Industry Deep Dive: The Great Reshaping of China’s Photovoltaic Sector

Policy Synergy, Supply-Side Reform, and the Transition from "Involution" to Value Reconstruction

Date: May 2026 (Based on Report Context)
Sector: Renewable Energy / Photovoltaics (PV)
Rating: Overweight (Maintained)
Analyst: Du Tongtong, Lianchu Securities Research Institute

Executive Summary

The Chinese photovoltaic (PV) industry is currently undergoing a profound structural transformation, marking a definitive inflection point from its "adolescent" phase of rapid, often chaotic expansion to a "mature" stage characterized by quality-driven growth and consolidated market leadership. This report analyzes the comprehensive policy framework dubbed "Anti-Involution" (anti-neijuan), a coordinated effort by central government authorities and industry leaders to rectify severe supply-demand mismatches and eliminate destructive price wars.

Our core thesis is that the current "involution"—defined by homogeneous competition and prices falling below cash costs—is not merely a cyclical downturn but a structural crisis resulting from excessive capital inflow outpacing the steady growth of global energy transition demand. The response has been a multi-layered governance system combining legal regulations, administrative supervision, and industry self-discipline. Key measures include the cancellation of VAT export rebates effective April 1, 2026, the enforcement of strict energy consumption standards, and the establishment of market-based capacity integration platforms.

We observe that these policies are already yielding tangible results. The unilateral downward trend in PV chain prices has been arrested, with polysilicon and module prices showing signs of stabilization and modest recovery. More importantly, the industry is witnessing accelerated differentiation. Companies with superior cost structures, robust balance sheets, and proprietary technologies (particularly in silver reduction and next-generation cell architectures like BC and Perovskite tandem) are beginning to reclaim pricing power and profitability. Conversely, latecomers and inefficient producers are being forced into exit or consolidation.

Looking ahead to 2026, designated by the Ministry of Industry and Information Technology (MIIT) as the "Year of Tackling PV Industry Governance," we expect the competitive landscape to shift decisively from volume-based price wars to value-based innovation competitions. We maintain an Overweight rating on the sector, recommending investors focus on two primary alpha sources: (1) Price Elasticity Plays: Leaders in segments with significant supply-side tightening (e.g., polysilicon, glass); and (2) Technology Premium Plays: Enterprises driving technological iteration and enjoying valuation reshaping through innovation.

Key Takeaways

1. The Root Cause of "Involution": Structural Mismatch and Homogenization

• Supply-Demand Dislocation: The core contradiction lies in the massive capacity built during the 2020-2023 investment boom versus the plateauing growth rate of global demand. Nominal capacity across all links (polysilicon, wafers, cells, modules) has exceeded 1,200 GW, while the China Photovoltaic Industry Association (CPIA) forecasts 2025 global new installations at only 570-630 GW.
• Profitless Growth: From 2023 to mid-2025, polysilicon prices plummeted over 95% (from peak ~¥65/kg to ¥35,000/ton), and module prices dropped over 60%, breaching the cash cost lines of many manufacturers. In Q1-Q3 2025, the main PV产业链 (industrial chain) incurred losses exceeding RMB 30 billion.
• Negative Externalities: This race to the bottom has eroded R&D capabilities, transferred undue industrial premiums to downstream buyers, and heightened risks of international trade friction (anti-dumping/subsidy investigations).

2. A Three-Pillar "Anti-Involution" Policy Framework

The governance model is a synergy of top-down regulation and bottom-up self-discipline:
* Legal & Administrative Guardrails: Central authorities have established clear red lines. The Price Law Amendment Draft explicitly prohibits dumping below cost. The MIIT and six other departments have convened multiple sessions to enforce capacity controls and quality standards.
* Fiscal Policy Shift: A pivotal move was the announcement by the Ministry of Finance and State Taxation Administration to cancel VAT export rebates for PV products effective April 1, 2026. This removes the subsidy incentive for low-price exports, forcing overseas prices to rationalize and shifting competition from "price" to "value."
* Industry Self-Regulation: Led by the CPIA, major players have moved from fragmented competition to collective action. Initiatives include the "Beijing Guanghe Qiancheng" platform for debt-assisted acquisition and elastic storage of excess polysilicon capacity, and strict adherence to non-compete agreements on below-cost sales. Notably, regulatory bodies have cautioned against monopolistic behaviors, ensuring these actions remain within legal bounds (e.g., no fixed pricing or market sharing).

