Broker: UOB Kay Hian
Date of Report: 7 August 2025

China’s Anti-Involution Policy: Winners and Losers Among Malaysian Stocks

Introduction: A New Chapter for China’s Market Dynamics

China’s recent push to curb excessive domestic competition through its anti-involution policy is starting to reshape industry landscapes — not just within China, but across Asia. This policy, emphasizing more rational pricing and reduced cutthroat competition, is expected to create both winners and losers among Malaysian companies, particularly those listed on Bursa Malaysia with direct or indirect exposure to Chinese markets. The implications are nuanced and far-reaching, potentially impacting commodity exporters, utility providers, and sectors such as solar and automotive.

What is China’s Anti-Involution Policy?

The term “anti-involution” refers to Beijing’s efforts to tamp down on unnecessary, excessive competition that leads to irrational product pricing and overcapacity. In July 2025, China’s National Development and Reform Commission (NDRC) released two draft documents guiding government funds toward strategic industries and discouraging overlapping, wasteful investments. The aim is to rationalize supply, prevent below-cost selling, and ensure stable pricing in industries suffering from ultra-competitive dynamics — such as e-commerce, electric vehicles (EV), solar, and building materials.

Implications for Malaysian Companies: Who Stands to Gain or Lose?

Overall Market Effect

The anti-involution measures, by fostering higher and more stable pricing, are forecasted to support the bottom lines of domestic suppliers and exporters to China. However, the picture is less clear for Malaysian importers of Chinese products. Factors such as Malaysia’s anti-dumping duties and China’s ability to export excess capacity could either lower import costs or, conversely, raise them if China successfully rationalizes its supply.

Key Beneficiaries: Malaysian Commodity Exporters

Commodity exporters to China could see a modest positive impact. While some commodity prices (such as hard commodities and petrochemicals) initially reacted positively to the draft Pricing Law amendment, most industrial metals ended July on a flat note, with the exception of ferrosilicon. Nevertheless, optimism around long-term supply rationalization is likely to support Malaysian exporters.

Losers: Malaysia’s Utility Sector, Especially Solar

The solar segment may face significant headwinds. Solar panel prices are projected to rise by US\$0.01/watt (12%) to US\$0.10/watt by December 2025, driven by higher polysilicon prices. With a broadened Sales & Service Tax (SST) imposed by the Malaysian government, the total cost of building large-scale solar plants could climb by 20%. This would erode project internal rates of return (IRRs) by 1-1.5 percentage points, putting additional margin pressure on turnkey contractors involved in LSS5 and LSS5+ projects. However, the long-term outlook for solar project orders remains robust, which may help offset near-term profitability challenges.

Automotive Sector: Neutral to Negative Impact

The auto sector remains underweight, with continued soft regional demand overshadowing any potential margin improvements for Malaysian companies operating in China — such as Sime Darby. For Sime, although China accounts for 18% of group revenue, the overall subdued market demand is expected to outweigh any benefit from more rational pricing in the region.

Recent Developments in China’s Anti-Involution Drive

• 1 July: President Xi Jinping underscores the need to curb disorderly competition and promote high-quality development, signaling a renewed focus on anti-involution regulation.
• 12 July: Xinhua publishes a commentary warning against “involution caused by one-sided efficiency obsession.”
• 16 July: Hunan province orders audits of chemical sector facilities, targeting shutdowns of those over 20 years old.
• 19 July: Ningbo city launches its own ‘anti-involution’ investment policy.
• 23 July: The China Photovoltaic Industry Association (CPIA) urges solar companies to avoid irrational capacity expansion and destructive price wars.
• 24 July: China releases its draft amendment to the Pricing Law, reinforcing the crackdown on destructive price competition and supporting fair market practices.
• 30 July: NDRC issues two draft documents for public comment, guiding government fund deployment and discouraging overlapping investments.

Sector and Company Impact Assessment

Investment Actions and Sector Outlook

• Press Metal: Remains a key beneficiary among exporters, though positive effects from China’s anti-involution policy may take time to materialize and are expected to be gradual.
• Autos: Maintained UNDERWEIGHT. The sector faces ongoing soft demand in the region, limiting upside even as China’s domestic competition cools.
• Utilities: OVERWEIGHT rating reiterated. Despite challenges from rising solar panel prices, companies with strong execution — such as Pekat — are well positioned to outperform peers, benefiting from a robust and growing project pipeline in the next three years.

Conclusion: Navigating a Shifting Landscape

China’s anti-involution policy marks a significant shift in its approach to industrial competition and pricing, with ripple effects extending to Malaysian equities. While exporters such as Press Metal stand to benefit from firmer commodity prices, the utility sector — particularly solar — faces near-term cost pressures. The automotive sector remains in a holding pattern amid tepid demand. Investors should monitor these policy developments closely, as longer-term supply rationalization could reshape the competitive dynamics and profitability of Malaysian companies engaged with China’s vast market.

Contact and Disclaimer

For further information, investors are encouraged to consult UOB Kay Hian’s analysts and research team. All data and recommendations reflect the situation as of the report date and are subject to change.