In the first part of this article we’ve looked at the origins of the term ‘common prosperity’, how the meaning changed over time and how it has gained new attention after publication of notes of a meeting by the Central Financial and Economic Affairs Commission (hereafter CFEAC) on August 17th 2021. In this second part 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?’.
As can be seen from these graphs from Google Trends and Baidu Index, the search term ‘common prosperity’ exploded in recent months. Baidu has its peak mid-August, around the time the meeting notes of the CFEAC, which we discussed in the first part of this article, were published. Google has the search term peaking in early September, probably when international media picked up on the topic.
Although the CFEAC meeting notes were pretty clear that ‘common prosperity’ did not mean egalitarianism, the government would support hard working entrepreneurs and would still allow some ‘to get rich first’ and it would protect legally obtained wealth, the policy announcement was still ambiguous enough for some to claim that China was going after its billionaires.
Xi’s wish list
Here you have a choice. If you just came here for a quick answer to the question in the title of this article, skip this next section and continue at ‘Going after the rich?’. But if you genuinely want to understand what it’s all about, do read on.
In October 2021, Xi’s full speech at the CFEAC meeting in August was published in Qiushi Journal, the theoretical journal of the CCP’s Central Committee, and translated by Caixin. Xi’s full speech overlaps with the notes on the CFEAC meeting that were released in August, but it also adds a few interesting points:
- “Currently, the world is facing a prominent issue of income inequality. In some countries, the wealth gap and middle-class collapse have aggravated social divisions, political polarization and populism, giving a profound lesson to the world. China must make resolute efforts to prevent polarization, advance common prosperity and realize social harmony and stability.” [Note: This seems to be a stab at the US, which has a Gini coefficient comparable to China’s (see part 1) and polarisation in countries like the UK under Brexit.]
- “Meanwhile, we must have a clear understanding that unbalanced and inadequate development remains prominent in China, and the disparities in development between rural and urban areas, between regions, and in income distribution remain substantial. A new round of technological revolution and industrial transformation is a powerful driving force for economic development and imposes a significant impact on employment and income distribution, including some negative effects that must be effectively solved.” [Note: technological revolution doesn’t mean the internet platform sector here. It involves ‘deep tech’ like semiconductors and AI that will help make the manufacturing sector more efficient.]
- “By 2035, we will make more remarkable and substantive progress toward achieving common prosperity for all and effectively ensure fair access to basic public services. By the middle of the 21st century, we will basically achieve common prosperity for all and reduce the income and consumption gaps between urban and rural areas to a reasonable range.” [Note: reaching ‘common prosperity for all’ is part of the ‘second centenary goal’ when the People’s Republic of China celebrates its 100th anniversary in 2049.]
In his speech, Xi named 4 principles for achieving common prosperity:
- Encouraging hard work and innovation. Besides better education (already mentioned in the CFEAC meeting notes) Xi also mentions the need to “improve people’s abilities to get employed and start a business and their competence to prosper (..) providing chances for more people to become wealthy and avoid “involution” and “lying flat.” The latter two terms refer to the tendency of the younger generations to give up and opt-out of society’s rat race.
- Adhering to the basic economic system. “As China is still in the primary stage of socialism, we must work unswervingly to both consolidate and develop the public sector and encourage, support and guide the development of the non-public sector. (..) We should allow a portion of people to become rich first, encourage them to help those still lagging behind and focus on encouraging entrepreneurial individuals who work hard, engage in lawful operations and have the courage to start their own businesses. We do not advocate becoming rich through side doors, and we will deal with violations in accordance with the law.” [Note: In other words, the CCP supports private businesses and entrepreneurs that gain wealth through legal activities but does expect them to share that wealth with society.]
- Doing everything within our capacity. “(We should) make the “cake” bigger and form a pattern of fair distribution for all. (..) We must recognize that the development level of our country still lags far behind that of developed countries. (..) we should not aim too high and make promises that cannot be fulfilled. (..) we should not set excessively high goals and provide excessive guarantees, in order not to fall into the trap of “welfarism” that encourages laziness.”
- Advancing step by step. “Even some developed countries have not achieved common prosperity yet, and the gap between rich and poor is instead becoming increasingly serious due to problems in their social systems, although they have been industrialized for centuries. Therefore, we need to be patient, take solid steps and improve the effectiveness of our work.” [Note: again, a stab at the USA, UK and probably Europe.]
Where the CFEAC notes were rather vague on concrete plans, Xi continues naming many next steps to be taken. It’s a long list, which I have broken it down in bullets to make it a bit more readable.
- Identifying a more balanced, coordinated and inclusive development path.
