China is currently undergoing an “overcapacity crisis.” Due to investment booms that far outstripped demand, firms in several major industries are engaged in price wars, what at one time was referred to as “cutthroat competition.”

Presumably because of the negative connotations of phrases like cutthroat competition, the Chinese have coined a neologism–“involution”–to describe their predicament.

Involution ?? or ? doesn't have to be a hard word, but I keep seeing it misused in China commentary, e.g. this article, which I also have mixed feedback on.

Simply: Involution is the state of intense competition AND the symptoms of that competition.?https://t.co/8D4rEDylZq

— David Fishman (@pretentiouswhat) September 20, 2025

The resort to euphemisms is always a tell of a deep problem. And in fine CCP fashion, it has launched a “campaign” against it:

In prosaic terms, then, this campaign is about limiting overcapacity and ensuring China doesn’t fall into the fatal tendency toward deflation that took over Japan three decades ago. It’s also a way to combat the collective action problems that bedevil all economies.

Dressing it as a campaign follows the Communist Party’s long history of presenting major shifts in policy as popular drives against particular internal enemies. It’s a successor to Mao’s anti-rightist and anti-intellectual movements, or the anti-corruption purge that Xi used to exert control over the state apparatus after he came to power in 2012.

And it’s surely a coincidence, right, that the overcapacity is most acute in industries which the government has targeted to be world leaders, which include solar energy (40-50 percent capacity utilization, 90 percent of companies losing money, measured in the billions) and EVs? But it also extends to more prosaic sectors, like steel and coal, and even hogs. Then of course there are the glittering infrastructure and transportation projects that are dazzling, but generate far less value than their cost. And don’t even start on residential construction.

There are no coincidences, comrade.

What has occurred in China represents the largest misallocation of capital in human history. And like much of China generally, the external appearance is but a veneer that conceals a fundamentally flawed construction.

This misallocation is the direct result of the huge degree of central control and “planning” in the economy. No, it is not Patriotic Nail Factory Number 10 will produce 5 billion nails in 2025 style planning, but planning implemented through a vast array of explicit and subsidies, tax breaks, and inducements offered by local governments jumping to the central government’s “guidance” on growth targets.

What the CCP has done, in essence, is play the Sorcerer’s Apprentice, and unleashed economic forces it cannot control.

Xi and his minions are desperately trying to stem the flood by . . . exercising more central control. Specifically, by the “anti-involution” campaign, which is basically government mandated and monitored cartellization of the over-capitalized sectors.

Of course many, particularly in the West, fret that the CCP policies to stifle competition will fail because they are not stimulative. No, really.

It’s a similar situation today, except Chinese policymakers are rolling out only half the solution. While Beijing’s recent push to curb overcapacity is helping rein in the glut in steel and solar sectors, the “anti-involution” campaign is missing a stimulus spark and could hurt the economy instead of bringing inflation back.

Uhm, you think that just maybe that “stimulus spark” is the cause of the problem, not the cure? You can’t follow the logical implications of this–which was in the immediately preceding paragraph?

When President Xi Jinping faced a deflation spiral a decade ago, he not only cracked down on China’s oversupply problem but also unleashed an almost $900 billion housing investment boom.

Not to mention the Keynesian idiocy implicit in this analysis, that “bringing inflation back” is the same as bringing back economic growth. The Phillips Curve, with Chinese characteristics.

What are other alternatives for the CCP? More central direction, of course:

Options available to Xi’s government include overhauling the incentive structure for local officials so they will chase faster consumption instead of investment and production, according to Robin Xing of Morgan Stanley, as well as reforms to transfer more income to households.

They just need to pull different levers, that’s all. Throttle back the investment, juice the consumption. By command!

That always works out well. After all, these guys did so great before why wouldn’t they do great now?

I can’t even. The stupid here–within China, and the Westerners who presume to analyze the Chinese economy–is beyond measuring.

They all would be better off heeding Hayek:

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account

But of course they won’t.

In sum, China is dizzy with success! It called forth massive investment, and its call was answered. Answered far too well, in fact.

The dizzying success is leading to a pullback, a tactical withdrawal like Stalin’s in 1930. But the fundamental communist mindset of direction from the top has not changed. Meaning that they won’t repeat the same mistakes. They will make new ones instead.