At Summer Davos, Chinese Premier Li Qiang dismissed Western claims that China is flooding the world with excess supply, quipping that China isn’t “stupid enough” to subsidize exports. That may be true—but even smart Chinese economic advisors are scratching their heads at just what the country’s intentions are. The Chinese leadership is fighting a battle against overcapacity, but as part of a domestic reckoning, not out of pressure over trade.
China is a massive country, and for all the party’s rhetoric, sometimes a surprisingly disunified one, especially economically. On July 30, a day after Chinese negotiators concluded their talks with U.S. counterparts in Sweden, China’s Politburo reaffirmed that the campaign to unify its national market will be key to improving market discipline and reining in “disorderly competition.” While couched in party language, the message points squarely at the dynamics that produce the results that alarm global trading partners. Local governments race to subsidize the same industries, and firms undercut one another in a spiral of price wars and overinvestment.
Chinese officials and scholars are framing this problem through a once-imported concept that has taken on a life of its own: neijuan, or “involution.” Originally a sociological term used to describe stagnation in agrarian societies despite rising labor input, neijuan went viral in China’s public discourse in 2020, with young people using it to express frustration with cutthroat academic and workplace competition that yields few rewards. More recently, the term has been adopted by officials and state media to describe economic behaviors—firms slashing prices, flooding the same sectors with redundant capacity, and racing to the bottom in pursuit of diminishing returns.
China’s centralized political system and uniform legal framework should, in theory, make top-down integration not only feasible but relatively straightforward. In practice, things are very different. Beijing governs through a relatively small central bureaucracy, delegating wide discretion to provincial governments over economic planning, implementation, and regulation. With performance metrics and career prospects still centered on local GDP, officials became de facto rivals, channeling resources into overlapping industrial initiatives and erecting trade barriers to shield local production from outside integration.
The economic toll of fragmentation is both real and significant. Inconsistent rules often tilt the playing field toward firms with local connections, discouraging cross-regional expansion and eroding efficiency. A recent study found that local firms are nearly 40 percent more likely to win government procurement contracts than non-local competitors, even when the latter offer superior value.
Another analysis from Peking University estimated that crossing a provincial border can impose trade frictions equivalent to tariffs of nearly 20 percent. Scholars have calculated that eliminating such barriers could lift China’s GDP by as much as 2.3 percent, nearly half the country’s entire growth rate in 2024.
Chinese President Xi Jinping has repeatedly cast the unified market as fundamental to advancing the 2020 “dual circulation” strategy, which seeks to promote internal circulation—domestic movement of goods and technology—as a buffer against global supply chain disruption.
And yet tangible progress remains elusive. Since launching a nationwide campaign in 2022 to curb local protectionism, market regulators have uncovered a growing number of cases each year in which local governments favor hometown firms through discriminatory procurement rules, duplicative inspections, unfair subsidies, and other barriers to entry. In May, the top market regulator conceded that despite stepped-up enforcement, local protectionism persists and continues to reinvent itself in new forms.
Beijing’s reform ambitions are colliding with local political and fiscal incentives that have shaped China’s political economy since long before the market reforms of the 1980s. In Mao-era mobilization campaigns like the Great Leap Forward, output targets often substituted for economic reality. Deng Xiaoping’s decentralizing reforms intensified the imperative by unleashing fierce competition among local governments to attract investment and expand output. Over time, a tacit social contract emerged: Local leaders were empowered to grow their economies by nearly any means, as long as they maintained stability and avoided political red lines.
Reformers accidentally supercharged the very localism that now frustrates national integration. Provincial authorities, and the municipal governments beneath them, became not just regulators but also investors, landlords, and stewards of their economies. For decades, they have wielded considerable authority over taxation, land allocation, and project approvals to nurture local champions and spur short-term growth, activities that were not merely tolerated but often celebrated. With measurable metrics like GDP growth, job creation, and local revenue still driving promotions, officials have every incentive to guard their turf.
This extreme incentive structure has produced a generation of officials adept at chasing short-term, quantifiable payoffs. It powered China’s economic miracle and endowed the state with formidable mobilization capacity. But it left the system ill-suited for more complex, long-term challenges.
When Beijing calls for a shift, whether to curb environmental damage, rein in overcapacity, unwind the property glut, or unify markets, local officials often balk, calculating that the political returns rarely outweigh the risks. As one former mayor confessed to one of the authors on condition of anonymity: “[These calls] may be right in the long run, but anyone who actually pushes them won’t be around to see the benefits. It’s planting trees for someone else’s shade, and only a fool would do that.” Without sustained top-down pressure, the system struggles to pivot even when the rationale is clear.