- the socialist market economy should be improved at a faster pace as a way to make development more balanced, coordinated and inclusive
- development should be more balanced among different regions through the implementation of regional major strategies and regional coordinated development strategies
- the transfer payment system should be improved [Note: ‘transfer payments’ concerns transferring money from richer parts of the country (mostly eastern, coastal provinces) to poorer (mostly Western inland parts).]
- differences in per capita fiscal expenditures among regions should be narrowed and support should be increased for less-developed regions
- coordinated development of industries should be strengthened
- reform of monopoly industries should be accelerated [Note: antitrust (link to podcast in Dutch) has been a major priority in 2021 resulting in many fines to internet companies, among which $2.8 billion for Alibaba and $534 million for Meituan.]
- coordinated development of the finance and real estate sectors with the real economy should be advanced [Note: ‘real economy’ is the basically government’s term for ‘offline’.]
- support should be rendered to the development of small and midsize companies [Note: a stock exchange for SMEs has already been launched in Beijing.]
- an enterprise development ecosystem in which large, midsize and small enterprises are interdependent and mutually reinforcing should be fostered [Note: ‘interdependent’ seems to be key here and the focus on SMEs seems to hint that the government does not want more ‘winner takes all’ monopolies.]
- Endeavouring to expand the middle-income group.
- quality of higher education should be enhanced so that students can be armed with expertise and useful knowledge
- efforts should be stepped up to train skilled talent, raise their salaries and attract more highly competent people to join the ranks of skilled workers [Note: in 2020 China already launched a plan to improve vocational training. China already has an oversupply in university graduates, many of whom can’t find suitable work. It clearly wants to shift the balance towards more highly skilled workers that can help the development of the industrial sector.]
- business environment [for small and midsize companies and self-employed] should be refined, their tax and dues burdens should be reduced
- more market-based financial services should be offered to help [small and midsize companies and self-employed] maintain stable operations and increase incomes
- reform of the household registration system should be deepened
- schooling of trailing children of rural migrant workers should be properly resolved so that they can migrate to cities without worries and find stable jobs [Note: these two points address problems with children of migrant workers that are left-behind in rural areas because the hukou system prevents them from getting public education in cities.]
- salaries and benefits of civil servants, especially front-line civil servants and civil servants at the grassroots level and grassroots-level employees of state-owned enterprises and public institutions should be appropriately raised
- urban and rural residents’ incomes from housing, rural land and financial assets should be increased.
- Facilitating equal access to basic public services.
- priority should be given to supporting the low-income group for common prosperity
- inclusive human resources investment should be increased to effectively reduce the education burden for needy families and make children from low-income families more educated
- systems of elderly care and medical security should be improved, which will help gradually narrow the gap in financing and security benefits between workers and residents, urban and rural areas, and raise the level of basic pensions for urban and rural residents
- the system for subsistence allowances should be improved by speeding up efforts to narrow the differences in social assistance standards between urban and rural areas, thus raising the subsistence allowances to guarantee the basic livelihood of the people
- the housing supply and security system should be perfected. We must keep in mind that housing is for living in, not for speculation, and need to encourage both housing purchase and renting by adopting city-specific policies. To this end, we need to improve the long-term rental policy and supply more government-subsidized rental housing with a focus on addressing the concerns of new arrivals. [Note: this addresses the problem of people buying real estate as one of the few options to invest their money while they won’t actually live in their multiple houses. This drives up prices and makes housing unaffordable for younger generations.]
- Intensifying the regulation and adjustment of excessive income. “While protecting legitimate income according to law, it is necessary to prevent polarization and eliminate unfair wealth allocation. In this regard, we should take many measures, like
- rationally regulating excessive income
- improving the personal income tax system
- standardizing the management of capital income
- actively and steadily promoting the legislation and reform of real estate tax while ensuring the good completion of pilot projects [Note: while an unpopular measure, China has already started pilots with property taxes.]
- intensifying tax regulation in consumption links
- expanding the scope of consumption tax collection [Note: these two points could mean increased/new VAT rates for certain categories of products like luxury goods.]
- strengthening the standardized management of public welfare and philanthropy
- improving preferential tax policies [Note: this most likely refers to tax deductions for charitable giving.]
- encouraging the high-income group and enterprises to return more to society
- cleaning up unreasonable income
- enhancing the management of income distribution in monopoly industries and state-owned enterprises
- rectifying the order of income distribution
- eliminating distribution chaos such as increasing the income of senior executives in the name of reform
- resolutely prohibiting illicit income [Note: more on this later.]
- curbing the power-for-money deal
- cracking down on the acquisition of illegal income through insider trading, stock market manipulation, financial fraud and tax evasion.
- attach importance to the protection of property rights, intellectual property rights and legitimate wealth acquisition
- resolutely oppose the unlimited sprawl of capital [Note: the ‘disorderly expansion of capital’ I discussed here.]
