Title page 1

Contents 1

1. Introduction 2

2. Tracing the evolution of involution in China 2

3. The trend of declining corporate markup power in China 5

4. Company productivity and markups 7

5. How is the Chinese government handling the involution problem? 10

6. Conclusions and policy implications 11

References 12

Figures 3

Figure 1. Chinese consumer and producer price indices (year-over-year, percent) 3

Figure 2. Chinese industrial enterprise profit YTD November (year-over-year, percent) 3

Figure 3. Chinese fixed assets investments and enterprise loans (year-over-year, percent) 4

Figure 4. Cost markup rates for Chinese firms (year-over-year, markup rate) 6

Figure 5. Decomposition of profit growth 6

Figure 6. Chinese companies' growth in total factor productivity (TFP) and changes to their markups 7

Figure 7. Relationship between firm markup and productivity growth 8

Figure 8. Share of zombie firms (percent) 9

Figure 9. Chinese zombie firms (percent) 9