Beijing treads fine balance in common prosperity drive

Sep 16, 2021

BEIJING - China's latest drive to close the widening gap between its rich and poor by clamping down on top earners such as tech billionaires has stoked fears that the world's second-largest economy will lose its lustre.

Concerns about heavier government intervention arose among some economists last month, right after policymakers vowed to "adjust excessive incomes" in China, where the top 1 per cent holds more wealth than half of the population.

At its core, policymakers are striving to keep China's entrepreneurial spirit burning while addressing the country's growing wealth gap, economists told The Straits Times.

Declaring a march towards common prosperity following a meeting of the ruling party's top economic and financial affairs body, including President Xi Jinping, Beijing sent the message that it is putting inequality in its cross hairs and expects more sustainable economic growth to come from a broader base.

Growing China's middle class is also critical to President Xi's strategy of dual circulation, which seeks to boost domestic demand to lessen the reliance on exports, they said.

Incomes for urban residents are roughly 2˝ times that of rural residents. Unequal growth in provinces, lack of tax reforms and neglect of rural development have been blamed for the widening chasm.

For now, concrete details of Beijing's common prosperity drive are scarce, but regulators have tightened the screws over the past few months, most notably on China's Big Tech companies such as Alibaba, Tencent and Meituan, for monopolistic practices.

The sweeping blitzes, wiping billions of dollars off the value of these companies, have led to worries over whether the stronger political drive to redistribute wealth will douse China's innovative fire, which has contributed vastly to its economic success over the past several decades.

China's growth has been slowing in recent years, though it was the first major economy to recover from the Covid-19 pandemic last year, mainly because it succeeded early in containing the virus.

But growth across a range of economic indicators such as retail sales and property pulled back sharply last month, compared with a year ago, according to official figures out on Wednesday (Sept 15).

Still, the government has not moved to employ the general tactic of retreating from the market when the economy starts to record slower growth and wages have increased, to allow for more productivity gains.

Mr Louis Kuijs, chief Asia economist at Oxford Economics in Hong Kong, said: "There is a clear risk that the common prosperity drive ends up hurting economic growth."

Professor Zhang Jun, dean of the School of Economics at Fudan University in Shanghai, shared the same view, telling news outlet The Paper on Aug 24 that "robbing the rich to give to the poor" would only result in "common poverty".

But that is not to say that there isn't room for intervention, though the devil will be in the details, economists said.

Mr Kuijs said: "There is absolutely room for more and better access to public services in China."

"The tax system is unfair and needs to be reformed, especially to ensure that the forms of income of richer people are also taxed," he added, pointing out that property and capital gains are currently "not taxed at all".

Raising the tax rates of those who earn 100,000 yuan (S$20,835) or more a month, requiring companies to provide annual wage increases, and encouraging rich companies, particularly firms in the Internet sector, to donate to charity are among ways that the government could close up China's wealth gap, according to an editorial on state media Global Times on Aug 22.

Regulators are also "likely to consider overhauling the individual income taxation system by raising the taxation threshold significantly from 5,000 yuan to 8,000 yuan or 10,000 yuan of monthly income - a move that will largely benefit the low-wage earners", it added.

Gig economy workers, who tend to be migrants who congregate in first-tier cities such as Beijing, Shanghai and Guangzhou, are one group that Beijing will seek to protect under the common prosperity drive, said economists.

Another group is tech workers, who have also been subjected to a punishing work culture called "996", in which they work from 9am to 9pm, six days a week, they added.

China's highest court warned last month that the "996" work culture is illegal.

Earlier this month, regulators warned China's biggest ride-hailing companies about issues such as unfair competition, data security and illegal labour, and asked that they "rectify" their treatment of workers and customers by the end of the year.

Professor of economics at Nanyang Technological University Tan Kong Yam said: "Mr Xi sees... companies like Meituan and Didi as being of only marginal national strategic importance... What is so great about delivering your noodles 10 minutes faster?"

But forcing tech firms to pay at least minimum wages, provide healthcare and social security, will be a step towards closing the country's wealth gap, which fits into national objectives, he added.

Another key to the success of China's balancing act will be in the speed of its reforms, economists said.

Mr Kuijs said: "Depending on how forcefully it is pursued, common prosperity may speed up the rebalancing of the economy towards consumption following the disappointing progress on that front in recent years."