HONG KONG — Governments usually intervene in the market to encourage competition. Chinese authorities are doing the opposite. An official campaign seeking to end excessive corporate rivalry has spurred hopes of an end to deflation and helped to push up the country’s benchmark CSI 300 Index by 10 percent in August. However, the long-term effects may be less positive for equity values.
Excess capacity and weak domestic demand have left Chinese companies fighting each other for survival. A 90 percent drop in second-quarter earnings at Meituan, driven by a price war with other food delivery groups, underscores the intensity of self-destructive rivalry.
The government backlash escalated in July, when President Xi Jinping’s Central Committee on Financial and Economic Affairs issued a call to arms against “disorderly price-cutting competition” and demanded “orderly withdrawal of outdated production capacity”. Media coverage of the clampdown has referred to “involution”, shorthand for companies slashing prices in a race-to-the-bottom scramble for market share.
Stock markets rarely react positively to government intervention. But the prospect of Chinese planners saving corporate executives from themselves has sparked a sustained rally in mainland equities. The CSI 300 index has now risen about 20 percent from its nadir in April, while average daily turnover in equities hit a record 2.2 trillion yuan ($308 billion) in August, per Bloomberg.
