These have been a bruising few months for many of China’s best-known businesspeople, with some prominent tycoons now knowing what it feels like to be the ball in a pinball machine.
That’s because the mood across different government ministries has turned markedly less friendly to tycoons across a variety of sectors. Witness the ‘three red lines’ blocking property developers from new financing (see WiC528), as well as the dramatic slap down for Alibaba founder Jack Ma last year and the cancellation of his Ant Group IPO in the days that followed (see WiC517).
Subsequently there have been well-publicised campaigns against anti-competitive behaviour across much of the internet sector, with fines and firmer regulation for Tencent, Alibaba and Meituan; draconian punishment for ride-hailing firm Didi for its reportedly unapproved share sale in New York; and the hobbling of online tutoring firms, which have been cut off from much of their customer base thanks to new state directives (see WiC546).
In a bid to make sense of a turbulent period, analysts have been looking for common strands in the government’s approach. And one of the suggestions is a newfound determination to deliver “common prosperity” across the wider economy. This would mean the benefits of success are broadly shared, as Chinese leader Xi Jinping puts it, “both in material and cultural terms”.
But what does ‘common prosperity’ entail and how is it going to be achieved?
Is it a new idea?
The idea is actually written in the constitution of the Communist Party of China (CPC) as one of its goals. On August 17 a meeting of the CPC’s central committee for economic and financial affairs discussed the theme yet again, when Xi reiterated that common prosperity is “an essential requirement of socialism”. The meeting ended with directives to “reasonably adjust high incomes”, encourage philanthropy as well as other “distribution policies” in order to reshape China into a society with an “olive-shape structure”, which means a very large middle class and few who are extremely rich or poor.
At heart, the push for common prosperity is a bid to secure a fairer distribution of wealth and income in a way that narrows the social and economic divides between urban and rural; rich and poor; and old and young.
The principle has a lengthy history in a country whose formal name carries the descriptor ‘The People’s Republic’. It appeared first under China’s first paramount leader Mao Zedong as a way of championing a more egalitarian society. There was then a shift in approach in which his successor Deng Xiaoping made his famous comments about “letting some people get rich first”. But Deng was not breaking completely with the previous orthodoxy: he qualified the change of heart by saying that common prosperity would then be achieved at a later time.
“Common prosperity has been written in the genes of the [Party] leadership as an internal requirement, and it is not a catchphrase that came to light suddenly,” Cong Yi, dean of the School of Marxism at Tianjin University of Finance and Economics, confirmed to the Global Times this month.
Why is common prosperity getting more emphasis now?
Some see in it a political dimension that allows Xi to connect ideologically with his revolutionary predecessors (in fact, he says a similar principle features in the ideas of not just Marx but Confucius – two thinkers separated by 2,500 years). Whatever the precise motivation, China’s current paramount leader has made a big effort to reintroduce the concept as a core priority, especially more recently. Xi made 30 mentions of common prosperity in 2020, Bloomberg reports, and he’s made 65 more references to it so far this year.
“We cannot allow the gap between the rich and the poor to continue growing – for the poor to keep getting poorer while the rich continue growing richer. We cannot permit the wealth gap to become an unbridgeable gulf,” he warned in another major speech in January.
China’s leaders like to set longer-term goals as a backdrop to policymaking, bringing a coherence to their agenda that may not be as apparent in decisions taken over the shorter term. For instance, Xi has just claimed success in achieving a “moderately prosperous society”, which is one of the CPC’s two centennial strategic goals.
In another victory declared earlier this year, Xi has been celebrating the eradication of “absolute poverty” too, another key policy objective.
In the bigger picture the newer discussion of common prosperity also signals a shift in approach from the priorities of the 1980s and 1990s, an era in which “fairness” took a back seat to “efficiency” in economic policy, says Luo Zhiheng in Caixin Weekly magazine.
Luo’s opinion piece rehashes the background to Deng’s decision that some people should be allowed to get rich before others as a means of triggering a radical overhaul of the economy. “The ‘absolute fairness’ in China before 1978 resulted in low efficiency and underdevelopment,” he explained (China was ‘absolutely fair’ in the 1960s and 1970s in the sense that nearly everyone faced penury). “Afterwards, during the reform and opening up period, efficiency became a priority and a key theme of the time… Efficiency relies on incentives. Those who make the pie bigger will get a larger share.”
