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Common prosperity

China’s Long March to Common Prosperity

Posted on 10 September 202113 September 2021 by Flying Sesame Editor

When the plug was pulled on the Ant Group IPO in November last year, no one saw that as a prelude to what was coming next. Seismic changes that followed, from regulatory crackdown on the big tech to the banning of private tutoring, generated both shock and bewilderment. Until the key to the riddle was revealed by President Xi Jinping (习近平) himself in August, at the 10th meeting of the Central Committee for Financial and Economic Affairs, and summed up in one catchphrase: common prosperity (共同富裕).

“The phrase has appeared 65 times in his speeches and meetings so far this year, compared with 30 in all of last year. ”

(Source: The Straits Times)

Historical context of common prosperity

For those who are new to the term, it is actually not Xi’s invention. The socialist concept has a long history going back to Mao’s time. But what is more interesting is that five generations of the Chinese leaders have adopted widely different approaches to it, mirroring the country’s rollercoaster journey of economic transformation in the past decades.

It first started with Mao’s aggressive egalitarian pursuit. Sadly, his interpretation of common prosperity, which involves eradication of private ownership, agriculture collectivisation, and relentless class struggle only produced common hardship.

Common prosperity

To rescue China from Mao’s catastrophe, Deng Xiaoping (邓小平) championed the Reform and Opening (改革开放) in the 80s. Deng’s mantra is to “allow some people to get rich first (让一部分人先富起来)”. Those who became rich first can then help others catch up, he said, and to eventually achieve common prosperity together.

Some thought that the second half of Deng’s statement was merely window dressing to make the idea of capitalism more palatable. After all, the nation was still pretty much indoctrinated with Mao’s ideology and personal cult back then. And Deng had to throw in a few novel creations, notably “socialism with the Chinese characteristics” (中国特色社会主义) and “primary stage of socialism” (社会主义初级阶段), to sidestep resistance from the conservatives.

As the private sector flourished and the economy boomed, the next leadership team led by Jiang Zeming (江泽民) had an easier time, carrying on with Deng’s legacy of prioritising “making the pie bigger” over sharing it equally. One episode that encapsulated the spirit of the time was the state sector reform in the 90s, widely known as the smashing of the “iron rice bowl” (铁饭碗) within China.

The tone became more nuanced when Hu Jingtao (胡锦涛) took over the centre stage. Hu proposed a “people-oriented scientific development” (以人为本, 科学发展), and promised to build a “harmonious society” (和谐社会). To translate these party jargons to plain language, what he actually meant was to promote a more inclusive development model, one that balances the race for growth with care for the working class. As such, some of his most notable policies include the removal of agricultural tax in 2006, the passing of labour laws in 2009 and the establishment of a social security system.

The changing wind reflects the party’s nervousness over the growing wealth gap since Deng’s market reform. Or in other words, some people did indeed get rich first. But they did not quite follow Deng’s expectation to spread the wealth.

Common prosperity
(Source: IMF)

And Xi is now determined to make them do so. He has little choice: at the national level, the ratio of top to bottom quintile in terms of disposable income has reached about 10 times and is still trending up. Tension is visible in all corners of the society.

Xi’s politburo speech in January 2021 said it all. “Common prosperity is not only an economic issue, it is a fundamental political issue that mattes for the Party’s leadership”, he declared.

Common prosperity

In a way, the sweeping measures recently announced should not have surprised us. Breaking up monopolies of the tech giants, saying no to excessive overtime, protecting gig workers’ rights, urging billionaires and corporates to demonstrate social responsibilities and channel more resources to philanthropy; parallels abound as we look back in history.

With rising affluence and maturing growth slows, inevitably many governments, many governments were forced to embark on such soul-searching, whether you call it “populist” or “progressive”. Crucially for a country like China, which went through challenging times, it can now finally afford to cut the cake in a fairer way.


Unpacking the idea of common prosperity: three stages of wealth distribution

So what does common prosperity exactly mean? The government called for “reasonable adjustment of excessive income”, expansion of middle-income group and more philanthropy. It all sounds pretty vague. Though this is not entirely unusual when it comes to China’s policy initiatives, as party leaders like to leave room for ambiguity that allows adjustment in interpretation later on.

What they did make explicit though is what common prosperity is not meant to be:

  • It does not mean equal prosperity, and changes will happen in stages. So don’t expect Xi to suddenly play Robin Hood tomorrow.
  • It does not mean a crackdown on private businesses and entrepreneurship. In Xi’s own words, ”wealth creation through hard work and innovation…especially pioneers who had the guts to start their own businesses with diligence and integrity” should be encouraged. So no death spell for capitalism.
  • It does not mean a cradle-to-grave welfare state. The focus will instead be on strengthening existing social welfare system, including equal opportunity, better education and healthcare.

Peeling through to the next layer, one then needs to examine the often overlooked references to the so-called “three stages of wealth distributions (三次分配)”.

There is nothing new in the concept itself, which was coined by the Chinese economist Li Yining (厉以宁) in 1994. However, in the August meeting of the Central Committee for Financial and Economic Affairs, for the first time the idea was enshrined as the foundation to narrow inequality. This is a clear signal of the party’s intention to use it a guiding principle for the actual implementation of the common prosperity policy. So let’s take a closer look at what the three stages of wealth distribution are about.

Primary distribution, as we all understand, is market-driven.

A second phase of re-distribution then follows, as the government balances the needs of the market with a pursuit for equality via policy tools, such as taxation, social security and fiscal transfer. In the context of China’s common prosperity drive, the government’s response will likely include introduction of taxes on capital and wealth, financial support to less developed regions and further improvement in social safety net.

