Common Prosperity: China’s Way of Tackling Social Inequality

5 min read.

A slew of regulatory actions in recent months by Beijing have caught Chinese companies and foreign investors by surprise, including unprecedented attempts to clamp down on cryptocurrency and big tech. In August this year, President Xi Jinping further announced at a finance and economic meeting, which is his first public chairing of a meeting since late July, that there will be a “reasonable adjustment of excessive incomes,” urging “high income groups and businesses” to “return more to society.” This announcement is viewed as a step towards achieving “common prosperity,” a centennial goal the government will strive to accomplish in the following decades. 

Through common prosperity, the Chinese government aims to reduce social inequality.
Credit: Lau Ka-kuen via SCMP

What is common prosperity?

The idea of common prosperity was introduced in President Xi’s commemorative speech for the 100th anniversary of the Communist Party of China (CPC) earlier this year. Broadly, this goal involves building a “moderately prosperous society in all respects” by ensuring that China’s development improves the lives of all its people, particularly those below or near the country’s poverty line.

Even before the announcement of this centennial goal, poverty relief has already been a priority of the government. In terms of poverty relief, China has lifted about 700 million citizens out of extreme poverty in the last three decades, contributing to about 70 percent of global poverty eradication in the period. Currently, only three percent of China’s population still remains in poverty. 

Despite promising progress in poverty alleviation efforts, income inequality among China’s 1.4 billion people has increased steadily over the last few decades. According to estimates published by Thomas Piketty, a professor at Paris School of Economics, and his team, the top 10 percent of the population earned 41 percent of total national income in 2015, up from 27 percent in 1978. Over the same period, the lower-earning half of the population has seen its share of national income fall to about 15 percent, down from about 27 percent in 1978. Urban residents in cities like Shanghai and Beijing have also enjoyed far higher incomes than residents in rural areas.

Recognising the need to tackle income inequality on a far-reaching scope beyond poverty alleviation, authorities have turned their attention towards the country’s rich, in order to prevent wealth from being concentrated at the highest stratas of Chinese society.

The Communist Party of China celebrated its 100th anniversary on 1 July 2021.
Credit: Quartz

What has the government done so far?

1. Clamping down on Big Tech

Efforts to curb unequal growth have undeniably accelerated in the past year, evident from the drastic measures authorities have taken to regulate big tech. For instance, after having shielded Alibaba from foreign competition for years, Beijing abruptly slapped a record fine of US$2.8 billion on the e-commerce giant after suspending its affiliate Ant Group’s massive IPO in November last year.

In the months following the lawsuit, Chinese regulators launched a massive crackdown on other big tech companies, including Pinduoduo, JD.com, Kuaishou and Bilibili, indicating the authorities’ intent to take a stricter stance in regulating large tech companies after receiving an onslaught of complaints from small businesses who have been backed into corners by digital behemoths.

“It may sound like internet platforms provide us with more opportunities, but it also puts more financial burdens on us,” a restaurant owner in Beijing told CNBC earlier this month, opting to stay anonymous out of fear of retaliation by the online food delivery services. Similarly, an investigation conducted by the State Administration for Market Regulation into Alibaba found that the company had “abused its dominant market position in China’s online retail platform service market since 2015 by forcing online merchants to open stores or take part in promotions on its platforms,” which constitutes a breach of the country’s anti-monopoly law.

In late July, authorities ordered food delivery platforms to pay workers the local minimum wage and removed restrictions on the country’s 200 million gig economy workers’ ability to access local health insurance and pension plans. 

The government cracked down on big tech companies after taking a hands-off approach previously.
Credit: SupChina

2. Urging the rich to redistribute their wealth

According to Zhang Zhiwei, chief economist at Pinpoint Asset Management, authorities are “trying to address the income inequality issue” this year particularly because they have a rare opportunity to tackle long-term problems without needing to worry much about growth. Morgan Stanley analysts have also pointed out the government’s goal “to increase the middle-income group’s share of the economy,” which will be achieved through a wide range of efforts, including a rebalance of the economy toward labour, social welfare, taxes and inclusive education.

President Xi’s latest pledge to curb ‘excessive’ incomes and call for the wealthy to give back more to society is viewed as a step toward the government’s goal of common prosperity. In calling on the rich to give back to society, however, officials have emphasised the need to strike a balance between philanthropic support and the encouragement of hard work. This is to “guard against falling into the trap of welfarism,” said Han Wenxiu, an official at the central financial and economic affairs commission.

Apart from President Xi’s speech, the idea of a “social hand” extended by the rich to the poor currently relies on the moral imperatives of the countries’ richest to divest some of their personal wealth. No concrete policy has been announced as of date, although authorities have hinted at government and market interventions alongside individual and corporate philanthropy. 

Despite the lack of tangible measures, the campaign has worked to an extent. This year, seven Chinese billionaires have collectively directed a record US$5 billion to charity so far, a sum which has exceeded total national giving in 2020 by 20 percent, according to data compiled by Bloomberg News. As a result of persistent encouragement of authorities and state media, over US$600 million in donations have also been made for flood relief efforts in Henan province, after torrential rain hit the area in July, resulting in over 300 deaths.

Donations have increased since President Xi called on the rich to “return more to society”.
Credit: Shutterstock

3. Possible policy interventions

Authorities acknowledge that relying on social obligation is not a long-term solution for improving wealth inequality. In response, experts have identified the country’s tax structure to be an important element in making common prosperity a reality. China’s current tax regime is, according to South China Morning Post, “a friend of Big Tech and the rich, but not a friend of wage-earners and small businesses,” which must change in order for wealth to be distributed more evenly.

Already, several celebrities have been put on public notice by the State Taxation Administration for evading tax this year. This includes Zheng Shuang, a high-earning actress who underpaid taxes by hiding US$46 million of her income, and Zhao Wei, a film star and singer who was removed from several streaming and social media platforms for speculations of tax evasion.

Yet, even though tax policies can help to reduce the gap between the rich and poor, some experts warn that excessive regulations will undermine China’s economic growth, and resulting effects can ripple far beyond borders, given how China has been the largest contributor to global growth for many decades. Others have taken to criticising the government’s deliberate attempt in shifting the political and financial burden of dealing with social problems to private actors, without undertaking tougher fiscal overhauls at a state level.

In the next few months, perhaps we can expect a clearer blueprint of the government’s strategy in achieving ‘common prosperity.’ Among other things, the plan is likely to incorporate elements of both fiscal policy and social reform. Although this notion will have far-reaching implications for China’s economic prospects first, whether the country’s growth can remain on a sustainable track will largely depend on its social outcomes.