Huang Yiping: misused industrial policy deepens China's low price trap

NSD director faults local government investment binges for fuelling overcapacity and, consequently, a vicious rat race of price undercutting.

In an interview first published on 11 September with Elite’s Talk, a video channel under Tencent Business & Finance, Huang Yiping, Boya Distinguished Professor, Dean of the National School of Development (NSD), Dean of the Institute of South-South Cooperation and Development (ISSCAD) at Peking University, delivered a blunt assessment of China’s overcapacity that has trapped firms in price wars and irrational competition—a vicious rat race of undercutting, eroding margins, degrading quality and sapping incentives to innovate.

China’s overcapacity is not just the investment rush typical of any industrial take-off; what makes it distinctive, says Huang, is the amplifying hand of local government. Industrial policy meant to correct market failures has been repurposed to churn out capacity. His remedy: scale back the state’s role, give enterprises and the market more sway over resource allocation, and judge officials by consumption, incomes and jobs rather than GDP alone.

That transition will take time. As a stopgap, Huang calls for China to look abroad, particularly to the Global South. Under his proposed Global South Green Development Plan, for example, blended finance that mixes aid, policy lending, and private capital could help poorer countries buy Chinese new energy products, soaking up surplus supply at home.

The video recording of the interview remains accessible on Tencent’s official website, and the full transcript can be found on the WeChat blogs of Tencent Business & Finance and the NSD.

黄益平谈产业政策：应用于帮助市场失灵，不能只是扩大产能规模

Huang Yiping: Industrial policy should fix market failures, not just add capacity

1. On the causes of irrational competition: excess supply pushes firms to scramble for market share

Elite’s Talk: Since July 2024, preventing “rat race and irrational competition” has become a policy watchword. How does this differ from competition driven by overcapacity in previous economic cycles?

Huang Yiping: The dominant macroeconomic backdrop to today’s low-price rat race is excess supply. With abundant capacity, firms must secure markets—most often by competing on price. The economy cools readily but is difficult to re-energise; the shortfall in demand is marked. Because this imbalance—supply persistently outstripping demand—is prolonged and broad-based, competition will only intensify as firms scramble for market share.

Elite’s Talk: In recent years, price indices such as the PPI and CPI have remained subdued. Do you see firms’ low-price irrational competition as one of the reasons for these weak readings?

Huang Yiping: Weak or declining price indices and the broader imbalance of supply outstripping demand are two sides of the same story.

In recent years, the platform economy has expanded rapidly, intensifying competition among firms and merchants. Some vendors, for instance, have marketed “the lowest price on the entire internet.” In the earlier phase of e-commerce, low prices tended to be localised or market-specific; in today’s platform environment, however, platform-wide price cutting in this low-price rat race can be more damaging.

2. On the harms of the rat race: how “lowest price on the entire internet” triggers a vicious cycle

Elite’s Talk: What are the harms of this low-price rat race, especially in the platform economy?

Huang Yiping: I think this is tied to the nature of platform economies. Nobel laureate George Akerlof proposed the “market for lemons” theory using the used-car market as an example. When buying a used car, consumers need two kinds of information—price and quality. Price is simple and transparent; quality is opaque and hard for ordinary buyers to assess. This information asymmetry nudges consumers toward cheaper cars. The consequence is that higher-quality but pricier cars become hard to sell and are forced to cut prices as well. Over time, prices keep falling and product quality deteriorates.

That is exactly what is worrying about the low-price rat race: it ultimately undermines the quality of economic development.

Elite’s Talk: For more than two decades, internet and e-commerce competition has often taken the form of cash-burning price wars—the “group-buying war,” the “bike-sharing war,” and so on, with consumers feeling they gained discounts. Do you see any positives in this model of competition, and what problems does it create?

Huang Yiping: I’m not a legal expert, so I can’t judge questions of fair or lawful competition. Economically, though, dumping and unfair competition are often assessed by asking whether prices cover costs. Many platforms have seized markets through heavy subsidies. Such strategies are unsustainable, especially when the aim is to squeeze out rivals and monopolise the market. From a societal perspective, they are problematic and call for regulatory oversight.

