Common prosperity dissected – Part 1: Going for the olive

A question I have been asked frequently in the past months is if I can explain ‘common prosperity’ (共同富裕, gongtong fuyu). Although the media hype around the topic has mostly died down, I decided to go back and summarize some important articles and opinions, especially those written by Chinese media and statements by Chinese authorities and experts. 

Dusted off

‘Common prosperity’ might seem like one of Xi Jinping’s invented catch phrases, but actually the term was first used in the 1950s, by the CCP under Mao Zedong. In an excellent analysis for the China Media Project, David Bandurski dates the first mention of ‘common prosperity’ back to an article in state newspaper People’s Daily on September 25, 1953: “United together, [we must] bring into play the spirit of collectivism, improving productivity, increasing production of grain and other crops, increasing income, striving for lives of common prosperity, according to the principles of willingness and mutual benefit.” 

The original idea, that common prosperity could only be reached when means of production were collectively owned, radically changed when Deng Xiaoping introduced his ‘let some get rich first’ approach in the late ’70s. But even under his reforms, common prosperity remained an ultimate goal. In 1986 Deng said: “Our policy is to let some people and some regions get rich first, in order to drive and help the backward regions, and it is an obligation for the advanced regions to help the backward regions.” Articles appearing in the People’s Daily started opposing egalitarianism and stating that “allowing some peasants to get rich first is a practical policy to achieve common prosperity” and “socialism is not egalitarianism, and common prosperity does not mean equal wealth.” In the decades that followed ‘common prosperity’ disappeared to the background while the country focussed on letting some get rich first. 

As a Bloomberg analysis shows, Xi Jinping has been using ‘common prosperity’ in his speeches ever since becoming party secretary. According to Caixin, in November 2015 Xi stated in a Communist Party Central Committee meeting that achieving common prosperity was the “fundamental position” for the country’s economic policy planning and development. In 2019, the Communist Party pledged in a plenary meeting to make more substantial progress in achieving common prosperity by 2035, through expansion of middle-income groups and reducing the gap between urban and rural regional development.

Xi started mentioning common prosperity much more frequently in 2020 and especially in 2021. The occasional mentions in the previous years gave way to 30 mentions in 2020 and 65 in the first 8 months of 2021 alone. China Media Project found that in 2021 mentions of ‘common prosperity’ have also significantly increased in articles in People’s Daily. In his speech on the centenary of the CCP on the first of July 2021, Xi pledged to “make more notable and substantive progress toward achieving well-rounded human development and common prosperity for all.” After eradicating absolute poverty in China as part of the first centenary goal of “building a moderately prosperous society,” it is part of the “second centenary goal of building China into a great modern socialist country,” to be realized by the 100th anniversary of the foundation of the People’s Republic of China in 2049. 

But it was only after the term was emphasized in the notes of a meeting (link in Chinese) of the Central Financial and Economic Affairs Commission (hereafter CFEAC) on August 17th 2021, that western media went into a frenzy about what it all meant. As always, the party’s words were deliberately vague and ambiguous, leading to confusion and misinterpretation. It was clear that common prosperity would play a significant role in the policy directions of the CCP. After letting some get rich, the time was right for the next phase. But what would that next phase look like? Speculations ranged from China going after it is billionaires to further crackdowns on the private sector. Some even suggested the resurrection of the term signalled a return to Mao’s egalitarianism that was discarded under Deng. Was the CCP turning into a ‘Robin Hood with Chinese characteristics’ going after the rich to help the poor?

What was actually said on the 17th of August?

Let us first look at what was actually said at the August 17th CFEAC meeting. Besides common prosperity the notes of the CFEAC meeting also talk about preventing financial risk, but I have limited myself to summarizing the important points on common prosperity below.

