August 23, 2021

Asia

CHINA: “Common prosperity” agenda shifts focus to income redistribution

BY Gabriel Wildau

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( 5 mins)
  • Top Communist Party leaders called for new policies to promote income redistribution, signaling a new focus for the Communist Party’s broader “common prosperity” agenda.
  • Policymakers have made similar pledges before, but the latest call came from a high-level party organ designed to overcome bureaucratic resistance on politically difficult issues.
  • The statement did not mention specific policies, but higher taxes, increased social spending, and more active corporate social responsibility efforts by big companies are all possible elements.

As previously noted, “common prosperity” is the ideological theme connecting recent regulatory activity on anti-trust enforcement, financial risk, digital privacy, and after-school tutoring. The new pledge to address income inequality came from a meeting of the party’s Central Financial and Economic Affairs Commission (CFEAC) on 18 August, chaired by President Xi Jinping. The commission called for expanding the middle class’ share of the total population, increasing incomes for the low- income cohort, making “reasonable adjustments to high incomes,” and creating an “olive-shaped income distribution structure in which the two extremities are small and the middle is large.”

High-level political consensus

The statement’s significance is due in large part to the importance of the CFEAC, whose statements are arguably more influential than those from individual state agencies or the State Council, China’s cabinet. Since taking over as party general secretary in 2012, Xi has strengthened the role of party organs in policymaking at the expense of government institutions. As noted in our analysis of recent efforts to strengthen environmental regulation, this effort has involved creating various party-based “leadership small groups” dedicated to specific issues. Their purpose is to overcome bureaucratic resistance and interagency squabbling. For climate policy, the Peak Carbon and Carbon Neutrality Work Leadership Small Group serves this function.

Unlike that group, the CFEAC is not completely new, since it evolved from the Central Leading Group for Financial and Economic Affairs created in 1989. But the party upgraded CFEAC’s status in 2018 as part of a broader government reshuffle, transforming it from a “leadership small group” – which is theoretically ad hoc and temporary – to a more permanent “commission.” Xi formally chairs the commission, while Liu He, the powerful vice premier, Politburo member, and Xi confidante on economic policy, runs its administrative office.

The new elevation of income redistribution and social equality as key priorities makes sense in the context of the party’s broader vision for China’s economic and social development. At his speech marking the 100th anniversary of the party’s founding, Xi declared that China had accomplished two previous objectives: building a “moderately prosperous society,” as defined by the doubling of per-capita GDP from its 2010 baseline; and the elimination of extreme poverty. With these goals achieved, addressing income inequality is a logical next step.

Moreover, income inequality in China is serious. China’s official Gini coefficient statistics are probably not reliable, but independent estimates range from 0.4 to 0.6 (where 0 represents complete equality and 1 represents maximum inequality). By comparison, the US’s value is 0.41, the UK’s 0.35, and Brazil’s is 0.53, according to the World Bank. Regardless of China’s exact Gini level, the trend towards increased inequality over the last two decades is unmistakable.

Though the CFEAC statement is the most important high-level statement from recent years about the need to address income inequality, this priority did not emerge from nowhere. In December, the Politburo and the annual Central Economic Work Conference called variously for “demand-side reform” and “demand-side management” policies – terms that were widely understood to mean income redistribution. But as we noted in May, these slogans have so far not translated into concrete policies.

Waiting for policy detail

Though the CFEAC statement appears to signal a high-level political consensus, uncertainty remains about precise policies. Given the statement, the outlook for such policies has improved significantly, but the range of possible policy outcomes remains wide. In an aggressive reform scenario, authorities could raise personal income tax rates for high earners. Personal income taxes comprise only 5% of total tax receipts in China, compared to 30% for value- added taxes, 28% for social insurance contributions, and 20% for corporate income taxes. But given that China’s parliament reformed the Individual Income Tax Law as recently as 2018 – making the rate structure modestly more progressive – the timing is awkward for another round of major income tax reform. More aggressive enforcement of existing law is likely, however, given that evasion of personal income taxes is rampant.

Another possibility is increased spending on health, education, and pensions. Increased social benefits could be financed through a combination of tax increases (though not necessarily personal income taxes), larger fiscal deficits, and allocating a larger share of state-owned enterprise (SOE) dividends to social welfare. In addition, SOEs may announce cuts to executive pay, though SOE executives are already poorly paid compared to global peers and endured an earlier round of pay cuts in 2015.

Even absent major policy changes, the party’s new emphasis on social equality is likely to trigger changes in corporate behavior, especially by large companies viewed as having benefitted disproportionately from China’s economic boom. The CFEAC readout called for measures to “encourage high-income groups and companies to give back more to society.” This appeal may generate a new wave of corporate social responsibility initiatives by both Chinese and foreign companies. Just a day after the CFEAC statement, Tencent announced a new RMB 50bn (USD 7.7bn) “common prosperity” fund devoted to boosting incomes for low-income groups, expanding health coverage, rural economic development, and grassroots education.

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