Anti-involution efforts are no quick fix for overcapacity

Our new Overcapacity Index for China shows that the government’s “anti-involution” campaign, which aims to tackle deflation by curbing excess supply, has yet to make much headway. That’s unlikely to change any time soon, as local officials will remain reluctant to embrace widespread production cuts that would drive up unemployment. Rebalancing towards consumption, a likely focus of the upcoming Five-Year Plan, offers a more viable solution to overcapacity over the medium-term. But it won’t provide immediate relief, and we expect China to remain stuck in deflation for at least another couple of years.