What followed was 40 years of remarkable economic boom in which some benefited a lot more than others. That was more acceptable politically when China needed to grow its economy from such an impoverished low base. But now the trade-offs are seen as more troubling, such as the rural-urban divide and some jarring disparities between regions and industries.
There is also a sense that some of these unwanted trends are moving in an unsustainable direction. China now reckons on having at least 400 million people in its middle class, defined as those with annual household incomes between Rmb100,000 ($15,400) and Rmb500,000. Yet 600 million more are living on monthly incomes of about Rmb1,000. A fifth of the population now earns more than 10 times that of the poorest 20%, while disposable incomes in the cities are two and a half times those in the countryside, according to official data.
Gini index data (published by the National Bureau of Statistics – though not always with great regularity given its political sensitivities) has indicated that inequality has been getting worse. Andrew Batson, a longtime China watcher, says that the government’s anti-poverty campaigns haven’t done much to blunt overall inequality either, because they seek to help an extremely narrow segment of the population subsisting at something akin to basic survival levels.
Some of WiC’s headline stories this year have given anecdotal insights into the financial pressures felt by millions of China’s more representative families, including a surge in after-school tuition costs for children now estimated to consume up to a third of parental incomes in some major cities.
This was part of the reason why Beijing recently outlawed for-profit tutoring schools. The educational ‘arms race’, government figures concluded, had fed more social anxiety and discontent over higher cost of living and made younger families reluctant to have more children, despite the state’s goal of raising the birth rate (see WiC543).
In the same vein, there is even a growing new subculture called tangping, or ‘lying flat’, in which a disillusioned demographic of twenty-somethings are giving up on the idea of a more prosperous future by refusing to buy property or strive for better jobs, in favour of opting out of the ‘rat race’ and just earning enough to get by (see WiC544). We also looked at discussions of how China might be tacking towards a ‘German model’ of more egalitarian social development (see WiC551).
So where is the government going to deliver common prosperity first?
Some of the common prosperity plan is aimed at boosting the prospects of middle-income families, which aligns with other planks of Beijing’s economic policy, like efforts to spur more spending from consumers, especially for local services. The same middle-income groups are seen as a fulcrum for the domestic consumption that drives Xi’s “dual circulation” vision as well (see WiC533), although policy wonks are waiting for detail about how the practicalities of common prosperity will be felt across the population.
The place to look first is Zhejiang, which was chosen in July as the test bed for initiatives under the theme. As one of the wealthiest provinces, with disposable incomes well above the national average, Zhejiang’s selection as a ‘demonstration zone’ makes sense.
“In the first rich areas like Zhejiang the high-income group has formed a certain scale,” explained Li Shi and Yang Yixin from Zhejiang University in the Economic Daily this month. “The high-income group has much more opportunities or channels to obtain income than the middle or low income groups, and the income opportunities are not completely equal.”
What happens next will provide pointers on how lower and middle income families are going to make gains elsewhere. Zhejiang’s provincial administrators have already been set some targets for 2025. Average disposable incomes should reach an equivalent of $11,750 a year, with middle-income groups (defined as households with Rmb100,000-500,000 in annual income) making up at least 80% of the provincial population. Other objectives include boosting the proportion of people resident in cities, increasing the average periods spent in education, and extending life expectancy to 80 years or more.
Who is going to fund the initial stages of the common prosperity push?
While middle-income families are being portrayed as potential beneficiaries of the new direction in policy, China’s top-performing star companies and the super-wealthy aren’t expecting to fare so well.
Many of China’s tycoons have a track record of dodging the country’s ‘rich lists’, although often their past reluctance to feature was less about the scale of their fortunes than how they acquired them.
The newer scrutiny is being fuelled more by questions about how their wealth is starting to make life worse for others – with the implication that the richest groups are behaving in ways that constrain the chances of smaller firms and more junior entrepreneurs from doing well.
An effort to champion the ‘little guy’ isn’t entirely new either, with longstanding concerns about how small and medium-sized firms get crowded out by more powerful (but more wasteful) state enterprises and ignored by the big banks, which prefer to lend to their state-owned peers.
But there seems to be a subtle shift in the narrative, with the interests of the smaller entrepreneurs being pitched against those of the biggest firms in general, many of which fall outside direct state control, being instead the property of prominent tycoons (admittedly distinctions between private and public ownership are greyer in China).
