China's Chemical Industry: Anti-Involution Policies Struggle to Resolve Overcapacity Dilemma

In 2025, China's top leadership made "anti-involution" the core direction of its industrial policy, attempting to reshape manufacturing competitiveness by cutting overcapacity and curbing blind investment. However, for the chemical industry—a sector characterized by heavy assets, strong cyclicality, and extreme fragmentation—the implementation of the policy has encountered significant resistance. The latest data show that the chemical industry not only failed to emerge from the downturn with the help of the policy tailwind, but instead sank deeper into an adjustment period under the combined pressure of weak demand and excess supply.

According to data released by China's National Bureau of Statistics on November 27, in the first ten months of 2025, total profits of industrial enterprises above designated size reached $827 billion, a slight year-on-year increase of 1.9%. However, profits in the manufacturing of chemical raw materials and chemical products fell by 5.4% year-on-year, recording only $43 billion. The profit growth rate of the chemical sector significantly underperformed the broader market, clearly illustrating the headwinds currently facing the industry.

The direct driver of the profit decline is the continued contraction in prices. A research report from Cinda Securities pointed out that China's chemical product price index has fallen for three consecutive years, with a cumulative decline of nearly 36%. Analyst Zhang Yansheng believes that this price collapse stems from two structural contradictions: first, the long-standing overcapacity in key chemical product markets; and second, the slowdown in downstream demand caused by decelerating economic growth and the deep adjustment of the real estate sector. Although the growth rate of chemical projects under construction eased in 2025, the absolute scale of investment is still climbing, indicating that the capacity cycle is far from bottoming out.

To address overcapacity across the industry, Beijing launched an "anti-involution" campaign in March, encouraging enterprises to cut output and postpone the construction of new facilities. The policy once brought confidence to the market: after major producers agreed to reduce output, caprolactam prices rose about 5% month-on-month in November; the industry prosperity index compiled by the China Petroleum and Chemical Industry Federation also rebounded from 98.43 in August to 99.79 in October. However, this recovery lasted only two months, and the prosperity index fell back to 99.79 in November, returning to the contraction zone at 97.21.

"Anti-involution is far more complex than a slogan," said Qiu Dengke, secretary-general of the Guangzhou New Energy Industry Association and a senior chemical industry analyst. "In a segmented market composed of thousands of small and medium-sized enterprises, no company is willing to proactively cut output and cede market share to others." More critically, local governments lack the motivation to implement the policy. As the main implementers, local governments, under pressure from tax revenue and employment, often hold reservations about mandatory production cuts—this constitutes a deep institutional obstacle to the implementation of the anti-involution policy.

Looking ahead to 2026, the fundamentals of the chemical industry remain far from optimistic. The domestic real estate market continues to be sluggish, suppressing demand for bulk chemical products such as building materials and coatings. On the export front, as China's chemical products continue to expand their global market share, trade protectionism is intensifying. Qiu Dengke predicts that anti-dumping investigations and local content requirements targeting Chinese chemical products will become more frequent, and the export environment may deteriorate further.Not all sectors lack bright spots. Driven by the "new three items" industrial chain, demand for chemical materials used in electric vehicles, energy storage batteries, photovoltaic modules, and high-performance fibers achieved over 8% growth in 2025, a trend also corroborated by statistics from the China Chemical Information Center. However, Qiu Dengke warned: "Production capacity for new chemical materials is expanding at an unprecedented rate. Without strict, punitive constraint mechanisms, this emerging track is likely to replay the overcapacity script of traditional chemical products within two years."

The predicament of China's chemical industry is essentially a contest between industrial upgrading and the old growth model. The anti-involution policy has captured the crux of the problem, but at the implementation level it is constrained by the triple reality of market fragmentation, local government rivalry, and insufficient demand. In the short term, administrative measures can only temporarily prop up prices, but can hardly reverse the long-term pain of capacity clearance. For China's chemical industry, the real way out may lie not in "how to cut production" but in "how to upgrade"—reshaping its position in the global chemical value chain through technological innovation, M&A integration, and global footprint. And this is destined to be a protracted battle that requires time.