From an economics standpoint, we are again looking at a “market for lemons.” If e-commerce platforms all pursue a “lowest price on the entire internet” strategy, serious distortions can follow.

Suppose a bowl of beef noodles sells for 8, 10, or 15 yuan. Unless consumers can verify that the 15-yuan bowl is genuinely superior, they will rationally choose the 8-yuan option. This, in turn, prompts rival vendors to undercut further, degrading quality and entrenching a vicious cycle of irrational competition.

Similar dynamics appear in episodes of deflation. For example, the United States fell into the Great Depression of 1929 precisely because prices kept declining. Under the classical gold standard, the supply of gold could not meet the monetary expansion required by growing output, leading to sustained price decline.

In partial-equilibrium terms, falling prices benefit consumers: noodles that once cost 15 yuan now cost 7. In general-equilibrium terms, however, lower prices force producers to cut costs and quality, and more importantly, curb investment, delay hiring, and restrain wages. And household incomes then shrink. Seen through the general-equilibrium lens, price cuts do not aid consumers; they drive contraction. This vicious cycle merits particular attention.

3. On escaping the low price trap: communicating more information about quality to consumers

Elite’s Talk: What impact does the low-price rat race in the platform economy have on platforms themselves and on the merchants operating on them?

Huang Yiping: Platforms have delivered substantial benefits to both producers and consumers. As platforms scale, collaboration between merchants and platforms deepens, and relationships become more complex. For instance, when a platform launches discount and subsidy campaigns, who ultimately bears the cost?

Platforms aggregate and support large numbers of firms and consumers, yet they also depend on those participants to grow. Their strength lies in powerful scale effects; the downside is displacement—some firms or merchants may struggle to develop. Therefore, when discussing the platform economy, especially efforts to counter irrational competition, it is essential to consider how platforms and their partners in the ecosystem can grow in a healthy and sustainable way. Models that rely on squeezing the opportunities and interests of other participants in the short term are unlikely to be sustainable. Building a sound ecosystem requires joint efforts by platforms, enterprises, and regulators.

Elite’s Talk: So these low prices are like a trap. How can the vicious cycle be reversed? How do we get out of the trap?

Huang Yiping: The starting point is to rebalance supply and demand and address the problem of excess supply. From the firm’s perspective, in the face of broadly excess supply, adopting aggressive competition tactics is understandable: if sales are not pushed—even at a loss—the eventual losses may be larger.

On the government side, recent efforts to boost consumption are very much in the right direction; as supply and demand move toward balance, the pressure for low-price competition will ease. Moreover, some local industrial policies may not, in practice, be eliminated entirely, but they can be alleviated, scaled back, or steered in a more rational direction.

Third, as I have emphasised, the task is to transmit clearer signals of quality to the market. In many consumer transactions, assessing quality is genuinely difficult, especially for used goods and non-standardised products. If merchants and platforms can provide more credible information on quality, consumers can choose products that better match their preferences for quality and price. In the used-car market, for example, third-party platforms can supply inspection reports, guarantees, or insurance, enabling more reasonable, informed choices.

Finally, some platforms engage in low-price dumping through heavy subsidies to drive out competitors. In some cases, subsidies are not funded by the platform itself but are imposed on merchants. Such practices should be regulated and should be a focus for regulators.

Elite’s Talk: Consumers, of course, want both high quality and low prices.

Huang Yiping: Yes. When I emphasise high-quality competition, I do not mean “the higher the price, the better.” I mean that good products should command prices commensurate with their quality; only then will producers be incentivised to make high-quality goods. As long as markets are competitive, firms cannot raise prices without constraint; that is something market competition disciplines. Of course, if a firm offers a high-quality product but engages in monopolistic behaviour that makes the price exorbitant, market regulators can and should step in.

Elite’s Talk: Where is the line between high-quality competition and a low-price rat race?

Huang Yiping: The key criterion is whether prices fall below cost, or whether price cuts are premised on degrading quality. If firms improve efficiency and quality while keeping prices low, I think that is different from a low-price rat race.

Elite’s Talk: With the rapid advance of AI and big data, the consumer sector is changing profoundly. Which digital technologies are most likely to help the consumer market escape irrational competition? What new business models might emerge?