- draw a negative list of access to sensitive areas and strengthen anti-monopoly supervision
- mobilize the zeal of entrepreneurs and promote the standardized and healthy development of all kinds of capital
- Promoting common prosperity of the people’s spiritual life. Basically, a series of propaganda and public-opinion steering tasks.
- Promoting common prosperity in rural areas. Xi calls this “a hard nut to crack (that) needs greater effort.”
- consolidate and expand the achievements of poverty alleviation
- strengthen monitoring and early intervention for people who are prone to falling into poverty again
- give counties out of poverty a leg up to get them going, thus ensuring that large-scale return to poverty and new poverty do not occur
- advance rural revitalization, speed up agricultural industrialization, make good use of rural assets and increase farmers’ property income, thus helping more rural residents to acquire wealth through hard work
- develop rural infrastructure and public service systems and improve the living environment in rural areas
That’s quite a list, isn’t it? The only thing missing is the opening ‘Dear Santa’.
The list might seem really ambitious, which it is, but keep in mind that this is what the party wants to accomplish in the next three decades, not overnight. The statements of Xi and the CFEAC should also be considered a starting point for lower government departments and local governments to start implementing programs that strive for common prosperity by the mid of this century. Without a doubt it will be further specified with KPIs and action plans in the months and years to come.
Xi concluded his speech by saying that pursuing common prosperity involves everybody, regardless of urban or rural areas and geographical regions and that “it does not mean simultaneous prosperity for everyone or the same level of affluence across the country.” In other words, some will still get rich first and some will still be more affluent than others, but an end goal of prosperity for all is now a clearer goal that it has been in the past 40 years.
Going after the rich?
According to Forbes, in 2021 698 of the world’s richest 2,755 are from China and Hong Kong. While Forbes claims that the US still has a few more billionaires than China, the Hurun Global Rich List 2021, counts more than 1,000 billionaires in China, the most in the world. Shortly after the publication of the CFEAC meeting notes in August, the question on many people’s minds was: “Is China going after these billionaires?”. Is this ‘Robin Hood with Chinese characteristics?
In the past months, China’s leaders have repeatedly explained that common prosperity is not egalitarianism or robbing the rich to feed the poor. According to a briefing by Han Wenxiu, executive deputy director of the General Office of the CFEAC, China’s goal is “not a pure and simple egalitarianism” – a statement later repeated by Xinhua News Agency – “but a common prosperity in which there is still some disparity.” Echoing Xi’s speech, which was published almost two month later, Han added: “Common prosperity means doing a proper job both of expanding the pie and dividing the pie (..) [We] must encourage hard work to get rich, entrepreneurship and innovation to get rich, and permit some people to get rich first, and after getting rich help others to grow richer. [We] will not ‘kill the rich to help the poor’.”
As we’ve seen, common prosperity doesn’t mean that every Chinese has the same income and wealth. It does however mean that things will be divided more equally than they are today. Whereas China’s wealth distribution currently looks a lot like a pyramid, with a small group of billionaires in the top and far too many relatively poor people making less than 1.000 RMB ($160/€140) a month at the bottom, the government is striving for a more olive shaped model, with a small percentage of people either being relatively rich or poor. The middle class, including lower and upper middle class, is where most Chinese should be found. If we are to believe Xi’s words, the party won’t go after the billionaires for being rich, but it will seek out those who have illegally enriched themselves at the expense of lower classes in society.
In the interview with Xu Shanda (mentioned in part 1) he elaborated on cases billionaires should be worried about. He mentioned three categories:
- Illegal income
- Corporate tax evasion (e.g., companies evading social security benefits and shareholders profit)
- Personal tax evasion (‘immoral income’): company owners running personal expenses through the company.
Regarding the latter category, one group of rich Chinese that have already been targeted are celebrities. A few years ago film star Fan Bing Bing was punished for tax evasion and more recently actress Zheng Shuang was ordered to pay 299 million yuan in overdue taxes, late fees and fines.
“There is an element of social responsibility.” said Xu:” Some entrepreneurs have made out like bandits but haven’t helped others. For example, those that bought chateaus in France – how does that help any of the impoverished people in China? It’s not that you can’t buy private jets or yachts, but most of your assets should be invested to create jobs for the impoverished and allow society to prosper together.” I’m sure this should not be considered a formal statement and I wonder how one draws the line between jets & yachts and expensive holiday homes. Nevertheless, this does show what the party has in mind.
As the CCFEA meeting notes and Xi’s speech said, legal income is protected, and the government supports the development of small and medium enterprises. Xu: “If you’ve invested in projects that help alleviate poverty and generated substantial profits, and shared the gains with your employees, regardless of how much you’ve made, we will support it.”
