Published by ChinaMNC · Luohe

China's New Push to Curb "Involution": What Foreign Founders Need to Know

China is rolling out new rules to standardize local investment incentives and curb cutthroat competition. Here's how the policy shift could affect foreign founders setting up or operating a company in China.

Why Beijing Is Targeting "Involution"

China's central government is intensifying efforts to build a unified national market and tackle what it calls "involution-style" competition—a pattern of excessive, often wasteful competition that can distort markets. Unlike previous campaigns that relied mainly on administrative measures, the current approach emphasizes institutional reforms to optimize competition mechanisms and promote high-quality economic development.

In recent days, several key ministries—including the National Development and Reform Commission (NDRC), the Ministry of Finance, the Ministry of Industry and Information Technology (MIIT), and the State Administration for Market Regulation (SAMR)—have announced plans to address these issues. They are focusing on areas such as capacity management in key industries and the regulation of fiscal subsidies. Policy documents expected to be introduced include a regulation on building a unified national market, a list of matters that hinder the construction of a unified national market, and lists of encouraged and prohibited investment promotion practices. These measures are expected to provide stronger legal and institutional support for curbing involution.

Key Policy Directions

At a recent State Council Information Office press conference, NDRC Deputy Director Wang Changlin stated that this year the focus of market regulation will be on deepening the construction of a unified national market to stimulate market vitality. The priority is to comprehensively address involution-style competition and shift from competing on price to competing on value. This includes strengthening capacity regulation, resolving temporary supply-demand imbalances, clarifying the boundaries of local investment promotion incentives and prohibitions, regulating local economic promotion behaviors, and enhancing price supervision in key industries to govern low-price disorderly competition in accordance with the law.

Regulating local government economic promotion behaviors is seen as crucial. The Fourth Plenary Session of the 20th Central Committee of the Communist Party of China emphasized the need to standardize local government economic promotion behaviors and break down local protectionism and market segmentation.

In the past year, SAMR conducted a special campaign against the abuse of administrative power to exclude or restrict competition, filing 96 cases and concluding 75, which effectively curbed improper interference in competition. Zhao Chunlei, deputy director of SAMR's Competition Coordination Department, noted that deepening the implementation of the fair competition review system and strengthening enforcement against administrative power abuse are important measures to regulate government interference in market competition. Next steps include intensifying efforts to break down local protectionism and market segmentation, and better combining an efficient market with a capable government.

Fiscal Subsidies Under Scrutiny

Regarding local fiscal subsidies, Vice Minister of Finance Liao Min stated that the central government takes seriously and resolutely corrects illegal subsidy practices that may exist in some localities. In 2025, the Ministry of Finance, together with relevant departments, formed a cross-departmental task force to carry out special rectification of local fiscal subsidies. Going forward, the task force's working mechanism will be improved, information sharing and regulatory coordination strengthened, and the system for standardized management of fiscal subsidies perfected. Local responsibilities will be enforced, and any violations will be dealt with as soon as they are discovered.

Luo Zhiheng, chief economist at Yuekai Securities, analyzed that China's tax revenue is mainly value-added tax (VAT), accounting for about 40%, which is shared among regions based on the production principle—meaning tax is paid where production occurs, not where consumption occurs. This naturally incentivizes local governments to attract investment.

An article by the NDRC Party Group in Qiushi noted that for some time, some localities have illegally offered tax and fee preferences in investment promotion, exacerbating involution-style industrial competition. A unified national list of local investment promotion behaviors will be formulated, clarifying encouraged and prohibited specific behaviors, and increasing the investigation and notification of illegal investment promotion activities. Localities will be guided to optimize and adjust their investment promotion assessment mechanisms, set assessment weights for quantitative investment promotion targets based on reality, and prevent unrealistic,层层加码 (layer-by-layer amplification) of targets.

What the New Rules Mean for Foreign Founders

For foreign entrepreneurs looking to register a company or operate in China, these policy developments signal a more standardized and transparent investment environment. The introduction of clear lists of encouraged and prohibited investment promotion practices will reduce the ambiguity that sometimes surrounded local incentives, making it easier to assess what support may be legitimately available.

