1/10 Industrial profits in China were down 4.3% year on year in June, and down 1.8% during the first half of 2025, even as revenues rose 2.5%. The drop was led by SOEs, down 7.6% in the first half, while private-sector companies saw profits rise by 1.7%.

2/10 Beijing wants to prevent what it sees as disruptive pricing competition by limiting the ability of businesses to compete on prices, but I don’t see how they can succeed. Price cutting is not the problem—it is simply a symptom of the problem.

3/10 Businesses are not cutting prices out of malice, but because they produce far more than they can sell domestically, and although they are aggressively turning to increasingly reluctant foreign markets, they still rely on domestic demand for the bulk of their sales.

4/10 Because China is unable to accept the short-term economic and employment impacts of closing down the least efficient producers, and is instead swamping them with additional credit, the supply-demand imbalance won’t change even if businesses are no longer...

5/10 able to compete on prices. The resulting rise in inventories, of course, must be financed with rising debt. And what would happen if businesses were no longer able to cut prices?

6/10 To the extent that they sell consumer goods, it means that one of the most effective ways of raising real disposable income has ended (lower prices effectively transfer income from businesses to households). That would mean slower growth in consumption.

7/10 To the extent that they sell goods to other businesses, the higher profits for the seller mean lower profits for the buyer, so that there would be no change in overall business profits, just a change in the way profits are distributed.

8/10 There are only two solutions to excess capacity. One is to raise demand, which has proved impossibly difficult. The other is to reduce supply, which means closing down production facilities and firing workers.

9/10 The problem with the second "solution" is that as workers are fired, demand declines even further, and although demand won't decline as fast as supply, the danger nonetheless is that the resulting economic contraction is bigger than expected. This is what the US faced in the early 1930s.

10/10 In the end, you cannot solve a structural problem through accounting or administrative measures. What we are instead likely to see is greater trade surpluses and rising inventories, with the former being the main way to limit the latter.