3. Early Signs of Market Rebalancing

• Price Stabilization: Polysilicon spot prices rebounded from a low of ¥35,400/ton to ¥53,600/ton. Module bid prices stabilized in 2025, averaging ¥0.70-0.78/W, ending the era of "low-price dominance."
• Supply Contraction: In Jan-Oct 2025, polysilicon production fell 29.6% YoY (first decline since 2013), and wafer production fell 6.7% YoY (first decline since 2009). Meanwhile, downstream cell and module outputs grew by 9.8% and 13.5% respectively, indicating a healthy structural adjustment where upstream bottlenecks are relieved and downstream demand remains resilient.
• Profitability Repair: While full-year 2025 saw significant losses, Q3 2025 losses narrowed by 46.7% QoQ to ~RMB 6.4 billion, with some firms returning to profitability. Operating rates in polysilicon hit historic lows (~33% in May 2025), facilitating inventory drawdowns.

4. Accelerated Industry Consolidation and Differentiation

• Exit of Weak Players: Cross-industry entrants and tail-end specialized manufacturers lacking core tech or cash flow are the first to be cleared. The CR5 (concentration ratio of top 5 firms) in capital-intensive segments like polysilicon and glass is expected to rise significantly over the next two years.
• Technological Moats: Companies mastering "silver-reduction" technologies (Silver-coated Copper, Electroplated Copper) and advanced cell architectures (BC, HJT, Perovskite Tandem) are securing premium valuations. Silver paste now accounts for >17% of module costs, making de-silvering a critical cost-saving and competitive advantage.
• M&A Activity: The acquisition of Qinghai Lihao by Tongwei Shares (announced Feb 2026) signals a shift from verbal self-discipline to substantive market-driven consolidation, setting a precedent for future capacity optimization.

5. 2026 Outlook: The Year of Governance and Value Reconstruction

• Policy Focus: MIIT has designated 2026 as the critical year for governance. Focus areas include: enforcing mandatory national standards on energy consumption and quality; promoting next-gen tech (Perovskite); and deepening international cooperation.
• Strategic Shift: The industry is moving from horizontal scale expansion to vertical strategic synergy and global localization. Leading firms are building overseas manufacturing bases (Southeast Asia, Middle East, US/EU) to bypass trade barriers and embed Chinese standards globally.
• Investment Implication: Beta-driven broad rallies are unlikely. Alpha will come from structural improvements. Investors should favor leaders with strong balance sheets and technological leadership.

Detailed Analysis: The Anatomy of the "Anti-Involution" Strategy

1. Diagnosing the Crisis: Why "Involution" Became Existential

The term "Neijuan" (Involution) in the context of the Chinese PV industry describes a state of intense, internal competition that yields diminishing returns. Unlike healthy competition which drives efficiency, this involution was driven by homogenization and overcapacity.

The Capital Cycle Trap:
Following the global carbon neutrality consensus post-2020, PV technology costs dropped rapidly, achieving grid parity. Local governments, eager for green GDP, offered land, tax breaks, and subsidies, triggering an investment frenzy. Social capital flooded into the sector, lowering entry barriers. The result was a synchronous expansion across the entire value chain.
* Capacity vs. Demand: By 2025, nominal capacity reached >1,200 GW. Even assuming optimistic global installation growth, the surplus was staggering. The CPIA’s forecast of 570-630 GW for 2025 highlights a utilization rate potential of less than 50% if all capacity were active.
* The Price War Spiral: To maintain cash flow and market share, firms began selling below cash cost. This "suicidal" pricing strategy was sustainable only for those with deep pockets or state backing, but it dragged the entire industry into loss-making territory. The head enterprises’ profit margins collapsed from ~20% to negative values.

