Recently, the Chinese authorities have taken a series of intensive control measures against the phenomenon of “incorporation” in the manufacturing industry, especially in the new energy vehicle sector. On Thursday (24th), they introduced the relevant provisions of the “Price Law” to regulate market price behavior, sparking widespread doubts about its policy logic and actual effects. Experts believe that this round of reform is much more challenging than a decade ago, with a high risk of failure that could significantly lead to a decline in China’s economic growth rate.
According to information from China News Network on Thursday, the National Development and Reform Commission of the Communist Party of China and the State Administration for Market Regulation jointly drafted the “Draft Amendments to the Price Law (Solicitation of Opinions)”, and began soliciting public opinions on July 24th.
The “Draft Amendments to the Price Law” includes 10 articles, emphasizing “the leadership of the Party” and explicitly prohibiting behaviors such as price collusion, selling below cost, and disguised price adjustment. At the same time, the draft further regulates government-guided prices and government-set pricing rules. For serious violations of openly marked prices, fines of up to 50,000 yuan can be imposed.
In response to this, Professor Sun Guoxiang from the Department of International Affairs and Business at Nanhua University in Taiwan pointed out that there is a clear “double signal” issue in the current Chinese economy: local governments continue to promote industrial expansion to achieve GDP and employment goals, while the central government is using administrative means to address the “incorporation” issue, creating a policy contradiction of “promoting expansion with one hand and curbing incorporation with the other.”
The Chinese automobile industry has long been supported by official policies for rapid expansion, but recent economic downturns and increased competition have put several car companies in a difficult situation. To boost sales, many car companies have engaged in price wars, leading to distortions in some markets such as the phenomenon of “brand-new second-hand cars.” This refers to new cars being quickly resold as second-hand vehicles after registration to create the illusion of high demand, deceiving consumers.
According to industry data, in 2024, there were over 200 models of cars with reduced prices in China. In the first four months of 2025, there were more than 60 models with price reductions, and in May, over a hundred models saw price cuts, with the highest reduction exceeding 50,000 yuan.
The ongoing price competition has severely eroded industry profits, with the profit margin of the Chinese automobile manufacturing industry being only 4.3% in 2024, further declining to 3.9% in the first quarter of this year, below the average level for the manufacturing industry.
American economist Davy J. Wong, when interviewed by Epoch Times, pointed out that while the Chinese authorities claim to be addressing the issue of “incorporation” in manufacturing, they continue to strongly support the expansion of related industries, causing confusion in policy signals and disrupting capital expectations.
Since March this year, regulatory agencies such as the Ministry of Industry and Information Technology of the CPC have taken over a dozen rectification actions targeting the new energy automobile industry, expanding from battery safety to price control, promotional activities, and account execution details.
The newly issued “Electric Vehicle Power Battery Safety Requirements” for the first time listed “non-flammable, non-explosive” as a mandatory indicator, known in the industry as the “strictest standard ever.”
Of particular note, from July 16th to 18th, the Chinese authorities held three consecutive high-level meetings and forums, emphasizing the crackdown on “irrational competition” and curbing the industry’s “vicious incorporation.”
However, companies have generally expressed concerns that the implementation period of the new regulations is pressing and technical standards are unclear, resulting in significantly increased operational costs. Industry insiders worry that this “overly detailed” regulatory approach may stifle innovation and force companies to allocate resources to compliance rather than technical research and development.
Reuters recently reported that Beijing is considering cutting industrial capacity to cope with price wars and deflation pressures, similar to the supply-side reforms a decade ago, but this “industrial slim-down” faces more formidable challenges this time.
China has a massive industrial system, yet it faces challenges of overcapacity. Analysts at Societe Generale noted that the capacity utilization rate in most industries is lower than the “healthy” threshold of 80%, mainly due to weak domestic demand and an investment-driven growth model that overemphasizes production over consumption.
Analysts predict that high-end industries like automobiles, batteries, and solar panels, referred to as the “new three goods,” will be the focus of capacity cuts as these sectors are deeply mired in price wars and overcapacity issues.
Professor He-Ling Shi from Monash University in Australia believes that this round of supply-side reforms is more challenging than the one in 2015, with a significantly higher risk of failure. If these reforms fail, the overall economic growth rate in China could see a significant decline.
Davy J. Wong compared the current situation with the supply-side reforms of 2015-2016, highlighting the harsher economic environment today: stagnant economic growth, weak domestic demand, high local debt levels, low confidence among private enterprises, and persistently high youth unemployment rates, suggesting that the scope for reforms has greatly diminished.
He believes that the root cause of the policy contradictions within the Chinese government lies in the economy’s heavy reliance on investment-led growth and capacity accumulation, lacking effective domestic demand transformation and market exit mechanisms. “Incorporation” is not a choice made by companies but a result of systemic pressure.
He mentioned that authorities do not allow for corporate bankruptcies, local capacity eliminations, or rising unemployment rates. By trying to curb “incorporation”, companies are forced to cut costs and compromise on quality, resulting in increased social risks.
Sun Guoxiang also shares similar concerns, pointing out that ten years ago, reforms could absorb resources and address employment pressures through urban renewal and infrastructure expansion. However, with limited room for real estate and infrastructure stimulus today, along with weak domestic demand and insufficient alternative drivers for growth, solutions are much more challenging.
He warned that improper “trimming of capacity” operations could cause a chain reaction: a weakening of real investment momentum, difficulty for consumption to fill the investment gap, and increased labor market pressures. Without well-designed and simultaneous demand-side stimuli and social security measures, this may lead to a significant economic downturn and intensified deflation in the near term.
Experts generally agree that the current rectification efforts in the Chinese automotive industry seem significant, but if they do not address core structural issues such as fiscal dependency, government-enterprise relationships, and market mechanisms, it may ultimately just be a “policy show.” With local governments still focusing on output value and tax revenue as key performance indicators, eradicating the fundamental causes of industry “incorporation” remains challenging.
Davy J. Wong stated that “incorporation” in the manufacturing industry is not malicious competition chosen by companies but a systemic dilemma due to resource surplus and growth pressures.
Despite frequent signals from the authorities about tightening controls, the market remains cautious about the effectiveness of the rectification efforts. Price wars are escalating, leading automakers to incur significant losses. Upstream and downstream companies in the supply chain are forced to reduce prices, increasing pressure on distributors and component suppliers, with some small and medium-sized enterprises even facing the risk of closure.
There are reports that some car companies, in a rush to seize the market and release new models quickly, significantly shorten the research and testing cycles, potentially shifting safety and stability risks to consumers.
Sun Guoxiang pointed out that solely relying on administrative rectification may lead to three major negative outcomes: first, weaker market players being forced out could lead to increased industry concentration, triggering a vicious cycle of price monopolies and inefficient expansions; second, small and medium-sized enterprises struggling against policy shocks may result in job losses and increased social risks; third, businesses allocating more resources to cope with policy uncertainties rather than investing in research and development could suppress industrial innovation.
He emphasized that the solution should shift toward a demand-oriented model, including boosting domestic demand and household incomes, optimizing market mechanisms, reducing the subsidy bias towards capacity-type projects, and establishing a genuinely market-oriented industry elimination mechanism, rather than just punishing market competition behaviors of companies.