The news: Alibaba, ByteDance, Pinduoduo, Xiaohongshu, and JD.com were publicly reprimanded by Chinese regulators for engaging in misleading marketing ahead of the 618 shopping festival, per Bloomberg.

An official statement posted on the Beijing Municipal Bureau of Market Supervision and Administration’s Weibo account outlined a series of violations, which included falling short on promises to give out tens of billions of yuan in subsidies. Regulators also said the companies failed to properly disclose promotional rules and display merchant information.

Why it matters: The crackdown on promotional campaigns marks the latest front in Beijing’s war against “involution,” or excessive competition, which is contributing to deflation and sharply squeezing corporate profits.

While curbing aggressive subsidies could favor merchants, it will likely hurt consumption during one of China’s most important shopping periods. Although inflation is finally picking up after years of deflation, weaker-than-expected consumer price index (CPI) growth in May indicates that demand and confidence remain weak.

At the same time, manufacturers’ input costs are soaring as the war in Iran causes energy prices to spike, which is likely to offset any potential benefit from lower subsidies.

Implications for retailers: Beijing’s scrutiny may cause China’s ecommerce giants to rethink their promotional plans for 618 and beyond. But the crackdown doesn’t address the underlying reason for the persistent price wars, which is that depressed consumer confidence and economic struggles are causing households to keep a tight lid on spending.

Given the government’s reluctance to fully address the issue, spending growth is likely to remain weak this year.

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