  • Common prosperity is the essential requirement of socialism and an important feature of Chinese-style modernization. The notes underline the historical realization that ‘poverty is not socialism’ and the reform and opening up policies broke with the traditional planned economy system and allowed some people to get rich first. 
  • Since 2012 (at the 18th National Congress of the Communist Party of China) common prosperity has gained importance. The CCP took measures to improve people’s livelihood, overcome poverty, build a moderately prosperous society, and has thereby created a solid foundation for common prosperity. [Note: this shows how common prosperity is considered a next step in China’s development].
  • The party is moving towards the second centenary goal and better satisfying the people’s growing needs for a better life. [Note: the ‘second centenary’ refers to 2049, the 100th anniversary of the founding of the People’s Republic]. 
  • The meeting emphasized that common prosperity is the prosperity of all the people, not the prosperity of a few people, nor is it uniform egalitarianism. However, the notes stress that some people will continue to be allowed to get rich first. [Note: In other words, Deng’s mantra still applies.] Those who work hard, operate legally, and dare to start a business will be supported.
  • Hard work and innovation to get rich are encouraged. Conditions for raising education levels and development abilities need to be improved. Opportunities for more people to become rich need to be created, as well as a development environment in which everyone participates.
  • Common prosperity needs to come in phases and will be a gradual, complex, and long-term process. Local governments are encouraged to explore effective approaches based on their local conditions.
  • Taxation, social security and ‘transfer payments’ need to be increased and more accurate [Note: more on this later].
  • The proportion of the middle-income group needs to be expanded, incomes of low-income groups need to be increased (more low-income people need to move up to middle class) and high-income groups need to be rationally regulated. The result should be an olive-shaped income distribution (wide in the middle and narrow at the ends). Social fairness, justice and all-round development of people need to be promoted so all people can progress towards common prosperity.
  • Regional development needs to be more balanced, industrial development better coordinated and development of small and medium sized businesses supported. [Note: China recently launched a SME stock exchange in Beijing].
  • Equal access to basic public services (pensions, medical services, housing, social security, elderly care) needs to be improved.
  • Excessively high incomes need to be rationally regulated and adjusted. Legal income should be protected. High income groups and enterprises need to be encouraged to return more to society. Unreasonable income should be cleaned up and standardized and illegal income should be banned.
  • Property rights, intellectual property rights and legal wealth need to be protected. Healthy development of various types of capital needs to be standardized and promoted.
  • Common prosperity of farmers and rural areas needs to be promoted. Poverty alleviation, rural revitalization, construction of rural infrastructure and public service systems and rural living environment need to be further improved.

Besides these points the notes also contain some party speak about core socialist values, spiritual and cultural needs of the people and promoting public opinion on common prosperity (read: propaganda). I have left these out of this list.

Before unpacking some of the notes and adding some expert insights, let us first have a look at why this is all necessary now.

Income inequality

As Deng Xiaoping had announced, some people in Chinese society got rich first. Many government officials with good connections moved into the private sector when China opened its markets in the eighties and nineties and foreign investments came pouring in (including a remarkable share from Taiwan). While China became the factory of the world, many of these and other early entrepreneurs amassed substantial wealth. Although urbanisation helped raise the average income in the country, many people, especially those living in rural areas remained relatively poor. What’s more, some local governments met their poverty alleviation targets by moving rural people into the cities without actually improving their livelihoods (and often adding to the costs of social security). 

While this year, the CCP declared success in rooting out poverty, premier Li Keqiang has stated in 2020 that 600 million Chinese have to live on less than 1.000 RMB per month (approximately €140 euro or $160). As such, many Chinese might not really feel anywhere near the moderately prosperous society that Deng Xiaoping and the leaders that followed have been striving for and that according to Xi Jinping was reached at the party’s centennial anniversary mid-2021. 

A larger challenge than eradicating extreme poverty that the party had been focussing on in the past decade is the enormous income inequality. China is among the 20% most unequal countries in the world and according to Credit Suisse the top 1% own nearly 31% of the country’s wealth.

Wealth and income (in)equality is often expressed through the Gini coefficient; a number between 0 (all wealth is divided equally among all people) and 1 (all wealth is concentrated with 1 person). A Gini coefficient of 0.4 is seen as a dangerous threshold and levels above that are associated with a rise in social unrest. Until the late 1980s. China’s Gini coefficient was lower than 0.3, but this has changed significantly. In an interview with Bloomberg, Li Shi, economics professor at Zhejiang University and an expert in income inequality, explained how “China’s income gap has expanded since the 1980s to reach a peak in 2008, when the Gini coefficient reached around 0.5. After that, it slowly declined for a few years, but has rebounded since 2015. Now it is at a high level of around 0.47, according to an official estimate. The actual income gap could be larger, because the estimate is based on household surveys, which tend to under-represent high-income respondents.” For comparison, the Gini coefficient of the United States is estimated to be 0.47 (in 2014) while the EU’s is estimated to be 0.31 (in 2012).

The wealth gap could undermine the CCP’s legitimacy and cause the social instability the party dreads so much. As the alleged moral crisis that developed in China over the past decades shows, some people are already fed up with waiting for the time they will get rich too and are opting for less ethical ways to enrich themselves. This has led to much publicized problems ranging from unsafe food to internet scams. 

