The Great Export: How China’s “Involution” (Neijuan) is Reshaping Indonesia’s Economy

The term “Involution” (Neijuan) introduce by Loo Cheng Chuan. a Singaporean entrepreneur, investor, and financial educator best known as the founder of the “1M65” movement, has evolved from a sociological concept describing societies that grow without developing into the defining feature of China’s post-2023 economy. It describes a state of frantic, diminishing-return competition where internal forces — overinvestment, saturation, and weak domestic consumption — create a pressure cooker environment.

For Indonesia, Neijuan is no longer a distant observation; it is an imported economic reality.

Data from late 2024 through 2025 confirms that China’s solution to its internal involution — an aggressive “export push” — is transmitting deflationary pressures directly into Southeast Asia. This transmission mechanism is fundamentally altering Indonesia’s industrial landscape, creating a sharp divergence between consumer surplus (cheap goods) and producer pain (deindustrialization).

“To sustain strong and durable growth, it [China] must now rebalance more toward domestic demand and deepen regional integration.” — IMF Blog, “Asia’s Economic Growth Is Weathering Tariffs and Uncertainty,” October 16, 2025

The Transmission Mechanism: Exporting Deflation

The economic logic of the “Involution Export” is simple: When Chinese factories cannot sell profitably at home due to saturation, they must export to survive, often at or below cost.

Current statistics reveal the scale of this structural overcapacity:

• Battery Glut: In 2024, China’s lithium-ion battery production capacity surpassed 2 TWh, creating a surplus 60% higher than total demand.
• Solar Saturation: Solar manufacturing capacity hit nearly 1,000 GW, roughly double the entire global demand.
• The Price War: To clear this glut, prices collapsed. In early 2025, Chinese EV makers like BYD slashed prices by up to 34% on key export models to maintain cash flow.

This excess capacity does not disappear; it flows to the nearest absorption markets. Indonesia, with its large population and open trade channels, has become a primary destination.

The Impact on Indonesia: Winners and Losers

The arrival of this “involuted” capital has created distinct winners and losers in the Indonesian economy, evidenced by the sharp contrast between trade deficits and consumer activity in 2025.

1. The Manufacturing Crisis: The Sritex Warning

The most visible casualty is Indonesia’s labor-intensive manufacturing. The textile sector, unable to match the marginal-cost pricing of Chinese imports, faced a catastrophic 12 months.

• Bankruptcy & Layoffs: The bankruptcy of PT Sri Rejeki Isman Tbk (Sritex) in late 2024 was a watershed moment. Burdened by debt and undercut by cheap fabric imports, the giant’s fall triggered over 10,000 direct layoffs, with industry associations estimating up to 126,000 broader job losses across the sector by mid-2025.
• The Trade Gap: Despite an overall surplus, Indonesia recorded a $10.7 billion bilateral trade deficit with China in the first half of 2025, increasingly exporting raw commodities (nickel) while importing finished goods that compete with local factories.

2. The Consumer Paradox

For the Indonesian consumer, the “Involution Export” initially appears beneficial. Brands like Mixue (with ~3,000 stores) and platforms like TikTok Shop offer goods at historically low prices. However, 2025 data reveals a dangerous paradox: Cheap goods are meeting weak wallets.

• In May 2025, Indonesia experienced 0.37% deflation, a rare signal of weak aggregate demand. The influx of cheap imports has coincided with a drop in consumer confidence, driven by anxiety over job security in the very manufacturing sectors being undermined.

Strategic Path Forward: From Protection to Adaptation

The “Involution” is not a temporary fluctuation; it is a medium-term macroeconomic reality. To survive the flood of under-priced capital, Indonesia must move from reactive panic to strategic adaptation.

A. Recommendations for Government: Smart Industrialization

The government must balance the need for affordable goods against the risk of rapid deindustrialization.

1. From Tariffs to Safeguards (BMTP): While headline-grabbing “200% duties” invite retaliation, the government should prioritize WTO-compliant Safeguard Measures (BMTP). These are temporary tools designed to give specific industries (Textiles, Ceramics) time to restructure.
2. Non-Tariff Barriers (NTB): China can subsidize prices, but they cannot bypass regulation. Aggressively enforcing SNI (National Standards) and Halal Certification raises the compliance cost for cheap imports without technically raising tariffs.
3. The “Build Here” Mandate: Leverage the domestic market of 280 million people. If Chinese firms want to sell EVs or solar panels, they must commit to deep manufacturing — not just assembly — via Joint Ventures (JVs) with local partners.

B. Recommendations for Business: Escaping the Red Ocean

For Indonesian CEOs, the era of competing on price against Chinese imports is over. You cannot win a price war against a competitor willing to lose money to keep their factory running.

1. Pivot to Service-Intensive Manufacturing: If your product is a commodity, you are vulnerable. Pivot to value propositions Chinese factories cannot offer remotely: customization, rapid installation, and after-sales service.
2. Supply Chain De-Risking: The “China+1” strategy is no longer optional. Relying 100% on Chinese raw materials exposes businesses to sudden regulatory shifts (like new tariffs). Diversifying sources to India or Vietnam is critical for continuity.
3. The “Trojan Horse” Partnership: Instead of fighting Chinese FDI, absorb it. Many Chinese firms are desperate to move production offshore to avoid US/EU sanctions. Local firms should offer themselves as the local JV partner — providing land, permits, and market access in exchange for technology transfer.

Conclusion

The “Involution” of the Chinese economy is forcing a structural transformation on Indonesia. The data from 2025 makes one thing clear: The “cancer” of overcapacity is contagious.

If left unchecked, Indonesia risks Premature Deindustrialization, becoming merely a market for finished goods rather than a production hub. However, with “Smart Industrialization” — combining targeted safeguards with requirements for deep investment — Indonesia can turn this flood of capital into the foundation for its next industrial phase.