Consequences of Unchecked Competition:
1. Erosion of Innovation Capital: Continuous losses stripped companies of the financial resources needed for R&D, threatening China’s long-term technological leadership.
2. Value Leakage: The immense scale and efficiency advantages of Chinese manufacturing were effectively subsidized to global buyers, rather than retained as industry profit.
3. Trade Backlash: Aggressive low-price exports fueled narratives of "overcapacity" in Europe and the US, leading to stricter trade barriers and investigations, jeopardizing long-term market access.

2. The Policy Toolkit: A Multi-Layered Governance Approach

The response from Beijing was not a single directive but a calibrated ecosystem of measures designed to correct market failures without stifling market dynamics.

A. Central Government: Setting the Rules of Engagement

B. Industry Level: From Fragmentation to Consensus

The China Photovoltaic Industry Association (CPIA) played a pivotal role in translating policy intent into industry action.
* Datong Workshop (Jul 2025): Industry leaders agreed to reject zero-sum games and stabilize the supply chain.
* Self-Discipline Initiative (Aug 2025): Six-point pledge including refusing below-cost sales, protecting IP, and maintaining quality.
* Capacity Integration Platform (Dec 2025 - Feb 2026): The establishment of Beijing Guanghe Qiancheng Technology Co., Ltd. by leaders like Tongwei, GCL, and Daqo represents a innovative market-based solution. It aims to acquire and store excess polysilicon capacity ("debt-assisted acquisition + elastic storage").
* Regulatory Check: In Jan 2026, the State Administration for Market Regulation (SAMR) intervened to ensure this platform did not violate anti-monopoly laws (no price-fixing or market allocation). This ensured the "self-help" remained within legal boundaries.
* Consolidation Signal: Tongwei’s acquisition of Qinghai Lihao (Feb 2026) demonstrated that M&A, rather than cartels, is the preferred path for capacity optimization.

3. Impact Assessment: Supply-Demand Rebalancing

The efficacy of these measures is evident in recent data trends.

Supply Side: Active Contraction
* Polysilicon: Production dropped 29.6% YoY (Jan-Oct 2025). Operating rates hovered near historic lows (33.38% in May 2025). This aggressive cutback was driven by both economic necessity (losses) and policy guidance (energy audits).
* Wafers: Production declined 6.7% YoY, the first drop since 2009. This indicates that even the previously robust wafer segment is aligning output with realistic demand.
* Downstream Resilience: Cell and module production continued to grow (9.8% and 13.5% respectively), suggesting that the bottleneck has shifted upstream, allowing downstream manufacturers to operate more efficiently without the pressure of inflated raw material costs or, conversely, that downstream demand is absorbing the optimized upstream supply.

Price Mechanism: Restoration of Rationality
* Polysilicon: Prices recovered from ¥35,400/ton to ¥53,600/ton. This ~50% rebound from the bottom significantly improves the margin profile for integrated players.
* Modules: Bid prices stabilized around ¥0.70-0.78/W in 2025. The volatility has decreased, and the "race to the bottom" has halted.
* Outlook: We do not expect a V-shaped recovery due to the sheer volume of existing capacity. Instead, we anticipate a "L-shaped" or gradual "U-shaped" recovery, where prices stabilize at a level covering the "full cost + reasonable profit" of efficient leaders. High-cost产能 (capacity) will remain idle or exit.

Financial Health: Narrowing Losses
* The main chain’s cumulative loss of >RMB 30 billion in Q1-Q3 2025 is concerning, but the trajectory is improving. Q3 losses were nearly halved compared to Q2. Cash flow statements for leading firms show sequential improvement, with some achieving break-even or profit in Q3/Q4 2025. This suggests the "bleeding" has stopped, and the healing process has begun.

