For the second year in a row, the phrase "rat-race competition" has made its way into the Government Work Report. Last year's report called for "comprehensive rectification". This year Premier Li Qiang's report emphasizes "in-depth rectification". Addressing an audience during the national two sessions, Minister of Justice He Rong also stated that this will be the focus of government legislation this year, marking the elevation of the campaign against neijuan, or involution, into a national strategy.

The shift in the wording from "comprehensive" to "in-depth" rectification signifies that China's anti-neijuan efforts, now officially stated as the campaign against "ratrace competition", have entered deep waters. A series of measures, ranging from policy formulation and legal revisions to improving governance systems, have been rolled out by multiple departments.

The term "involution" was originally used by anthropologist Clifford Geertz to describe a paradox in agricultural societies in Java, Indonesia, where limited land resources led to ever-increasing labor inputs but resulted in diminishing marginal output. The outcome was a self-locking state unable to progress to a higher stage. Over the past few years, economists and policymakers have used the term to describe a systemic malaise in China's economy.

In economic terms, neijuan is a negative-sum game caused by pressure from weak demand. On the production side, businesses engage in relentless price wars to maintain market share. Instead of improving efficiency by eliminating outdated capacity, they ramp up production to amortize their fixed costs. This in turn triggers industry-wide price collapse, lower profits and dwindling investment in research and development. This traps companies in a quagmire where increased output does not result in higher revenues, but instead may lead to greater losses.

Rat-race competition, the officially adopted English translation, captures both the phenomenon and its harmful effects. In such inefficient competition, where increasing inputs lead to decreasing outputs, some companies may gain temporary competitive advantages at the cost of profit margins. But over time, forcing all players into price wars weakens the overall industrial competitiveness and damages the ecosystem. It could become a major hindrance to China's sustainable and high-quality growth.

This relentless competition is especially prominent in manufacturing and e-commerce. China's new energy vehicle industry has grown rapidly, ranking first globally in production and sales for the past 10 years. Yet in 2024, the profit margins of automakers fell to 4.3 percent, with only BYD, Seres, Li Auto, and Leapmotor reporting profits. Many companies saw their research and development spending decline. Similarly, the profit margins of the auto parts and accessories sector dropped by 30 basis points year-on-year in 2024, while liabilities rose 10.6 percent.

Several factors are driving this cutthroat competition. Besides external uncertainties and insufficient domestic demand, which create oversupply and periodic mismatches, local protectionism fuels irrational competition. Take the photovoltaic industry: on the one hand, there is a clear short-term oversupply, with prices of polysilicon, wafers, cells, and modules all sliding sharply. On the other hand, some local governments continue to heavily subsidize new projects with land and capital incentives, with investments exceeding 800 billion yuan in 2024 alone.

This could be one of the reasons why the Party Central Committee decided to launch education initiatives this year about how political performance should be measured. When performance is judged by visible expansion, some localities tend to offer excessive policy incentives and blindly launch new industrial projects. The result is duplication, inefficiency and persistent overcapacity. Also, administrative intervention can delay the phasing out of outdated capacity, worsening the vicious cycle. Now that "rectifying rat-race competition" has been made a political task, local governments' unbridled efforts to attract investment are likely to be regulated.

For Chinese entrepreneurs, a shift in mindset is equally necessary. Competition is indeed the lifeblood of the market economy. Without it, the "China miracle" of rapid economic growth would not have been possible. The tireless striving of Chinese business leaders helped the nation catch up with the world. But when competition turns inward, and companies exhaust themselves just to outlast their rivals, it ceases to create value. The challenge for Chinese entrepreneurs now is to shift from zero-sum competition to positive-sum collaboration that creates new value.

The rat-race competition is not just a domestic problem but may also have external spillovers. Commerce Minister Wang Wentao recently warned Chinese companies in the United States against exporting their price-cutting strategies overseas. He urged Chinese companies to focus more on innovation-driven rather than factor-input-driven growth, moving from price competition to value competition. This will not only help reduce trade frictions but also improve the global image of Chinese enterprises and products.

Ending the rat race is not about slowing down, but about moving away from a cycle of diminishing returns toward a path where competition drives innovation. In that shift lies the next stage of China's economic story.

The author is chief researcher at the China Watch Institute, China Daily.