China’s campaign to stop “Unfair competition” between companies may have positive effects for some companies, but it increases the risk of deflation and makes it difficult to recover consumptionwarned the Fitch Ratings agency.
In a quarterly credit bulletin, the financial rating agency states that efforts to rationalize production and stabilize prices in sectors with excess supply, namely cement, steel or automobiles, can benefit more efficient companies with state support – as is the case with many of those rated by Fitch – but can also reduce demand faster than supply, penalizing growth.
A Fitch predicts that Chinese economic growth will slow to 4.7% this year and 4.1% in 2026, with the impact of tariffs imposed by the United States limiting the contribution of exports.
The increase in domestic consumption, which Beijing defined as a priority for 2025, is expected to slow from 4.9% this year to 3.5% next year, due to weak consumer confidence, stagnation in the real estate sector and the exhaustion of one-off effects such as subsidies for the replacement of household appliances.
“In the short term, the campaign against devolution may alleviate price wars that negatively affect consumer service providers’ credit ratios”the report reads.
The term ‘involution’ designates a form of excessive internal competition, in which manufacturers reduce prices to the point of compromising profit margins, in a fight for survival that ends up making businesses unsustainable.
The agency notes that less aggressive discounts could help stabilize the profitability of vehicle manufacturers, but warns that competitive pressures associated with innovation and battery costs continue to pose risks.
Fitch highlights the downward revision of Beijing Automotive Group’s debt, from ‘b+’ to ‘b’, reflecting the expectation of lower profit margins and greater liabilities until 2026.
On the other hand, the agency maintained the ‘BBB+’ rating of the home delivery company Meituan, but revised the outlook, from positive to stable, due to the slowdown in revenue growth and lower profitability in the face of intense competition.
The agency also considers that the difficulties in rationalizing cement production or oil refining, including political resistance to the closure of factories, illustrate the obstacles to the implementation of the anti-involution policy.
In sectors such as steel, domestic demand could be lower than expected, leading Chinese producers to intensify exports and increase pressure on foreign rivals..
In the financial sector, Fitch estimates new cuts in the seven-day reverse repurchase rate, which should fall to 1.2% this year and 1% in 2026, something that will allow banks to reinforce liquidity
However, the effects of monetary policy are limited, due to weak demand for credit and pressure on bank margins.
Stimulus measures, such as subsidies that reduce the interest rate on new consumer loans by up to one percentage point, will, according to the agency, only have a marginal impact.
Despite the strong recent performance of Chinese stock markets, driven by the diversion of investments from the real estate sector to technology stocks, the financing via the stock market remains marginal.
A Fitch predicts a slight devaluation of the yuan against the dollar, from the current 7.12 to 7.30 per dollar by the end of 2026, insufficient to offset US tariffsbut which could favor Chinese exports to other Asian markets.
In the real estate sector, sales of new homes are expected to fall by 7% in 2025 and a further 6% in 2026, prolonging the collapse that began in 2022.
The agency emphasizes that a recovery in consumption will be unsustainable without a lasting restoration of consumer confidence and a stabilization of the housing sector.