China's Productivity-Driven Rebalancing: High-Conviction Sectors in the Anti-Involution Era

China's economic rebalancing in 2025 is no longer a distant promise but a strategic imperative. Faced with U.S. trade threats, a property sector slump, and deflationary pressures, the government is doubling down on productivity-driven reforms and anti-involution policies. Goldman Sachs' Hui Shan and his team have identified a clear path: shifting toward consumption and technology while curbing destructive competition. For investors, this framework highlights sectors poised to benefit from structural policy support and long-term growth.

The Anti-Involution Framework: A New Economic Paradigm

The anti-involution campaign, aimed at curbing profit-eroding price wars and overcapacity, is reshaping China's industrial landscape. Key sectors like electric vehicles (EVs), steel, petrochemicals, and building materials are under scrutiny. The National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology (MIIT) have introduced “growth stabilization work plans” to enforce orderly competition. For example, the EV sector, once plagued by aggressive price cuts, now faces stricter rules to prevent low-price dumping. This creates a more sustainable environment for firms with strong R&D and operational efficiency.

The steel industry, a case study in anti-involution, has seen production cuts and inventory drawdowns. While this may seem bearish in the short term, it signals a long-term shift toward consolidation and higher-margin operations. Firms with advanced manufacturing capabilities or green technology integration are likely to outperform.

Labor Market Reforms: Aging Population Meets Productivity Gains

China's working-age population is shrinking, and the average age of workers has risen to 39.72. To address this, the government has implemented a phased increase in the statutory retirement age and introduced flexible retirement options. These reforms aim to extend workforce participation and ease labor shortages in high-demand sectors like technology and advanced manufacturing.

The revised Anti-Unfair Competition Law (AUCL) of 2025 further supports this shift. By prohibiting platforms from forcing merchants to sell below cost, the law indirectly protects jobs and stabilizes wages. For instance, gig economy platforms like Meituan and Alibaba's Cainiao Network are now under stricter scrutiny to ensure fair labor practices. This aligns with broader efforts to promote a “996”-free work culture and improve worker well-being.

High-Conviction Sectors: Where Policy and Productivity Align

1. Electric Vehicles and Advanced Manufacturing
   The EV sector is a prime beneficiary of anti-involution policies. While price wars have historically eroded margins, the government's push for consolidation and quality over quantity is creating room for leaders like BYD and NIO. These firms are investing heavily in battery technology and AI-driven manufacturing, aligning with the 15th Five-Year Plan's focus on self-reliance.

2. Digital Infrastructure and AI
   China's “grand unified market” vision hinges on digital infrastructure. The AUCL's emphasis on fair competition in the digital economy is fostering a healthier ecosystem for tech firms. Companies like Huawei and Baidu, which are developing AI-driven solutions for industries ranging from healthcare to logistics, are well-positioned to capitalize on this trend.

3. Green Energy and Sustainable Materials
   The steel and petrochemical sectors are being forced to adopt cleaner technologies. Firms that integrate carbon capture, hydrogen production, or circular economy models—such as Baowu Steel and Sinopec—are likely to attract both policy support and capital. The government's 500-billion-yuan swap facility for financial institutions also signals a commitment to funding green transitions.

4. Consumer Goods and Services
   While household consumption growth remains muted (projected at 5% in 2025), targeted policies like trade-in programs and newborn subsidies are stimulating demand. Luxury brands and premium services, which cater to a more affluent urban middle class, could see stronger growth.

Risks and Considerations

Structural challenges persist. The property sector's drag on GDP (projected to subtract 2 percentage points in 2025) and weak consumer confidence remain headwinds. Additionally, global trade tensions could disrupt export-driven sectors. Investors should prioritize companies with strong balance sheets and diversified revenue streams.

Investment Thesis

Goldman Sachs' analysis underscores a clear opportunity: sectors aligned with productivity, anti-involution, and structural reforms. While the path to 4.5% GDP growth in 2025 is fraught with challenges, the long-term shift toward consumption and technology offers a compelling narrative. For high-conviction investors, the EV, AI, and green energy sectors represent not just policy tailwinds but a fundamental reordering of China's economic priorities.

In conclusion, China's rebalancing is a marathon, not a sprint. But for those who can navigate the near-term volatility and focus on structural trends, the rewards are substantial. As Hui Shan notes, the choice is clear: support productivity-driven growth, or accept a slower, less resilient economy. The market is already pricing in the former.