No doubt the campaign against the giant internet firms also gives political seniors the chance to cut a few of the tech moguls down to size. Regulators were clearly unhappy about the ways that fintechs like Ant Group have challenged the incumbent banks, while Beijing’s newly determined focus on data privacy has been shaped by the realisation that companies like Tencent and Bytedance are getting insights into the lives of hundreds of millions of Chinese that are unavailable even to government officials.
The more immediate consequences for the blockbuster firms and their founders is what Beijing has lauded as “the tertiary distribution mechanism” – political jargon that more bluntly boils down to a new round of political and moral pressure for the super-rich to hand over more of their profits for the greater good.
Companies like Tencent saw this coming a while ago, pledging Rmb50 billion to social causes in April. The internet conglomerate also set up a Rmb50 billion ‘Common Prosperity Fund’ last week for programmes that boost incomes, promote rural economies and subsidise schools.
E-commerce major Pinduoduo also announced this week it would donate $1.5 billion in future earnings to charity after posting its first quarterly profit since going public in New York three years ago.
In fact, five of China’s best-known tech billionaires have pledged more than $13 billion of their personal or corporate fortunes to charitable initiatives in recent months, including Lei Jun, chairman of smartphone maker Xiaomi, the world’s second-largest smartphone maker, who gave away $2.2 billion in company shares.
Wang Xing, founder of delivery platform Meituan, has pledged $2.3 billion towards education and scientific research, while Colin Huang, Pinduoduo’s founder was widely praised in the media in May when his donations to biomedical science, food and agriculture research were said to have reached $1.85 billion over the previous 12 months.
How else could common prosperity be funded?
A deluge of donations from China’s tycoons won’t on its own be enough to level the playing field in the way that proponents hope. That is why the government has also pledged to use “taxation, social security and transfer payments” as a means of advancing Chinese society towards the common prosperity goal.
Similar to the way that a wealth tax is being debated in the US, to counter a system in which many well-advised billionaires have paid little to no income tax, one possibility for Chinese planners is an overhaul of the way income tax is collected, with differentiated rates for different types of employment.
That might jack up taxes on incomes from professions seen as less productive for the economy, which might be a concern for celebrities in the entertainment industry, online influencers and livestreaming hosts, for instance. Semiconductor scientists, smart manufacturing gurus and engineers at electric vehicle firms can probably sleep easier at night on this score.
Another approach would be a standardised tax on property, a proposal mentioned in the current Five-Year Plan, which runs through to 2025. Proponents say there’s an agenda for a fuller discussion of a national property tax over the next 12 months, although sceptics say that a final decision will be delayed because it is such a contentious issue – not least for civil servants themselves who may need to explain how they own high-priced apartments (and often more than one) in spite of relatively meagre salaries.
WiC has been reporting on proposals for a new nationwide annual property tax for about a decade, which is suggestive of how sensitive the issue is for Party cadres.
There’s also the likelihood that such a ‘wealth’ tax would trigger fury from the nation’s other property owners, especially those that have stretched themselves financially to get onto the real estate ladder. Indeed, any measures that shadow a more immediate redistribution of the pie are going to be fraught with risk, not just in threatening to destabilise some of the higher-growth engines in the economy but also by angering those that feel that they are paying too much of a personal price.
So far Xi has talked about targeting groups with “excessively high income” in his common prosperity push, implying tougher treatment for China’s dominant tech and internet firms, and a firmer tap on the shoulder for the country’s richest people to ‘give back’. But there’s also the question of who might bear the brunt of the redistributive effort over the longer term.
There will be a wider set of sensitivities to consider if some of the focus turns to the wealthy and not just the super-rich, for instance, and particularly if it prompts some talented individuals to emigrate.
In the meantime policymakers are keeping to safer ground by talking about the merits of a new ‘social safety net’, rather than debating the means of paying for it. Reportedly, it will be created within two years, although regular readers of WiC might recognise some crossover with efforts to resolve the frustrations of millions of migrant workers with the iniquities of the hukou household registration system (this prevents migrant families from getting the same access to urban schools and other public services as locally born residents).
While there has been a relaxation of hukou rules in some smaller cities, the system has largely been maintained in richer parts of the country – ironically in many of the places where the common prosperity agenda could be pushed hardest.
Critics of the slow progress of hukou reform will argue that the chances of greater prosperity for all are going to be stunted if such a long-derided and discriminatory system is allowed to run in parallel. But the counter argument – as so often in China – is that the government’s common prosperity agenda will be advanced through cautious experimentation, avoiding the risks of social and economic upheaval by trying to do too much, too soon.
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