4. Corporate Differentiation: The Rise of the "Strong"

The "Anti-Involution" era accelerates the Matthew Effect (the rich get richer).

Who Wins?
1. Cost Leaders: Firms with the lowest cash costs (often due to scale, vertical integration, or location advantages like cheap electricity in Xinjiang/Inner Mongolia) can survive the price floor and gain market share as competitors exit.
2. Technology Innovators:
* De-Silvering: With silver prices high, technologies like Silver-Coated Copper (SCC) and Electroplated Copper are critical. SCC is compatible with existing TOPCon lines and is scaling up. Electroplated copper offers a complete silver replacement but faces technical hurdles. Leaders here will enjoy a significant cost advantage.
* Next-Gen Cells: BC (Back Contact) technology is gaining traction for its aesthetic and efficiency benefits, commanding a premium. HJT (Heterojunction) is finding niches. Perovskite Tandem is moving from lab to pilot lines. Companies with credible roadmaps in these areas are valued for their future optionality, not just current earnings.
3. Balance Sheet Strength: In a credit-tight environment, companies with low leverage and positive operating cash flow can withstand the transition period and fund necessary CapEx for tech upgrades.

Who Loses?
1. Cross-Industry Entrants: Companies that entered PV during the hype cycle without proprietary tech or supply chain integration are vulnerable. They lack the cost structure to compete and the tech to differentiate.
2. Tail-End Specialists: Small, independent players in commoditized segments (like standard PERC cells or generic wafers) face existential threats as CR5 concentration rises.
3. High-Cost Producers: Facilities with high energy consumption or older technology will be shut down by mandatory standards or rendered uncompetitive by market prices.

Risks / Headwinds

While the outlook is constructive, several risks could derail the recovery or impact specific investments:

1. Policy Execution Risk:

   • Local Protectionism: Local governments may resist the closure of local PV factories due to employment and GDP concerns, potentially slowing down capacity exit.
   • Regulatory Uncertainty: The balance between "industry self-discipline" and "anti-monopoly" is delicate. Over-correction by regulators could stifle legitimate cooperative efforts or, conversely, allow hidden collusion that distorts the market.

2. Global Demand Slowdown:

   • Interest Rates & Macro Economics: High interest rates in key markets (Europe, US) can dampen the IRR of solar projects, slowing installation growth.
   • Grid Constraints: In many mature markets, grid congestion is becoming a bottleneck for new solar connections, limiting actual demand regardless of panel prices.

3. International Trade Friction:

   • Tariffs & Barriers: Despite the cancellation of export rebates, the EU’s Carbon Border Adjustment Mechanism (CBAM) and potential new tariffs from the US or other regions could further restrict market access.
   • Geopolitical Tensions: Escalating tensions could lead to decoupling efforts, forcing Chinese firms to rely more on domestic or non-Western markets, which may have lower margins.

4. Technological Disruption Risk:

   • Path Dependency: Heavy investment in one technology route (e.g., TOPCon) could become stranded if a competing technology (e.g., Perovskite Tandem or HJT) achieves a breakthrough in efficiency or cost faster than expected.
   • IP Litigation: As competition shifts to tech, intellectual property disputes may increase, creating legal costs and operational disruptions.

5. Raw Material Volatility:

   • Silver & Polysilicon: While polysilicon prices are stabilizing, silver prices remain volatile and high. Any spike in silver costs could squeeze margins for manufacturers who haven’t fully adopted de-silvering technologies.

Rating / Sector Outlook

Sector Rating: Overweight (Maintained)

We believe the Chinese PV industry has passed the point of maximum pain. The combination of policy intervention and market forces has initiated a sustainable correction. The sector is transitioning from a Beta-driven growth story (where all boats rose with the tide) to an Alpha-driven value story (where stock selection matters critically).

