In short
China’s policy shift to curb “excessive competition” (“evolution”) and restore pricing power, affecting domestic markets and global supply chains.
Guest backgrounds
Laura Wang, Morgan Stanley Chief China Equity Strategist.
Key claims
Since 2021 China has faced deflation, falling prices, a housing slump, and manufacturing overcapacity; a September 2024 pivot and a mid-2025 targeted anti-evolution campaign aim for market-based consolidation. Base case forecasts ROE rising to 13.3% by 2030 (from 10% May 2024; 11.6% July 2025); bullish ROE up to 16.3%, earnings growth 7.6% in 2025 to 11.1% by 2027, and valuation normalization toward 12–13x forward P/E.
Notable examples
EV batteries (policy support, rapid consolidation), steel/cement (capacity controls), and airlines (no seat oversupply, regulatory coordination). Global implications: materials, chemicals, and autos; watch 15th five-year plan for tax/social welfare/local incentives.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOUnderstanding China's Economic Evolution
0:46 to 2:08
Discussion on the concept of 'evolution' in China's economy and the government's anti-involution campaign.
“In China, evolution describes a cycle of excessive competition.”
Investment Opportunities in China
2:09 to 3:56
Exploration of sectors poised for growth in light of the new economic policies and their implications.
“We also expect earnings growth to accelerate.”
Future Outlook and Investor Considerations
3:57 to 4:28
Insights on what investors should monitor regarding China's anti-evolution campaign and its broader impacts.
“So what should investors be paying attention to?”
Transcript
Automatic transcript. May contain errors.0:00Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist. Today, a consequential shift in China's economic policy is set to reshape domestic markets and send ripples across the global economy. It's Thursday, October 2nd at 2 p.m. in Hong Kong.
0:22If you are an investor, it's important to understand China's new approach to economic development. The government's policies to drive a recovery from an economic slump are changing the rules of competition, profitability, and growth. This affects Chinese companies and in turn global supply chains and investment flows. Let's start with the term evolution. What is it? In China, evolution describes a cycle of excessive competition. Think companies fighting for market share by slashing prices, ramping up production, and eroding profits. often to the point where nobody wins. The government's anti-involution campaign is a direct response to this problem.
1:06What factors prompt the launch of this anti-involution initiative? Since 2021, China has faced mounting deflationary pressures, falling prices, a housing market slump, and a surge in manufacturing investment that led to overcapacity. The September 2024 policy pivot began to address these issues, and in mid-2025, the government launched a more targeted anti-evolution campaign. This phase focuses on reducing excessive competition and restoring pricing power through market-based consolidation. As we assess the potential effectiveness of China's anti-evolution policy, our base case projects China's return on equity to reach 13.3 % by 2030, up from a cycle low of 10 % in May 2024 and 11.6 % by July 2025.
2:01In a bullish scenario, decisive reforms and demand-side stimulus could push PowerOE as high as 16.3%. We also expect earnings growth to accelerate. With our base case showing an annual earnings growth rate of 7.6 % in 2025, rising to 11.1 % by 2027. We forecast valuations to normalize towards 12 to 13 times forward price to earnings in line with emerging market peers, but this could re-rate higher if reforms succeed. In terms of investment opportunities, we believe the EV battery industry will benefit the most from the Chinese government's anti-evolution efforts. It's got strong policy support, cutting-edge technology, and a market that's consolidating fast, meaning the days of low quality and excess capacity are fading.
2:56We are seeing a shift towards long-term sustainable growth. Steel and cement are industries where the state has a strong hand and capacity controls are well established. These factors help stabilize the market and open the door for steady gains. Finally, airlines. While the industry has faced persistent losses, there isn't an oversupply of seats, and regulatory coordination is strong. With the right reforms, airlines could be poised for a significant turnaround. The sector's best position to benefit from China's anti-evolution strategy are more domestically oriented. But this policy is bound to have global implications, and the ripples will likely extend to global supply chains, especially in materials, chemicals, and autos.
3:44Looking ahead, the pace and success of anti-evolution will depend on further structural reforms, demand-side support, and the ability to digest industrial credit risks gradually. The upcoming 15th five-year plan could bring more clarity on tax, social welfare, and local government incentives. So what should investors be paying attention to? China's anti-evolution campaign is more than a policy tweak. It's a recalibration of how the country balances growth, innovation, and sustainability. The key is to track sector-level reforms, watch for signs of consolidation, and focus on companies with strong fundamentals and policy tailwinds.
4:28Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.
4:37Laura Wang:The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
Our Chief China Equity Strategist Laura Wang discusses how China’s new approach to economic development is transforming domestic industries and reshaping the global investment landscape.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Laura Wang, Morgan Stanley’s Chief China Equity Strategist.
Today – a consequential shift in China's economic policy is set to reshape domestic markets and send ripples across the global economy.
It’s Thursday, October 2nd at 2pm in Hong Kong.
If you’re an investor, it’s important to understand China’s new approach to economic development. The government's policies to drive a recovery from an economic slump are changing the rules of competition, profitability and growth. This affects Chinese companies, and in turn global supply chains and investment flows.
Let’s start with the term involution – what is it? In China, involution describes a cycle of excessive competition—think companies fighting for market share by slashing prices, ramping up production, and eroding profits, often to the point where nobody wins. The government’s anti-involution campaign is a direct response to this problem.
What factors prompted the launch of this anti-involution initiative? Since 2021, China has faced mounting deflationary pressures—falling prices, a housing market slump, and a surge in manufacturing investment that led to overcapacity. The September 2024 policy pivot began to address these issues, and in mid-2025 the government launched a more targeted anti-involution campaign. This phase focuses on reducing excessive competition and restoring pricing power through market-based consolidation.
As we assess the potential effectiveness of China’s anti-involution policy, our base case projects China’s return on equity (ROE) to reach 13.3 percent by 2030, up from a cycle low of 10 percent in May 2024 and 11.6 percent by July 2025. In a bullish scenario, decisive reforms and demand-side stimulus could push ROE as high as 16.3 percent.
We also expect earnings growth to accelerate, with our base case showing an annual growth rate (CAGR) of 7.6 percent in 2025, rising to 11.1 percent by 2027. We forecast valuations to normalize towards 12–13x forward price-to-earnings, in line with emerging market peers, but this could re-rate higher if reforms succeed.
In terms of investment opportunities, we believe the EV Batteries industry will benefit the most from the Chinese government’s anti-involution efforts. It’s got strong policy support, cutting-edge technology, and a market that’s consolidating fast—meaning the days of low-quality and excess capacity are fading. We’re seeing a shift toward long-term, sustainable growth. Steel and Cement are industries where the state has a strong hand and capacity controls are well established. These factors help stabilize the market and open the door for steady gains. Finally, Airlines. While the industry has faced persistent losses, there isn’t a[n] oversupply of seats, and regulatory coordination is strong. With the right reforms, Airlines could be poised for a significant turnaround.
The sectors best positioned to benefit from China’s anti-involution strategy are more domestically oriented. But this policy is bound to have global implications. And the ripples will likely extend to global supply chains, especially in Materials, Chemicals and Autos.
Looking ahead, the pace and success of anti-involution will depend on further structural reforms, demand-side support, and the ability to digest industrial credit risks gradually. The upcoming 15th Five-Year Plan could bring more clarity on tax, social welfare, and local government incentives.
So, what should investors be paying attention to? China’s anti-involution campaign is more than a policy tweak—it’s a recalibration of how the country balances growth, innovation, and sustainability. The key is to track sector-level reforms, watch for signs of consolidation, and focus on companies with strong fundamentals and policy tailwinds.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.