Looking at the internet platform sector, a lot of the rectifications that started in the last quarter of 2020 were related to punishing private companies for abusive practices that hurt the lao bai xing, the commoners. e-Commerce companies that use their monopolistic power to force merchants to exclusively sell on their platforms and thereby stifle competition. Delivery platforms that don’t give proper payment and securities to their couriers. Fintech companies that push consumer credit on consumers, adding to rising household debt while adding risk to financial markets. Han Wenxiu explained that these regulations of the internet sector were aimed at irregularities and illegal behaviour and did not specifically target private companies as such.
I have heard quite a few Chinese people that moved to European countries say: ‘Wow, this place is more socialist than China’. They normally refer to better income equality (Europe’s estimated Gini coefficient in 2012 was 0.31, while the most recent estimation for China was 0.47) and care for disadvantaged groups in society. With common prosperity China aims to fix this disparity, while not wanting to go as far as becoming a ‘welfare state’ that takes away the incentive of hard work. As such, the common prosperity policy direction seems to be filled with good intentions. But even within China there are some that have doubts and concerns. Zhang Weiying, an influential liberal Chinese economist and professor at Peking University, wrote: “If we lose our faith in the market and introduce more and more government intervention, China will only go into common poverty.”
Also, a more cynical interpretation of common prosperity is that this is a tactic by Xi to humble the rich to boost his own power. I would personally question this explanation. With Xi’s anti-corruption campaign, which has even crossed over into the private sector, and the common belief that few with power and wealth in China are squeaky clean, common prosperity would seem like a very circuitous approach. Also, as we’ve seen with the many regulations hurting sectors, companies and individual billionaires this year, there are faster and more efficient ways to do things than through a ‘second centenary goal’.
Another theory is that Xi is using common prosperity to build popularity so he can have broad support for his likely third term. But that would assume he isn’t popular in China now, which he is. Most Chinese think the country has done very well in the last decade and especially during the pandemic and would probably welcome another 5 years (or more?) under Xi. Regardless of question if this common opinion is justified and coloured by government propaganda, Xi has a lot of support from the people.
Some of the policies might not actually work. Many of the companies in the online platform industry have been given small or large fines while new regulation pushes them into the direction of more ethical behaviour. But not all of this might not be effective in the long run. Forcing the whole after-school tutoring sector to go non-profit might eventually not have the desired effect of ‘reduction’ of the financial costs on parents to make successful students out of their children. Tutoring seems to be going underground or moving to one-on-one in-house services, driving up the costs with hourly fees that only the wealthy can afford.
In 2020 Xi pledged to make “more substantial progress on common prosperity for all” by 2035 but he has also admitted that there is a lot of uncertainty over the policies: “On fixing poverty, we have plenty of experience; but on managing prosperity, we still have much to learn.” As such it will be another case of ‘crossing the river by feeling the stones’, with the risk of many an unstable or slippery stone. The first small steps in this three-decade project have been taken. In June 2021, Zhejiang province, which already has lower inequality and higher growth than most other provinces, was designated a pilot region for common prosperity initiatives. It would be wise to keep an eye on what’s happening there, even if it seems like low-hanging fruit.
As far as investors that wonder if they should still put their money in China are concerned, without a doubt there are still lots of opportunities if you choose them wisely. Maybe avoid sectors that have recently been heavily regulated and threaten what the government calls ‘the real economy’ (read: traditional offline business). But judging from the various statements and priorities of the government there are still many opportunities in the industrial internet, health care, care for the elderly, agriculture, etc.
A recent Bloomberg article has more tips and suggest looking at what Xi called ‘high-level development’ of the economy. As Kinger Lau, a strategist at Goldman Sachs Group Inc. says in the article: “While income redistribution is important, sustainable growth and prosperity through upgraded technology is equally if not more important — this is needed in order to have something to redistribute.” Bloomberg suggests forgetting about luxury items, flashy brands and internet platforms. Instead, it suggests there are opportunities in durable goods, companies that produce affordable food & beverages/househould appliances/cars/medical care, semiconductors, robotics, telecommunication, big data, AI, new infrastructure (link in Dutch). It also suggests that domestic brands might sometimes be a better bet than international ones (e.g., sportswear, catering, cosmetics), biotechnology, renewable energy and electric vehicles.
Ask yourself if a business is helping the government reach the goal of common prosperity (and many other ones like carbon neutrality), if it earns its money in an honest way without disadvantages to lower income groups and (as always) if there is a solid business model and trustworthy company. Also look for those that launch CSR programs and take better care of their employees, even if those initiatives might affect the bottom line. Those could be safe bets, but it being China, they will never be completely without risk.