Why Overweight?
1. Valuation Reset: Most PV stocks have corrected significantly, pricing in the worst-case scenarios of prolonged losses. Current valuations reflect a distressed asset base, offering a margin of safety for leaders.
2. Policy Put: The explicit commitment from the central government to stabilize the industry provides a "policy put," reducing the risk of further catastrophic price collapses.
3. Structural Improvement: The exit of inefficient capacity and the rise of technological barriers will lead to healthier long-term ROIC (Return on Invested Capital) for surviving firms.
4. Global Leadership Intact: Despite trade headwinds, Chinese PV firms remain the most efficient and technologically advanced globally. The shift to overseas manufacturing mitigates some trade risks while preserving competitiveness.

Time Horizon:
* Short Term (6-12 months): Volatile but upward trending. Focus on price stabilization news and quarterly earnings beats from leaders.
* Medium Term (1-3 years): Consolidation phase. M&A activity will increase. Market share gains by top 5 players will drive earnings growth.
* Long Term (3+ years): Mature utility-like growth with periodic tech-driven super-cycles.

Investment View & Strategy

In the new normal of "high-quality growth," investors should abandon the strategy of broad sector exposure and adopt a selective, differentiated approach. We identify two primary investment themes:

Theme 1: Price Elasticity & Margin Recovery (The "Cyclical" Play)

Logic:
Segments with the most significant supply-side contraction and highest barrier to entry will experience the sharpest price recovery and margin expansion. The removal of excess capacity creates a tighter supply-demand balance, allowing leaders to raise prices or maintain them despite cost fluctuations.

Key Segments:
1. Polysilicon:
* Why: Highest capital intensity, longest lead times for new capacity, and most aggressive production cuts (operating rates <40%). The establishment of the capacity integration platform directly targets this segment.
* Beneficiaries: Top-tier integrated players with low-cost assets (e.g., those in Sichuan/Inner Mongolia with cheap hydro/coal power) and strong balance sheets. Look for companies that can turn cash-flow positive quickly as prices rise above ¥50,000/ton.
2. PV Glass:
* Why: The industry has already seen exit of small kilns (<1,000 tons/day). Environmental and energy constraints limit new supply. Demand is supported by the dual-glass module trend.
* Beneficiaries: Duopoly leaders with scale advantages and proximity to float glass raw materials.

Selection Criteria:
* Cash Flow Positive: Ability to generate operating cash flow even in trough periods.
* Low Debt Ratio: Resilience against high interest rates and refinancing risks.
* Cost Leadership: Bottom-quartile cash cost position.

Theme 2: Technology Premium & Valuation Reshaping (The "Growth" Play)

Logic:
As price competition subsides, technology becomes the primary differentiator. Companies that can deliver higher efficiency, lower BOS (Balance of System) costs, or unique aesthetics will command a premium. This is a shift from selling "commodities" to selling "solutions."

Key Technologies:
1. De-Silvering Technologies:
* Why: Silver is a major cost driver. Reducing or eliminating silver usage directly boosts margins.
* Beneficiaries:
* Material Suppliers: Companies producing silver-coated copper powders or electroplating chemicals.
* Equipment Makers: Suppliers of screen printing equipment compatible with SCC or electroplating lines.
* Cell Makers: Early adopters of SCC in TOPCon lines who can demonstrate yield stability and cost savings.
2. Advanced Cell Architectures (BC & Tandem):
* Why: BC (Back Contact) offers higher efficiency and better aesthetics, appealing to premium residential and commercial markets. Perovskite Tandem promises a leap in theoretical efficiency limits.
* Beneficiaries:
* BC Leaders: Firms that have successfully scaled BC production and secured partnerships with high-end distributors.
* Tandem Pioneers: Companies with credible pilot lines and partnerships with research institutes for Perovskite commercialization. Note: This is higher risk/higher reward.

Selection Criteria:
* R&D Intensity: High R&D spending as a % of revenue.
* Patent Portfolio: Strong IP protection in key tech areas.
* Customer Validation: Signed contracts or pilots with reputable downstream partners proving tech viability.
* Management Vision: Clear roadmap for tech iteration and willingness to cannibalize old products for new ones.

