Xi's Anti-Involution Campaign: Sector Consolidation and the Path to Profitability

China's Anti-Involution Campaign, launched to combat overcapacity and unproductive competition, marks a pivotal shift in the nation's industrial policy. By targeting sectors plagued by price wars and redundant production, the strategy aims to restore pricing power, improve margins, and redirect capital toward sustainable growth. For investors, this represents a rare opportunity to identify sectors poised for recovery—and avoid those still mired in cutthroat competition. Below, we analyze the three key industries—solar, steel, and EVs—while cautioning against overexposure to private-sector dominated fields where consolidation remains elusive.

Solar: A Policy-Backed Boom in Renewable Capacity

The solar sector exemplifies the Anti-Involution Campaign's dual focus: reducing overcapacity while accelerating low-carbon transitions. The government's Renewable Portfolio Standards (RPS) now require polysilicon producers and solar manufacturers to source 25-70% of their energy from renewables, effectively raising the cost of backward integration for smaller firms. This has already triggered a wave of consolidation, with state-backed giants like Longi Green Energy and JinkoSolar gaining market share through vertical integration and advanced R&D.

Investment thesis: Solar firms with access to low-cost polysilicon, advanced N-type cell technology, and government contracts for large-scale projects (e.g., China's “14th Five-Year Plan” solar installations) are positioned to capture pricing power. Margins for top-tier firms could expand by 3-5% as smaller competitors exit, while subsidies for green hydrogen and offshore wind projects provide a secondary growth vector.

Steel: Cutting Capacity to Rebuild Pricing Discipline

The steel industry, a poster child for overcapacity, faces stringent production cuts and environmental audits. The Ministry of Industry and Information Technology (MIIT) has mandated a 10% reduction in crude steel output by 2025, targeting outdated furnaces and excess capacity in regions like Hebei and Shanxi. State-owned enterprises (SOEs) like Baowu Steel are leading consolidation, while smaller private mills face shutdowns.

Investment thesis: Steel stocks like Baowu (600019.SS) and Hebei Iron & Steel (000709.SZ) offer value at P/B ratios below 1x, with upside as supply curbs tighten. Watch for quarterly data on China's steel exports and domestic inventory levels—both indicators of rebalancing. Avoid pure-play regional mills lacking scale or government backing.

Electric Vehicles (EVs): A Mixed Picture of Subsidy-Driven Winners

The EV sector is a cautionary tale of uneven progress. While the Anti-Involution Campaign has curbed subsidies for low-end battery manufacturers and legacy automakers, premium segments—dominated by BYD, NIO, and state-backed SAIC Motor—benefit from quality controls and export incentives. However, private-sector firms lacking proprietary battery tech or charging networks (e.g., Li Auto's competitors) face prolonged margin pressure as overcapacity persists in mid-tier models.

Investment thesis: Focus on EV leaders with global supply chains (e.g., BYD's Tesla partnerships) and those receiving preferential treatment in export quotas. Avoid private EV startups without proprietary IP or government ties; their valuations (often P/S multiples above 5x) may compress as subsidies taper.

The Private Sector Trap: Caution for Unregulated Markets

While the Anti-Involution Campaign targets state-heavy industries, sectors dominated by private firms—such as e-commerce, fintech, and food delivery—remain vulnerable to price wars. Alibaba's (BABA) recent profit warnings and Meituan's (3690.HK) margin struggles underscore the lack of policy support in these areas. Investors should prioritize sectors where Beijing's hand is visible, not absent.

Valuation Metrics to Watch

• Steel: P/B ratio (target: 1.2x+ post-consolidation).
• Solar: P/S ratio (premium for firms with N-type cell capacity).
• EVs: Gross margin (aim for 20%+ in high-end segments).

Conclusion: Riding the Tide of Industrial Rationalization

Xi's Anti-Involution Campaign is far from a blanket recovery. It rewards investors who distinguish between policy-backed consolidation (solar, steel) and free-market chaos (private services). The playbook is clear: back firms with scale, state support, or technological differentiation—and avoid those reliant on subsidies or low-cost competition. As China's industrial policy reshapes markets, the winners will be those who align with Beijing's push for quality over quantity.

Investment recommendation: Overweight solar and steel equities; underweight private-sector EVs and unregulated services. Monitor government production quotas and subsidy reforms for sector-specific catalysts.