Common Prosperity: Decoding China’s New Populism

Investors are realizing that President Xi Jinping’s rhetoric on inequality is far more than just empty sloganeering

By Nathaniel Taplin and Jacky Wong

Billionaire Jack Ma founded Alibaba, one of the tech companies facing regulatory scrutiny in China as President Xi Jinping urges wealthy individuals and companies to contribute more to society. / PHOTO: POOL/GETTY IMAGES

After decades of hewing to Deng Xiaoping’s maxim that it is OK for some people to become wealthy first, Beijing suddenly seems more inclined to eat its rich—or at least take a healthy nibble out of their fortunes.

Following the high-profile crackdown on tech firms like Alibaba and Meituan, an Aug. 17 speech from President Xi Jinping on “common prosperity” caught investors’ attention. 

Mr. Xi called for rationally “adjusting” excessive incomes and for high-income individuals and companies to contribute more to society. 

He also called for more aggressive measures to expand the middle class and the social safety net, including health and elderly care.

China has long been one of the most unequal major economies in the world, with one common measure of income inequality, the Gini coefficient, at 0.465 in 2019 according to official data out of a possible 1.0. 

Wealth inequality is higher: The top 1% hold 30.6% of the country’s wealth according to Credit Suisse data, below the U.S. at 35.3% but well above the U.K., Japan and Italy.

But rapidly falling birthrates, the coronavirus pandemic and its aftermath have made inequality tougher to ignore. 

The political stumbles and anticompetitive practices of tech titans like Alibaba and Tencent have also handed Mr. Xi a convenient target for the public’s ire. 

As a result, high-net-worth individuals and internet tech firms could come under further pressure to “donate” resources to social causes and find their tax rates rising. 

China’s long-mooted property tax could finally become a reality, although that is less certain.

Beijing’s response to the pandemic focused on loan forbearance for businesses and goosing credit growth rather than direct support for households as in the West. 

That helped small businesses survive and positioned China well for rebounding exports. 

But it also meant a big income loss for average households and even more debt as housing prices headed skyward again. 

The climb in China’s household debt over the past half-decade has been among the most impressive in recent global history: one reason consumption has remained stubbornly weak this year, even as income growth has finally rebounded.

The weak recovery in services—where most college students head after graduation—has also further exacerbated already high youth joblessness: Surveyed unemployment among the 16 to 24 set, which averaged 11% in 2018 and 2019, has since then averaged 14%. 

Demographic changes are making the problem worse: About half of the newly available labor force every year are now college graduates, according to HSBC. 

China’s rising population of graduates is often cited as a key advantage, but if structural economic problems mean there aren’t enough suitable jobs, it could end up as a major source of discontent instead.

In this context, Beijing’s decision to paint big, fast-growing tech companies as the villain looks risky. 

The IT, software and finance industries have experienced by far the largest private sector salary growth since 2008, according to HSBC—roughly quadrupling to around 80,000 yuan, the equivalent of $12,360, annually in 2019. 

Those are also the two sectors that employ the most new graduates of Tsinghua, one of China’s top two universities, according to the bank. 

Cracking down hard on fast-growing, highly remunerative sectors is one way to deal with inequality. 

But it is unlikely to do much to salve the anxiety of ambitious young grads—especially if prospective internet entrepreneurs are scared away, rather than encouraged, by the wide-ranging assault.

Tech giants clearly have received the message that they are expected to give back more. 

On Tuesday, internet commerce firm Pinduoduo reported its first quarterly profit since listing in 2018. 

It also said it would donate it all—$374 million—to support agriculture and rural areas, and would do the same with any future profit up to a total of 10 billion yuan. 

Its shares rose 22% that day. 

On Aug. 18, Tencent pledged to contribute 50 billion yuan, the equivalent of $7.73 billion, to low-income groups, basic healthcare and education—on top of a separate 50 billion yuan charitable pledge in April. 

Meituan founder Wang Xing donated 10% of his stake in the food-delivery company to his philanthropic foundation in June.

All of this might indeed help to a certain extent with issues like rural poverty—but it also looks like a convenient way for the government to shift the political and financial burden of dealing with social problems to private actors, forcing them to act more like state-owned enterprises, without necessarily addressing the deep structural roots of inequality and scarce opportunities for good jobs.

At the Chinese Communist Party’s centennial celebration, President Xi Jinping called for defiance against foreign pressure. 

China’s public revenue system, which relies heavily on value-added taxes and mandatory contributions to social insurance funds, is extraordinarily regressive. 

Effective tax rates at the lower end of the income distribution can be above 40% according to a 2020 blog post by Brad Setser, formerly of the Council on Foreign Relations. 

China’s household registration system, which in many cases still ties benefits to a person’s place of birth, often in small cities or the countryside, making it harder for workers to chase the best jobs. 

And low fixed deposit rates systematically transfer wealth from households to big banks that often lend to state-owned enterprises rather than the private firms responsible for most job growth.

Fundamentally, China needs a better-funded social safety net not tied to a certain location, and a financial sector that is less unfair to small businesses and households, if it really wants to fight inequality and keep young graduates employed. 

Foisting the blame on the tech sector without undertaking tougher fiscal overhauls, on the other hand, looks a lot like trying to have your cake and eat it too.

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