In August, Xu Shanda, former Vice Minister of State Taxation Administration, said in an interview with Caijing magazine (summarized here by @MoatlessCapital): “We eliminated absolute poverty, so our goal is to increase the income of the 100 million working age peasants that cannot find job opportunities. If we cannot help them find jobs, we cannot eliminate relative poverty.” After solving the problem of absolute poverty (people living below the poverty line) the government’s next goal is solving relative poverty (income inequality).

Redistributing wealth

The CFEAC meeting notes contained few details on how the government plans to reach common prosperity, leading to speculation and uncertainty. The CFEAC pledged to use “taxation, social security and transfer payment” policies and to “clean up and regulate unreasonable income (..) eradicate illicit income (..) and encourage high income groups and enterprises to return more to society.” Let us unpack some of these things.

There are three ways the government wants to redistribute wealth:

1 – Increased taxation of the wealthy

Li Shi, the economics professor, explained: “There’s a huge difference between public services in rural areas and cities, such as the quality of schools and teachers. We need to invest more resources in rural areas and poorer regions through public spending. (..) We need to make greater use of taxes to adjust high earners’ income and use transfer payment to improve low-income groups’ earnings. (..) China needs to increase direct taxes, including income tax, property tax and inheritance tax.”  According to Li, the lives of the rich won’t change much: “Rich people may have to make more contributions in terms of taxes and charitable donations. But paying 5% or 10% more taxes won’t bring a significant impact to their lives.”

China has already started some pilots with property taxation, an unpopular but necessary development. 

2 – Better social security for the poor

As mentioned by Li, some of the tax income from wealthy groups will be distributed to support low-income groups and regions (‘transfer payments’). A few days after the CFEAC meeting, Han Wenxiu, executive deputy director of the General Office of the CFEAC, gave a briefing in Beijing in which he addressed some of the confusion and clarified common prosperity. According to Han, support to lower income groups would not be overdone and China must “guard against falling into the trap of welfarism”.

3 – Philanthropy 

As I have experienced (link in Dutch) myself when I worked as an international volunteer in China and supported fundraising activities for Chinese NGOs, charitable giving is relatively limited in the country. As a Caixin article points out, charitable donations amount to only 0.15% of GDP in China, while it is 2.1% in the USA. In China, only 40% of donations come from individuals, while the number is 75% in the USA. China is still lacking good management of charitable organisations and tax incentives for charitable giving. The government wants to see that change and expects companies to make more contributions to society.

The government’s goal is to use philanthropy by the upper class and private sector to firm up the middle class and increase income for the disadvantaged. In his briefing, Han Wenxiu explained that charitable giving should be encouraged through taxation policies and  donations were “not compulsory”. Nevertheless, many corporates got the message. At least 73 companies mentioned ‘common prosperity’ in their earnings reports in August.

Companies like Alibaba, Tencent and Pinduoduo have already responded to this call for philanthropy by allocating hundreds of millions of dollars to noble causes and development programs. They have, after all, some goodwill to regain after many of them have been severely punished during the tech rectification … right?

Well, there is a few things that should be taken into account here. First of all, companies like these have had CSR programs for many years and have shown during difficult times, like at the height of the pandemic (link in Dutch) and during recent flooding, to be willing to offer help and donations. And many of their (former) CEO’s already were philanthropists. Jack Ma made $500 million in donations in 2020, long before the drama with Ant Group and Alibaba started. Tencent’s Pony Ma donated about $402 million and ByteDance’s Zhang Yiming $189 million. Pinduoduo founder Colin Huang stepped down as CEO of Pinduoduo and donated $1.85 billion worth of his shares to charity, while Meituan’s CEO Wang Xing donated $2.3 billion worth of Meituan shares in June. Without a doubt, these donations by tech leaders are partially done to stay on good terms with the government, but at the same time they were not ordered to make them (at least not publicly). 

Second, I would like to note that especially where these donations and CSR programs involve rural areas, they often are highly beneficial to these companies themselves. Development and more disposable income in the countryside means more e-commerce purchases on their platforms. As such, philanthropy kills two birds with one stone: pleasing the government and public and building your own future markets. Take Alibaba, which pledged to spend $15.5 billion between now and 2025. This money will be partially spent on improving digital infrastructure in undeveloped regions and improving benefits for gig-economy workers. The latter sounds sympathetic but it is also something that was required by the government when mistreatment of couriers and delivery men came under scrutiny. Meanwhile, Pinduoduo pledged $1.5 billion of its first net profit since going public to support the country’s farmers and agricultural areas, conveniently also its primary customers since suppliers pay for advertising and commissions on the platform.

In the second part of this article, we will see how an October publication of the full speech Xi Jinping gave at the CFEAC meeting added a bit more detail to ‘common prosperity’ and we will answer the question ‘is China going after its billionaires and private sector?.’