  • Speaking of taxation, many would raise their eyebrow, if they find out that socialism with the Chinese characteristics so far entails only 20% withholding tax on interest income and no capital gain tax on shares. Nor is there any inheritance or property tax.
  • Property tax, for instance, has been talked for years. It is now widely anticipated that pilot program introduced in Shanghai and Chongqing since 2011 will be broadened to other areas. But given the deep-rooted house ownership culture in China (with 90% house ownership versus 65% in the US) and the fact that about 70% of the Chinese family wealth is in real estate, whatever comes will see substantial caveats.
  • Another Chinese tax quirk I recently discovered is that the weight of direct taxes, such as income tax, is much lower compared to that of indirect tax in the form of VAT and other consumption taxes. In fact, the ratio is estimated to at 3 to 7. Obviously such indirect taxes as part of the price of goods sold are shared by all consumers, and weighs disproportionally on the poor.
  • On the point of social safety net, hukou (户口), or residency permit, used to be a big sticking point. The system has led to hardship for many migrants. Without a local hukou, they are not entitled to unemployment benefit, and their children can’t get into local schools. After talking about reform for years, the government is finally easing the pathway to hukou in most cities.

Coming on to the third phase of distribution, or voluntary donation, it is a topic that actually caused the biggest stir among the Chinese public.

  • According to Caixin, donation accounted for just 0.15% of the Chinese GDP in 2019 compared to 2.1% in the US. Interestingly, the same article also points out that 70% of the donation in China is done by businesses. That figure stands at just 5% in US, where individual donations speak for the lion share of 70%. So clearly the government has task in its hand to put tax incentives in place to encourage firms and high net worth individuals for more charitable activities.
  • Another obstacle, which is likely to be removed in the future is the lack of inheritance and gifting tax. Today the moneyed class in China usually opt to pass down the wealth to the next generation, to the detriment of social mobility.
  • The more thorny issue in the way of the third phase of distribution though is China’s struggle to institutionalise its non-profit sector with better transparency. Rife scandals in recent years have battered the sector’s reputation and dented public confidence.
  • In any case, incentivised or not, China’s beleaguered tech titans have certainly gotten the cue. Last month, Tencent spearheaded the effort by pledging USD 15 billion to its social responsibility programme, which was soon matched by Alibaba. But just dishing out cash is not enough. The party’s watchful eyes will be on other matters too, especially anti-competitive behaviour, consumer data protection, gig worker’s right and illegal work hours.

Path to common prosperity: cross the river by feeling the stones

When charging forward his reform agenda in the 80s, Deng is known for his philosophy of “crossing the river by feeling the stones (摸着石头过河).” As shrewdly observed by Ezra Vogel in his masterpiece “Deng Xiaoping and the Transformation of China”, it was Deng’s “creative way of encouraging experimentation and acknowledging that in a new situation they should not expect that all policies would work well”.

Sure enough, Deng first experimented with “household enterprise” (个体户) in which the entrepreneur himself worked, as a way to boost employment while dodging criticism from hardliners. He went on with more famed trial of the Special Economic Zones in Guangdong and Fujian provinces, paving the way for the eventual opening up of the Chinese economy.

Common prosperity
(A giant Deng Xiaoping poster with his quote “development is the hard truth”)

Since then, trying out ideas in certain localities before pushing for wider adoption has become a hallmark of the party leadership. Despite Xi’s rhetorics, this pragmatic attitude is expected to stay when charting the path of common prosperity.

“As with many of its signature initiatives, the party will not impose a common approach to common prosperity. Local authorities will be encouraged to explore effective ways that suit local conditions…Over time, the successful projects will be said to conform to Mr. Xi’s vision; in reality, his vision will coalesce around them.”

(Source: The Economist)

A case in point here is Zhejiang province, which was recently named as a pilot zone for the common prosperity project. Hence the KPIs shared by the Zhejiang government offer us a preview of the party’s vision of common prosperity in practice:

  • Disposable income per capita reach RMB 75k (c. USD 12k)
  • Share of labour compensation in GDP surpasses 50%
  • Share of household with annual disposable income within RMB 100-500k (USD 15 -75k) and 200-600k (USD 30k – 90k) band reaches 80% and 45% respectively
  • Maximum and minimum disposable income ratio falls below 1.55x; urban and rural household income ratio falls below 1.9x
  • Urbanisation rate of 75%
  • Gross enrolment in higher education exceeds 70%; expected average schooling for children reaches 15.5 years
  • Share of personal healthcare expenditure in total healthcare spending remains below 26%
  • Urban housing support coverage reaches 23%

Common prosperity is a laudable objective. On balance I am delighted to see China taking some baby steps towards it. But will China be able to do it in a way that does not stifle innovation and drive to succeed? How to tackle corruption within the party, which is another manifestation of an unfair society? There are certainly more questions than answers at this point.

With all things considered, I feel I can at least draw some comfort from China’s past track record of correcting its own mistakes, from the end to the Cultural Revolution in the 70s, the rightsizing of the bloated state-owned enterprises in the 90s to a debt de-leveraging campaign in recent years. The Chinese leaders can prove remarkably adaptable when they feel social stability is under threat. That they have now become obsessed with how to make society fairer is a good starting point for the long march ahead.

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China’s Long March to Common Prosperity via /r/economy | Chet Wang
1 year ago

[…] China’s Long March to Common Prosperity https://www.flyingsesame.com/chinas-long-march-to-common-prosperity/ […]

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