China's push for 'common prosperity' may drive assets overseas if not for curbs

Aug 27, 2021


CHINESE President Xi Jinping's vow for a fair redistribution of wealth is not an attempt to revive Maoist Utopianism, but rather an urgent need to rebalance the powers of state institutions, private firms and workers as it transforms to become a global engine for innovation.

Promoting income redistribution and "common prosperity" - a situation under which wealth is shared by everyone in the country - has become an important objective for Beijing, which has declared that it met its target of eradicating extreme poverty last year.

The term returned to the spotlight after a meeting of the Chinese Communist Party's Central Committee for Financial and Economic Affairs last Tuesday, where Mr Xi outlined a plan to regulate and redistribute excessive wealth.

This comes at a time when China boasts of 5.28 million millionaires, individuals with household wealth above US$1 million. The richest 1 per cent holds 30.6 per cent of the country's wealth, up from 20.9 per cent two decades ago, a Credit Suisse report has noted.

To achieve its goals, the government plans to expand the size of the middle-income group and adjust excessive incomes to promote social fairness and justice.

It intends to alter the tax and social security regimes, as well as make a range of fiscal transfers to create greater social mobility and give better access to education and housing.

China's state-run news agency Xinhua reported that Zhejiang province, an economic powerhouse which is home to the Alibaba Group, has been designated as a pilot zone for promoting common prosperity.

Under the guidelines, the province will strive to grow its per capita gross domestic product (GDP) to the level of moderately developed economies by 2025 and achieve common prosperity by 2035, with its per capita GDP and the income of urban and rural residents reaching the standard for developed countries.

A property tax pilot, which has been in the pipeline for a while, has been drafted for rollout. Targeted cities will be those where runaway home prices are common.

"There is likely to even be a state-led campaign against excessive spending that promotes frugality. This will negatively affect luxury goods sales in China," said Imogen Page-Jarrett, an analyst at The Economist Intelligence Unit (EIU).

However, if the middle class is enlarged over time, the number of people who can afford mid- to high-end products could rise.

"This could benefit luxury brands in the long term, although middle-class consumers might not be able to afford the most expensive items, like luxury cars," she said.



There have been no signals yet that the government will take drastic measures to reallocate income by increasing taxes for high-income earners or by introducing a nationwide property tax. But Ms Page-Jarrett suggested that the authorities would crack down on illegal, undeclared, or "inappropriate" income streams, as well as tax evasion.

"The "common prosperity" campaign will fan the desire to move assets overseas, but with capital outflow restrictions tight, this will be difficult. It will also be challenging for Chinese consumers to travel overseas - given the pandemic-linked current travel curbs - so they cannot physically take cash with them either, she said.

Ren Zeping, the chief economist at Soochow Securities and former head of the Evergrande Research Institute, said he expects China to continue to strengthen antitrust efforts on the Internet, finance, real estate and education.

"As the country's economic development has entered a new stage, more efforts will be made to drive vigorous development of manufacturing, hard technology, real economy, new energy, new infrastructure and the capital market," he said.

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Bank, stressed that "fairness does not mean returning to the egalitarian practice of everybody eating from the same big pot during the Mao era", but rather, efforts to narrow the excessive disparity between the rich and the poor, and moral suasion for the rich to give back to society.

China's Gini coefficient - a measure of inequality, with 0.4 taken as a red line for inequality - has hovered between 0.45 and 0.48 since 2011; more worrisome is its growing wealth divide.

Last year, the per-capita disposable income of China's 550 million-plus rural residents, representing 40 per cent of its total population, was 17,131 yuan (S$3,623).

Among urban residents, the figure was 43,834 yuan, according to China's National Bureau of Statistics. Wealth creation is also concentrated in certain sectors, with the rich found mostly in the southern coastal region.

Yukon Huang, a senior associate at the Carnegie Asia Programme, said that while China needs to address its growing social inequality, it should not interfere with entrepreneurial activities, which have created jobs and wealth. The most pressing issue in the next decade could be "how to tax the rapid rise in wealth, especially excessive wealth, without disincentivising innovation," he said.

EIU principal economist Yue Su said companies need to prepare for the new policy environment, with tax enforcement being stricter and making donations a new norm.

"The government may also enforce more interventions in wage setting and request companies to safeguard labour rights for all types of workers (including gig workers)," she said. "From a broader perspective, consumer companies should orientate themselves towards the needs of middle-income households, the number of which the central government seeks to expand."