Huang Yiping: AI and big data can make it easier to convey signals about quality and make quality information more transparent. The National School of Development (NSD) has developed a China Online Consumer Brand Index (CBI) that aims to characterise product quality across multiple dimensions. The hope is that AI and big data will render quality information transparent enough to guide decisions, much as price signals do, so consumers are not blindly drawn to the cheapest option.

Elite’s Talk: E-commerce platforms already display a lot of quality-related information—ratings, user reviews, and so on. Yet there are also practices like fake ratings and paying for positive reviews.

Huang Yiping: Those problems do exist, and evaluations can also differ across income groups for the same product. NSD’s CBI shows that in some industries, brand information is clear and relatively salient to consumers. Take smartphones: consumers generally know which brands offer better quality and value. In other categories, the brand signal is much murkier. NSD’s research finds that women’s clothing is one such case, perhaps because the sector emphasises fashion and encompasses a wide variety of styles. Low prices may therefore carry greater weight, as women are likely to purchase a larger range of items. By contrast, brand information in men’s clothing tends to be clearer.

Elite’s Talk: In economics, discussions of price often invoke concepts such as perfect competition and efficient markets, where prices are said to incorporate all available information; only in monopolistic or oligopolistic settings, prices are distorted and fail to reflect a product’s true characteristics.

Huang Yiping: For prices to convey quality, one prerequisite is that quality information be relatively transparent. A good example is smartphones: most people use them, the number of leading brands is limited, and the information is fairly clear. Beef noodles, by contrast, have countless suppliers, and when ordering, consumers cannot readily tell whether the price reflects quality.

The concepts of perfect competition and market efficiency are important, but in real life, information is often incomplete. In such circumstances, it is advisable to provide consumers with more detailed information on quality, especially by leveraging modern technologies and artificial intelligence, thereby reducing information asymmetries.

4. On local governments behind the rat race: shifting focus from mega-projects to household demand

Elite’s Talk: In the past, efforts to cut excess capacity focused on outdated output in sectors such as steel and coal. Why, in recent years, have emerging industries—EVs, wind, solar, and even AI (with its recent “Hundred Model War”)—also seen overcapacity and price wars? How do you view these developments?

Huang Yiping: Excess supply can occur in both traditional and emerging industries, but the underlying mechanisms differ. In traditional sectors, firms expanded capacity and supply during past booms, but demand has since shrunk, leaving much output unsold and leading to severe excess supply.

In emerging industries, excess supply may be driven by both market dynamics and government intervention. When a new sector takes shape, firms and investors are naturally drawn to technologies and products that appear promising. During the Industrial Revolution, for instance, the boom in railways quickly gave rise to a proliferation of railway companies. More than twenty years ago, the rise of the internet drew in vast amounts of capital, culminating in the dot-com bust. In every case, when a sector with strong potential emerges, it attracts heavy investment, often pushing supply growth beyond demand growth, inflating a bubble. After a period of adjustment, the industry undergoes consolidation and shakeouts. In new industries, such a cycle is difficult to avoid.

What makes China’s case distinctive is the amplifying role of local governments. Many localities, enthusiastic about new-energy sectors, have used a range of direct and indirect instruments to push firms to scale up production.

I believe industrial policy is legitimate, but it should be used to help firms overcome market failures and to raise technological capability and efficiency. In practice, however, some local governments’ support for sectors such as new-energy vehicles has mainly expanded output, with limited gains in technology or efficiency. The sudden proliferation of firms nationwide and the rapid expansion of associated supply chains have disrupted markets and generated overcapacity.

Therefore, while market-driven surges of investment and episodes of oversupply are hard to avoid, local government conduct requires stricter discipline. The central authorities have, in fact, called for regulating local investment-promotion practices, constraining illegal or non-compliant subsidies and phasing out industrial policies that merely expand capacity without advancing innovation.

Elite’s Talk: Local governments’ rat-race-style investment spree has even extended to direct investment in industries. What is the logic behind such behaviour?

Huang Yiping: First, I believe local governments played an extremely positive role in driving reform and economic development in the past. In the early reform era, the central government delegated authority to localities, and local governments actively tailored economic decisions to local conditions. Encouraged by the “GDP tournament,” mayors in effect became CEOs of their local economies, striving for higher growth rates.

