Growth without Profits: Where will China’s Involution End?

China’s economy continues to record robust growth, but beneath the surface lies a persistent deflationary pressure and intensifying corporate competition - often described as economic involution. Using firm-level data from listed companies between 2012 and 2024, this paper jointly estimates markups and total factor productivity (TFP) growth to uncover how firms’ pricing power and efficiency interact.The results reveal a clear divergence: while productivity has improved steadily since the pandemic, firms’ markups have weakened very rapidly. This “high-productivity, low-markup” configuration suggests that Chinese firms are fighting for market share by cutting prices, even at the cost of profitability. Furthermore, it is the companies that tend to be more productive that are cutting their mark-ups faster, which was not so much the case in the past. In other words, more productive firms are leading this adjustment, reinforcing the deflationary competitive environment.This phase, however, is transitional rather than sustainable. If market clearing proceeds naturally, inefficient firms will exit and leading producers will consolidate, restoring profitability and innovation - a “Darwinian victory.” But if government intervention continues to protect weaker or “zombie” firms, the system risks sliding into prolonged involution, where over-competition erodes returns and stifles innovation.Therefore, Chinese policies should therefore focus on accelerating market clearing, reducing unnecessary intervention and subsidies, and realigning local government incentives toward domestic demand and service-sector development. By allowing market discipline to function, China can transform its current involutionary pressures into a more dynamic, innovation-driven growth model. This will also key for the long-term forecast for Chinese economy.