Not Reach Consumers
Many people argue that they cannot afford to consume because they lack funds. However, the article points out that this is a result of the past growth model:
- Over the past few decades, China's development has been driven by investment in physical assets such as factories and infrastructure, which has rapidly increased production capacity. However, much of this investment has gone towards tangible assets rather than improving workers' wages.
- For example, a factory may spend 1 million yuan on machinery that produces more products, but worker wages may only increase by 5%. While this has led to strong production capabilities, it has not kept up with income growth, resulting in low consumer spending.
III. Why Does Involution Make People More Reluctant to Spend?
Involution affects consumers directly:
- Declining Corporate Profits → Stagnant Wages: Companies engaged in price wars have less money to spend on wages and may cut costs (such as by laying off employees or reducing benefits).
- Intensifying Job Competition → Poorer Expectations: With companies competing for existing market share, there is less demand for new workers, making it harder to find a job. This fear of unemployment leads people to save money instead of spending.
IV. The Financial System: Why Do Companies Prefer Involution Over Innovation?
The article identifies a fundamental issue with China's financial system, which has not yet adapted to the needs of an innovative era:
- Banks traditionally prefer lending to companies with tangible assets (such as factories and equipment) that can be used as collateral. Innovation, however, requires investment in talent, technology, and brands, which are harder to secure as collateral.
- As a result, companies continue to focus on visible forms of expansion (e.g., building more factories or producing more similar products) rather than investing in innovative activities (such as research and development). This keeps competition focused on price and scale, preventing the cycle of involution from breaking.
V. How to Break the Cycle
The article offers several solutions:
1. Transform Growth into Increased Income: Improve social security systems (e.g., healthcare and pension plans) to reduce people's need to save for emergencies and encourage spending.
2. Shift Corporate Competition from Price Wars to Innovation: Reduce government interference to allow healthy companies to thrive while weaker ones fail, encouraging them to rely on technology and quality to generate profits.
3. Financial Systems That Support Innovation: Develop venture capital to fund companies investing in innovation and talent.
4. Promote Service-Based Consumption: Expand industries like education, healthcare, and tourism, which create more jobs and provide stable incomes, thereby boosting consumption.
5. Invest in People: Invest in education and research to empower individuals to innovate and spend more.
Only by implementing these measures can the Chinese economy emerge from the cycle of involution and achieve a new model where everyone has enough money to spend and companies are motivated to innovate, leading to healthy economic growth.
In Summary: To break the cycle of involution and insufficient consumption, it is crucial to distribute more wealth to consumers and shift competition towards value creation. This will encourage spending and motivate companies to innovate, enabling sustainable economic growth.