Today, however, that model shows clear downsides. The problems are twofold.

First, local governments’ goals are very straightforward: pursuing GDP growth. The most direct way to achieve this is to stimulate the supply side. For example, local governments use resources under their control to attract investment, or even directly launch infrastructure construction and large-scale projects. This approach keeps economic activity lively, but it also generates a persistent imbalance of excess supply over demand, an endogenous problem that tends to endure over the long term.

Consumption demand in China remains relatively weak. To smooth the international and domestic “dual circulation,” especially by strengthening the domestic loop, the policy must lift consumption. Yet this is hard to achieve. When the economy faces downward pressure, the call is to stimulate growth, but demand-side measures are harder to implement than large supply-side projects. This pattern has not fundamentally changed: local governments still tend to spur growth through major project investment rather than directing the bulk of resources toward strengthening consumer demand. Investments in major projects support short-term growth, but leave demand underpowered and further accentuate the imbalance of supply outstripping demand.

Huang Yiping: The second issue is that the delegation of powers remains incomplete. Delegating authority from the central to local governments has been an important reform, but an equally important objective—reiterated by the third plenary sessions of the 18th and 20th Central Committee of the Communist Party of China (CPC)—is to let the market play the decisive role in resource allocation. Although much allocation authority has shifted from the centre to localities, it still largely resides with local governments. The next step is to shift more of that authority out of government and into the hands of markets and enterprises.

Elite’s Talk: The logic behind local governments’ behaviour reflects both the prevailing growth model and habits of thinking and action built over decades. How should this be adjusted?

Huang Yiping: There are solutions, though they are easier said than done.

First, when evaluating local governments’ economic performance, the assessment should go beyond GDP growth. Although evaluation metrics have diversified, GDP still tends to dominate in practice. Indicators such as household consumption, income, and employment could be incorporated into performance assessments for local governments. That way, when local governments have resources and seek to promote growth, they would not focus solely on expanding supply.

Second, advance market-oriented reform by shifting more resource-allocation authority to markets and enterprises. Government should move further toward providing public services—education, healthcare, and social security—while ceding more of the role in organising economic activity to enterprises and market forces. Making the adjustment and regulation of local governments’ functions a core reform priority would help reduce resource-allocation distortions and the structural imbalance of supply outstripping demand.

Elite’s Talk: Central–local relations also shape local government behaviour, since industrial development priorities set by the centre need to be implemented by localities. From this angle, how can local governments be steered away from “piling into” the same sectors all at once?

Huang Yiping: The first focal point in central–local relations is the fiscal relationship. Local governments have extensive responsibilities but insufficient revenue shares; the two have long been out of balance. The tension has always existed, but in the past, localities had strong revenue-generating capacity—for example, land transfer income and large-scale fundraising via local government financing vehicles (LGFVs)—which, to some extent, offset the shortfall in revenue share. Now, many of those avenues are no longer sustainable. The next step, therefore, is to rebalance central–local fiscal arrangements: granting local governments a larger share of revenue while shifting certain spending responsibilities upward to the centre.

As for economic development, more of the work can be undertaken by enterprises and the market. Should industrial policy remain, and should centrally defined directions still be pursued? I believe industrial policy can have a role, but the central authorities have also emphasised “fostering new quality productive forces in line with local conditions” as well as “bringing local regulations and institutions for attracting investment under regulation and strictly prohibiting policy incentives in breach of laws and regulations.”

When local governments introduce industrial policies, two key issues warrant attention. The first is whether the funds used to subsidise firms come from the government’s own fiscal resources. If subsidies rely on other parties’ funds, the approach is inherently unsustainable, which suggests the need for clearer fiscal discipline on local governments going forward.

Second, and this is crucial: the objective of industrial policy should be to remedy market failures. Many innovative activities of enterprises generate positive externalities; absent public support, firms may lack incentives to undertake them. If a firm bears the heavy costs while society at large reaps the benefits, and the firm cannot internalise the returns, government subsidies to support innovation are necessary.

At present, many local governments, responding to central directives, have introduced industrial policies in selected sectors without actually delivering gains in efficiency or innovation. What has emerged instead is a simple expansion of capacity, fueling a rat race within industries and exacerbating the imbalance of excess supply over demand.