Beijing has long recognized these problems. Under former President Hu Jintao, efforts were made to incorporate “green GDP” metrics into cadre evaluations to balance growth with sustainability. Xi, too, has called for moving beyond “GDP-only” assessments, advocating broader criteria that include ecological and social governance. Yet studies show that economic growth remains the dominant determinant of promotions, a testament to both institutional inertia and the political difficulty of dismantling a model that, until recently, delivered headline-grabbing growth few nations could match.
This phenomenon owes much to the informal incentives baked into China’s political culture. For decades, cadre promotions have hinged not just on meeting growth targets, but on navigating patronage networks where “promotion fees” and factional loyalties matter as much as performance. Growth-heavy agendas generate the rents, visibility, and guanxi that propel officials upward, advantages cleaner governance or environmental reforms rarely match.
Adding to the challenge is the fiscal distress plaguing many local governments. Declining land sales and mounting debt burdens, as well as the heavy costs of the COVID years, have made local authorities increasingly desperate for revenue, often preying on non-local firms through protectionist tactics.
Some issues originate at the top. High-level policy documents are often deliberately vague, allowing flexibility for widely varying regional fiscal capacities and economic structures. This leaves wide latitude for local interpretation but creates a patchwork of inconsistent requirements—from tax incentives to product certifications and environmental standards—with little transparency or accountability.
No volume of policy documents can resolve the root problem if the underlying incentive structure remains untouched. What is needed is a durable institutional shift that aligns local incentives with national goals. In China’s mix of vertical authority and horizontal autonomy, this would require a powerful national regulator with not just oversight responsibilities but real authority to adjudicate and enforce.
Such a body already exists in name: the State Administration for Market Regulation (SAMR), created in 2018. From the outset, SAMR was given a sweeping portfolio, from market access and antitrust to quality inspection and price supervision. In 2024, the central government placed SAMR in charge of the newly strengthened fair competition review mechanism, tasking it with screening local policies for market-distorting clauses, a core pillar of the national unified market agenda.
Yet SAMR’s ability to restrain local governments remains limited. Recent estimates suggest that the number of staff responsible for fair competition review and antitrust enforcement is less than 100. Its tools—namely, policy coordination, guidance, and exhortation—lack the binding legal force to override entrenched interests. Because it sits parallel to local governments rather than above them, it must rely on local bureaus or negotiate with other agencies, leaving it without the authority to override the entrenched growth-first mindset.
Other countries have shown that empowered national competition authorities can overcome fragmented governance. One instructive example is the European Union’s Directorate-General for Competition, which has the power to investigate and penalize member states for discriminatory practices or illegal state aid. Over time it has taken action not just against multinationals like Google and Apple but also against powerful governments like Ireland and Italy.
Building such an institution in China would be neither swift nor easy. The EU’s competition regime emerged only after decades of negotiation among sovereign states. Even in a unitary state like China, recalibrating the balance between center and locality—especially when local incentives still favor growth above all—will meet resistance. But without this step, Beijing risks remaining trapped in a cycle where reform depends on the self-restraint of officials whose incentives point the other way. A strong, rules-based national regulator is not a panacea, but it is an essential starting point.
Enforcement alone, however, is not enough. Reform must also be reinforced by positive incentives. One way forward is to tie more central fiscal transfers to cross-provincial cooperation and regulatory compliance. Conditional transfers are hardly novel. In the United States, federal funds are often contingent on state compliance with national goals, from environmental protection to education benchmarks. Beijing already disburses substantial transfer payments. In 2024, central-to-local transfers exceeded 10 trillion yuan, nearly half of local fiscal revenue. Yet these funds are mainly designed to equalize fiscal capacity or support earmarked tasks like poverty alleviation, not to reward regulatory performance or cooperation across provinces.
Incorporating market unification goals into transfer formulas would require clearer metrics and politically sensitive decisions about allocation, which could favor wealthier or more reform-minded regions at the risk of resentment elsewhere. But the idea is not unworkable. The Ministry of Finance has piloted performance-based transfers in sectors like environmental governance and rural health care.
These models could be expanded. Provinces that dismantle market barriers, comply with harmonization audits, or participate in cross-provincial judicial platforms could receive additional funds. To make such a system credible, however, Beijing would need to invest in better data, clearer rules, and an institutional framework that makes compliance both measurable and politically safe.
The goal is not to eliminate local discretion entirely, but to channel it toward outcomes that advance national integration. A truly unified market cannot be built by fiat alone. It must emerge from a system where cooperation is rewarded, arbitrariness punished, and businesses can rely on rules rather than relationships to operate across borders.