31 Aug 2025 11:15:37 ET │ 10 pages China Economics PMIs Reveal More Impact from Anti-Involution CITI'S TAKE Manufacturing PMI stopped its decline in August, and non-manufacturing PMI expanded on stronger services. The data continued to show the impact from Supply-Side Reform 2.0, with price indices rising obviously. A continued easing of industrial deflation could be what the markets are looking for. In the meantime, we think that with continued headline PMI contraction, the economy still needs more policy ...

Summary of Key Points from the Conference Call Industry and Company Focus - The discussion centers around China's "anti-involution" policies and their implications for various sectors, particularly those facing overcapacity issues such as solar modules, lithium batteries, new energy vehicles (NEVs), and traditional industries like steel and cement [5][13][12]. Core Insights and Arguments 1. **Initiation of "Anti-Involution" Policies**: The term "involution" describes excessive competition leading to diminishing returns, prompting policymakers to regulate price-cutting and competition. This initiative was reinforced in recent meetings, including the Central Economic Work Conference [5][6][12]. 2. **Objectives of Policymakers**: The policies aim to address persistent PPI deflation, overcapacity, and growth concerns. China has seen 33 consecutive months of PPI deflation, with around 80% of industrial sectors reporting negative year-over-year price growth [7][12]. 3. **Sector Focus**: Key sectors identified for potential regulation include solar modules (149% of global demand), lithium batteries (126%), and NEVs (105%). Traditional sectors like steel and cement are also highlighted due to long-standing overcapacity issues [13][12]. 4. **Differences from Previous Reforms**: The current initiative differs from the 2016-18 supply-side reform in its broader scope, including new sectors and a more cautious approach to avoid undermining private sector confidence [17][20]. 5. **Market Reactions**: Speculation around these policies has led to a rally in commodity prices, stock prices, and bond yields, indicating market optimism despite the lack of detailed implementation plans [6][9][35]. Additional Important Content 1. **Implications for Growth and Employment**: The sectors involved in "anti-involution" policies account for 5.5% of GDP and 2.4% of total employment. However, mandatory capacity cuts are expected to have a limited direct impact on overall growth [30][32]. 2. **Potential Measures**: Proposed measures include capacity buyout funds for solar companies, price regulations in the EV sector, and production cuts in steel and cement. However, implementation details remain uncertain [16][12]. 3. **Monitoring Future Events**: Key upcoming events include the release of sector-specific implementation plans by the Ministry of Industry and Information Technology (MIIT) and the Politburo meeting, which will outline policy priorities for the second half of the year [38][39]. Conclusion The "anti-involution" policies represent a significant shift in China's approach to managing overcapacity and competition across various sectors. While the intent is to stabilize prices and improve profitability, the actual impact will depend on the execution of these policies and the broader economic context. Market participants are advised to monitor upcoming policy announcements and sector-specific developments closely.

Summary of Key Points from the Conference Call Industry Overview - The focus is on **China's Supply-Side Reform 2.0 (SSR2.0)**, particularly in the **manufacturing sector** including steel, solar, and cement industries [1][10][18] - The context includes ongoing **PPI deflation** and the need to address **overcapacity** and **intense competition** in various sectors [2][25][27] Core Insights and Arguments - **Resilience in Manufacturing**: Despite weaknesses in the property market, manufacturing **Fixed Asset Investment (FAI)** remains strong, indicating potential for recovery [1] - **PPI Challenges**: The Producer Price Index (PPI) is struggling in negative territory, with prolonged deflation impacting profitability across industries [1][38] - **SSR2.0 Expectations**: Authorities are expected to implement SSR2.0 to combat overcapacity and price wars, with less aggressive capacity cuts compared to SSR1.0 [2][3][15] - **Sector-Specific Measures**: The reforms will likely include capacity control, production cuts, and regulatory tightening, particularly in sectors like coal, aluminum, and steel [4][63][64] Key Differences Between SSR2.0 and SSR1.0 - **Demand Stimulus**: SSR1.0 had strong stimulus measures, while SSR2.0 is expected to have a milder approach [3][15] - **Capacity Concentration**: SSR1.0 focused on upstream sectors dominated by state-owned enterprises (SOEs), whereas SSR2.0 will address mid- and downstream sectors [3][15] - **Implementation Challenges**: Policymakers may face difficulties in enforcing reforms due to the complexity of the current industrial landscape [3][65] Potential Outcomes and Stock Picks - **Base Case Scenario**: Mild demand stimulus with modest improvements in prices and margins for steel, cement, and solar sectors. Preferred stocks include **Baosteel, Tongwei, and Conch Cement** [5][18] - **Bull Case Scenario**: Stronger demand stimulus could benefit additional sectors like lithium and batteries, with preferred stocks being **Angang, CNBM, CATL, and Tongwei** [5][18] - **Bear Case Scenario**: Less effective supply control could lead to underwhelming demand, favoring existing winners from previous cycles like **Hongqiao and Chalco** [5][18] Important but Overlooked Aspects - **Historical Context**: Previous successful reforms in coal and aluminum contrast with the underperformance of the steel sector, highlighting the need for targeted interventions [12][15] - **Trade Tensions**: Rising trade disputes, particularly in the steel and chemical sectors, could complicate the reform landscape [38][50] - **Labor Market Impact**: The expected labor market impact from SSR2.0 is anticipated to be minimal compared to previous reforms, with less aggressive capacity cuts [66][70] Conclusion - SSR2.0 is positioned as a critical response to ongoing economic challenges in China, with a focus on stabilizing prices and improving profitability across key sectors. The effectiveness of these reforms will depend on the implementation of supportive demand-side measures and the ability to manage overcapacity effectively [1][27][66]