Specific Investment Actions

Monitoring Indicators for Investors

To navigate this transition, investors should closely track the following high-frequency data points:

1. Polysilicon Inventory Levels & Operating Rates: A sustained drop in inventory and stable low operating rates confirm supply discipline.
2. Module Bid Prices (Weekly/Monthly): Watch for stability or slight increases. A return to steep declines would signal policy failure.
3. Export Data: Monitor the volume and average price of exports post-April 2026 (after tax rebate cancellation). A drop in volume but rise in average price is a positive sign of value migration.
4. M&A Announcements: Increased M&A activity indicates healthy consolidation. Distressed sales without buyers indicate lingering oversupply.
5. Tech Yield Rates: News on mass-production yields for BC and Silver-Coated Copper. High yields = faster cost reduction and adoption.

Conclusion: From Quantity to Quality

The Chinese PV industry stands at a crossroads. The past decade was defined by the relentless pursuit of scale, driven by policy subsidies and capital abundance. This era has ended. The "Anti-Involution" policies are not a temporary fix but a structural realignment of the industry’s DNA.

For institutional investors, the message is clear: The tide has turned. The indiscriminate buying of PV stocks is no longer a viable strategy. Instead, success will come from identifying the survivors and the innovators. The companies that emerge from this crucible will be leaner, more technologically advanced, and more profitable. They will compete not on who can sell the cheapest panel, but on who can deliver the most value over the lifecycle of a solar asset.

We recommend positioning portfolios to capture this alpha. Focus on the leaders who are shaping the new order, and the innovators who are defining the next generation of solar technology. The short-term pain of consolidation is the price paid for long-term sustainability and profitability. As the industry enters its mature phase in 2026 and beyond, we expect a re-rating of quality assets, rewarding those who have navigated the "involution" trap with foresight and resilience.

Appendix: Detailed Policy Timeline & Impact Matrix

(For reference, summarizing the regulatory landscape)

Phase 1: Awareness & Signaling (Mid-2025)
* Actions: Media campaigns, high-level meetings.
* Impact: Sentiment shift. Market realizes government seriousness. No immediate supply impact.

Phase 2: Rule Making & Initial Constraints (Late 2025)
* Actions: Price Law amendments, Energy Standards drafts, Industry Self-Discipline pledges.
* Impact: Psychological constraint on pricing. Some voluntary production cuts. Prices stabilize but don't rise significantly.

Phase 3: Hard Constraints & Fiscal Shifts (Early 2026)
* Actions: Export Tax Rebate Cancellation (Apr 1), Mandatory Energy Standards enforcement, Capacity Integration Platform operations.
* Impact: Structural Change. Export prices rise. Low-efficiency domestic capacity shuts down due to energy costs. M&A begins. Prices begin to reflect true costs.

Phase 4: Consolidation & Value Creation (Late 2026 onwards)
* Actions: Market-driven M&A, Tech differentiation, Global localization.
* Impact: Higher industry concentration. Improved ROIC. Stable, moderate price growth. Innovation-driven premiums.

Disclaimer

This report is prepared by Lianchu Securities Research Institute for institutional clients only. It does not constitute an offer to sell or a solicitation of an offer to buy any securities. The information contained herein is based on sources believed to be reliable, but Lianchu Securities makes no representation or warranty, express or implied, as to its accuracy or completeness. The views expressed are those of the analyst as of the date of publication and are subject to change without notice. Past performance is not indicative of future results. Investors should conduct their own independent research and consult with financial advisors before making investment decisions.

Analyst Certification: The analyst named in this report certifies that the views expressed accurately reflect his personal views about the subject securities and issuers. No part of the analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Contact:
Du Tongtong
Analyst, Lianchu Securities Research Institute
Email: dutongtong@lczq.com
License: S1320526020001