5. On how firms can move beyond the rat race: cultivate Global South markets; broaden the dimensions of innovation

Elite’s Talk: Many industries and firms now call for ending the rat race and reducing capacity, yet a “prisoner’s dilemma” persists: each hopes rivals will cut capacity so it can gain more. What role can policy play in guiding enterprises out of this dilemma?

Huang Yiping: As long as the fundamental imbalance of excess supply remains unresolved, policy guidance will be difficult to implement. In the near term, a practical approach is to cultivate new sources of demand. Take new-energy vehicles: the domestic market currently faces excess supply, but there is still considerable room abroad. Given the many restrictions in Europe and the United States, enterprises can focus more on markets in the Global South.

I recently conducted fieldwork in several African countries, where I found a very strong demand for China’s new energy products. The challenge, however, is that these countries lack sufficient financial capacity to purchase the products and technologies. This raises the question: Can a more comprehensive plan be developed?

Last year, I proposed establishing a Global South Green Development Plan. The idea is that China has already built a large-scale, relatively advanced, and currently low-cost new energy sector, including solar, lithium batteries, and new-energy vehicles. Domestically, excess supply is a binding constraint; internationally, exports face increasing restrictions in Europe and the United States. Against this backdrop, it is worth considering support for green energy transitions in Global South countries. Energy transition is a global undertaking, not limited to advanced economies; developing countries, including China, will also need to move in this direction. For energy-constrained countries in the Global South, additional new energy supply is of great significance, but the near-term obstacle is insufficient financing to purchase these products.

A blended approach could be pursued: part of the support through government aid, part through policy-based lending, and part through fully market-based investment, to help Global South countries undertake their new-energy transitions. This would also open new markets for China’s new energy capacity, effectively stimulating demand, albeit realised overseas.

Such measures would boost China’s aggregate demand and help stabilise its macroeconomy. Given the size and quality of China’s new energy industries, it would be regrettable if insufficient demand led to widespread firm closures, as already seen with annual shakeouts among new energy vehicle producers. The task, therefore, is to expand demand, whether at home or abroad, in order to ease the structural imbalance between supply and demand.

Elite’s Talk: At the firm level, how can enterprises be steered from price competition toward competition in innovation and quality?

Huang Yiping: A low-price rat race is itself a symptom of insufficient innovative drive: firms remain confined to existing industries, competing in narrow arenas where quality advantages are not salient.

When discussing innovation, attention often defaults to cutting-edge technological breakthroughs. But innovation should be multidimensional. For instance, a recent KPMG study finds that the adoption rate of AI technologies is higher in many emerging and developing economies than in advanced ones.

Now, consider mobile money in parts of Africa. The underlying technology is relatively simple—digital money transferred online. Though not as advanced as China’s WeChat Pay or Alipay, for some African economies, it effectively delivers the core payment function and solves practical problems.

Innovation, therefore, need not be purely original technological invention. It can also mean improving specific product attributes, optimising management processes, or raising operational efficiency.

Let me give another example familiar to smokers: disposable lighters that sell for one yuan apiece, a price that reportedly hasn’t changed in twenty years. The industry is large, but margins are thin. At one yuan per lighter, how much can be allocated to labour? If wages rise, firms struggle to stay viable.

Over the past few decades, the lighter supply chain shifted from Japan to Wenzhou. As costs rose there, it moved to Shaodong in Hunan; in recent years, however, labour costs in Shaodong have also increased. Firms considered relocating again to even lower-cost regions, but discovered this was difficult. A lighter may seem simple, yet it contains around sixteen components, each essentially a small supply chain. If these suppliers are dispersed, transport costs become prohibitive and coordinated relocation is hard to achieve. Most manufacturers, therefore, remained in Shaodong but adopted more automated processes. The machinery is relatively simple, yet well-suited to the industry; as a result, these firms have reduced labour costs to roughly 0.01 yuan per lighter.

The implication is that innovation need not always be at the technological frontier like DeepSeek or Unitree. For most firms, applying existing technologies and management methods to improve efficiency and quality can deliver substantial gains.

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