Central Financial and Economic Affairs Office officials, in interpreting the Central Economic Work Conference, stated that in 2026, at the government level, in response to illegal offers of tax, land, and electricity preferences—and even debt-fueled subsidies—in investment promotion, the introduction of lists of encouraged and prohibited matters for local investment promotion should be accelerated to draw clear red lines. Illegal investment promotion through "drawer agreements" and other disguised forms will be resolutely corrected. Law enforcement involving enterprises will be further standardized, and administrative discretion benchmarks improved. Efforts will focus on rectifying irregularities in bidding and tendering in some fields, cleaning up unreasonable restrictions, and preventing local protectionism.

Local governments are also taking action. Shandong Province has proposed to actively integrate into the unified national market, standardize investment promotion behaviors, strengthen rectification of bidding and tendering systems, and coordinate reforms integrating "access, scenarios, and factors." Fujian Province aims to deepen its integration into the unified national market, increase efforts to break down barriers, accelerate the creation of a first-class business environment, standardize investment promotion behaviors, and deepen systemic rectification of prominent issues in bidding and tendering.

Industry-Specific Measures

MIIT Minister Li Lecheng recently stated that efforts will be made to strengthen capacity monitoring and early warning in key industries and consolidate the results of comprehensive rectification of involution-style competition. On January 7, MIIT and three other departments jointly held a symposium on the power and energy storage battery industry, noting blind construction and irrational competition such as low-price competition that disrupt market order and weaken sustainable development. The meeting deployed measures in areas including strengthening market supervision, optimizing capacity management, supporting industry self-discipline, and enhancing regional coordination.

On January 13, MIIT convened an inter-ministerial joint meeting on the energy-saving and new energy vehicle industry, emphasizing the need to standardize industrial competition order, strengthen cost investigation and price monitoring, enhance product production consistency supervision and quality inspection, and strengthen the role of standards in leading industrial upgrading and guiding industry self-discipline.

Li Lecheng previously noted at a State Council Information Office press conference that preliminary results have been achieved in governing irrational competition in key industries such as new energy vehicles and photovoltaics in accordance with the law. Industry governance is a long-term, systematic project. The approach will adhere to law-based governance, strengthen industry self-discipline, implement regulatory responsibilities, enhance service capabilities, and use reform-oriented methods to build a collaborative, efficient, and well-regulated industry governance pattern.

Institutional Reforms on the Horizon

Wang Renfei, director of the NDRC's Comprehensive Reform Department, outlined the next steps: "one regulation, two lists, and three systems." The one regulation refers to studying and formulating a regulation on the construction of a unified national market to strengthen legal guarantees. The two lists are the list of matters that hinder the construction of a unified national market and the list of encouraged and prohibited matters for investment promotion, clarifying what local governments can and cannot do in promoting economic development. The three systems involve improving statistical, fiscal and tax, and assessment systems conducive to building a unified national market, and perfecting incentive and constraint mechanisms.

Wang stressed that this year efforts will be deepened in breaking down entrenched problems. With a problem-oriented approach, focusing on key issues such as low-price disorderly competition, local government procurement and bidding, and investment promotion, four working mechanisms will be improved: problem discovery, clue verification, supervision and rectification, and interview and notification. Greater efforts will be made to resolutely remove bottlenecks and blockages hindering the construction of a unified national market, break down local protectionism and market segmentation, and make the unified national market a fair competition stage for all types of business entities.

Xu Zhaoyuan, deputy director of the Industrial Economics Research Department at the Development Research Center of the State Council, stated that the "15th Five-Year Plan" period is a critical stage for building a unified national market. It is important to grasp the relationship between an efficient market and a capable government, coordinate the "visible hand" and the "invisible hand," and build an economic order that is both "flexible" and "well-regulated," forming a strong synergy for deepening the construction of a unified national market.

For foreign founders, these reforms could mean a more predictable regulatory environment, reduced arbitrary local incentives, and a stronger emphasis on fair competition. However, it is essential to stay informed about the evolving lists and regulations, as they will define the boundaries of permissible support and compliance requirements.

This summary is based on information published by the relevant Chinese government website and is general information, not legal or tax advice.