- A newly published speech by President Xi Jinping and a pilot project in Zhejiang province are important signals about the Communist Party's “common prosperity” agenda to address social inequality.
- These signals suggest a long-term program of tighter regulation, improved public services, and conservative moralism – not a Maoist program of radical wealth re-distribution or a shackling of private enterprise.
- Xi wants to avoid the toxic combination of economic inequality, political polarization, and cultural nihilism that has weakened the social fabric in other countries.
The Chinese Communist Party's top journal of ideology, Qiushi (“Seeking Truth”), published a speech on 15 October that Xi delivered in August to the party's top economic policymaking organ, the Central Financial and Economic Affairs Commission. Though the speech does not contain any specific new policy announcements, it hints at future policies that the party may embrace under the banner of “common prosperity,” the ideological slogan underpinning this year's broad regulatory crackdown on housing developers, privately-owned technology companies, after-school tutoring, child video game addiction, and dissolute celebrity culture.
New era, new problems
Xi's vision of common prosperity builds on earlier ideological themes, notably his declaration at the 19th Party Congress in 2017 that China had entered a “new era” in which the “principal contradiction” – a Marxist term denoting society's central problem, which the ruling party must address – has fundamentally changed.
The pre-2017 contradiction was the one between “the ever-growing material and cultural needs of the people and backward social production” – essentially, economic deprivation. In the “new era,” the principal contradiction is the one “between unbalanced and inadequate development and the people's ever-growing needs for a better life.” This ideological statement signaled a shift away from a narrow focus on economic growth and industrialization, towards issues like growth quality, social equality, environmental protection, and culturally conservative moralism.
Not a revolution
Xi begins by noting the trend in “some countries” of rising economic inequality, political polarization, and a weakening social fabric, declaring that China will avoid these dangers. He references two widely discussed cultural trends that policy should seek to minimize: “involution” and “lying flat.” Both trends are associated with a sense of futility and listlessness arising from relentless competition and lack of social mobility. In response to these challenges, Xi's speech suggests a long-term program of incremental reform and tighter regulation, not a Maoist revolutionary upheaval. Xi says the campaign for common prosperity should be a “gradual and orderly process” that will be “long-term, arduous, and complex.”
Charity and social investment
Under common prosperity, the most successful private companies will face increased pressure to make investments that support the party's social objectives, even if these objectives are commercially dubious. Building on Deng Xiaoping's call to “let some people get rich first,” Xi adds that “those who become rich first should lead and assist those who are not yet rich.” He also calls for tax incentives to encourage charitable giving.
Equality vs efficiency
Xi calls for encouraging an “olive-shaped” income distribution with a large middle class and smaller lower and upper classes. He says policy must “correctly handle the relationship between efficiency and fairness,” while increasing the “balance, coordination, and inclusiveness of development.” These statements appear to endorse, among other things, regional development strategies that channel corporate investment and fiscal resources towards underdeveloped regions. Similarly, Xi calls for policies to narrow the gap between urban and rural areas, even though investments in rural areas may deliver lower economic returns. Free market-oriented economists have criticized regional policies like “Revitalize the Northeast” and “Develop the West” for guiding investment towards less productive regions, leading to poor returns on investment. However, Xi's statements suggest a willingness to sacrifice some economic efficiency in favor of promoting equality between people and regions.
Neither Xi's speech nor other recent signals indicate an intention to substantially increase personal income tax rates for high earners. But the State Administration of Taxation promised in August to address rampant income- tax evasion, while the labor ministry is becoming more aggressive in forcing companies to make social insurance contributions on behalf of employees as required by law. Meanwhile, Xi's speech calls for addressing stock market manipulation, financial fraud, and other forms of illicit income.
Less housing, less finance
In terms of specific sectors, Xi appears to call for reducing the economy's reliance on housing and finance, even at the cost of lower growth, at least in the short term. As previously discussed, problems at Evergrande are largely the result of government policies designed to wean the economy off of its addiction to property. Xi calls for gradually advancing a property tax through pilot programs, in line with our forecast. For the financial sector, future policies may target executive pay at state- owned financial institutions. The Finance Ministry may also channel a larger share of profits from state-owned financial institutions towards general fiscal revenues to fund social spending, rather than re-investing those profits into state companies.
Better public services
Xi pledges to increase the quality of public services and benefits – including education, medical insurance, and pensions – and to reduce benefit gaps between urban and rural areas. He calls for deepening reform of the household registration ( hukou ) system, which denies urban welfare benefits to migrants from rural areas. He also calls for increasing the “minimum guarantee” ( dibao ) system that delivers cash payments to low-income urban workers. At the same time, however, Xi signaled that he does not envision an overly generous, Western European-style social welfare system. His speech warns against “falling into the trap of nurturing lazy people through ‘welfarism.'”
Moralism and nationalism
Finally, Xi calls for addressing cultural and moral concerns. “We must strengthen the guidance of the Socialist Core Values, and education on patriotism, collectivism, and socialism.” This objective could lead to further regulation of the media and entertainment sectors and greater emphasis on ideological education.
Zhejiang pilot program
Beyond Xi's speech, a common prosperity pilot project in Zhejiang province that the State Council authorized in June also offers clues about policies and objectives that party leaders may eventually apply nationwide. Beijing selected Zhejiang partly because the province is home to a vibrant private sector, including Alibaba and other large technology companies. The State Council called on Zhejiang to narrow rural-urban gaps, promote high-quality growth, and improve public services. The result was a list of modest targets for 2025, including:
- increasing average household disposable income from USD 8,100 in 2020 to above USD 11,600;
- increasing the urbanization rate from 72.2% to 75% (an effort that will require progress on hukou reform);
- increasing the labor compensation share of GDP to 50% from 47.8 % in 2019;
- increasing the share of middle-class households from 75% in 2020 to 80%;
- increasing college enrollment from 62% to 70%;
- holding the urban/rural income ratio below 1.9 from 1.8 in June 2021.
The incremental nature of these targets reinforces the impression that common prosperity is more reform than revolution.