Another month, another decline. The producer price index (PPI) fell 2.2% year-on-year in November, the 38th consecutive month of decline, according to data from China’s National Bureau of Statistics. The streak stretches back to late 2022, and there’s no end in sight.
We last checked in on hyper-competition known as “involution” (nei juan) in August. Since then the situation has not improved.
“Manufacturers are still cutting prices to shift excess supply,” Zavier Wong, a market analyst, told CNBC, noting that the strategy is hurting bottom lines across the region.
At a recent supply chain roundtable hosted by the British Chamber of Commerce in South China, industry representatives warned that involution is actively eroding what they called China’s manufacturing “depth.” This refers to the dense, highly specialised network of small-scale factories that has long been among China’s competitive advantages.
As one executive put it, the current “race to the bottom” is forcing the most specialized (but financially vulnerable) players out of the market.
So, does the data support this? And what does it mean for those of us buying in China?
Involution in the Numbers
If you look for this crisis in formal bankruptcy filings, you might miss it. In China, insolvency is a notoriously complex legal process, making it a lagging indicator. Despite this, credit insurer Allianz Trade forecasts a 6% rise in business insolvencies in China for 2025.
Loss-making enterprise counts and profit declines offer a sharper real-time view.
As of October 2025, China had over 143,000 industrial enterprises formally classified as “loss-making.” While this fluctuates monthly, it represents a massive cohort of “zombie” or distressed companies kept alive despite negative cash flows.
Profit Plunge: Industrial profits fell 5.5% year on year in October, the steepest decline in five months. This follows a severe 9.1% plunge in May, confirming that the “price wars” are directly eroding the bottom line.
Despite the financial bleeding, the conveyor belts haven’t slowed. Industrial output actually grew 4.8% in November, highlighting the massive disconnect between production volume and actual value.
The solar industry has become the poster child for involution’s destructive potential. More than 50 solar companies along the supply chain filed for bankruptcy in 2025 alone, with a third of China’s 121 listed solar producers now operating in the red. Last year, for example, major producers not only cut wages, but also laid off nearly a third of their workforce.
Should Overseas Buyers be Concerned?
The answer depends on your priority: price or resilience.
In the short term, this is a buyer’s dream. Many companies sourcing in China are currently benefiting from unusually low prices as Chinese firms with excess capacity aggressively court foreign markets. If your procurement strategy is purely cost-focused and short-term, this is a buyer’s market.
However, those lower prices come with two hidden costs.
- The most immediate implication for overseas companies is a sharp increase in “quality fade,” which we wrote about last summer. Put simply, the involution pressure forces factories to swap high-grade components for “good enough” alternatives to maintain a 1% margin.
- Supplier fragility is another issue. Your primary supplier might be one bad quarter away from a total collapse. Yet, even if a primary supplier remains stable, the collapse of their raw material providers causes a domino effect. This forces manufacturers to find immediate alternatives, typically at the expense of traceability and consistency.
Structural Persistence
Don’t expect relief anytime soon. As economist Michael Pettis has observed, the Chinese system remains “geared toward supporting production capacity to meet GDP growth targets.” Local governments are still judged by output and employment metrics. This creates an environment where they continue to prop up “zombie” manufacturers to preserve jobs, even when those factories are destroying value.
Despite these pressures, China’s manufacturing ecosystem remains significantly deeper than that of its closest competitors. It still possesses a massive, unparalleled array of suppliers and will continue to be a primary destination for foreign buyers.
However, it is worth keeping one reality in mind: in an involuted market, if the price seems too good to be true, you may well be subsidizing your supplier’s slow-motion collapse.
