China’s new initiative to reduce inequality

A few weeks ago, Chinese state journal Qiushi published the text of a widely discussed speech China’s leader Xi Jinping gave in August describing a new initiative which will “focus on driving common prosperity for… all people in their material and spiritual [moral] lives… to seek happiness for the people and continuously consolidate the Party’s foundation for holding power over the long term.”

Xi did not promise immediate success: “We need to be patient, and progress step-by-step in a firm and steady manner… Achieving common prosperity is a dynamic process; we must continuously drive it forward.”

But make no mistake:  to borrow a phrase from Brookings consultant Ryan Hass, this is a “hard pivot” in China’s policies.  In September, Xi himself described the common prosperity initiative as a response to “changes unseen in a century.”

There can be no doubt that the last several decades of Chinese economic policy have led to the fastest GDP growth spurt in history (see my post How the ‘China Model’ lifted 850 million people out of poverty,)  In its 2015 Five Year plan, China announced a goal of eliminating poverty completely by 2020.  And, in no surprise to anyone, Xi announced last year that this goal had been met, right on schedule.  This despite the skepticism of some mainland Chinese, including the social media user who wrote “Perhaps the motherland forgot to count me,” and the one who joked “China has eliminated absolute poverty… Everyone is just relatively poor.”

There will always be controversy about exactly where to draw the line defining poverty, but there can be no doubt that the income gap between hundreds of millions of Chinese laborers and their bosses has never been greater or more obvious.  Kind of like in capitalism.  As one Shanghai businessman put it “When I was growing up, textbooks tried to convince us about the decadence of capitalism by showing a picture of rich Americans’ pets enjoying air conditioning, a luxury that few Chinese dreamed of having in those days. Today, my neighbor’s dog will only drink Evian.”

The gap between China’s rich and poor is being addressed by a new “common prosperity” initiative.

When China began its period of explosive growth in the 1980s, China’s leader Deng Xiaoping famously said that China needed to “allow some people to get rich first.”  The result was several decades of a kind of Wild West capitalism in which everything goes, and a new class of billionaires emerged from the struggle.

New insights into the excesses of that period appear in “Red Roulette: An Insider’s Story of Wealth, Power, Corruption, and Vengeance in Today’s China,” a book published in August by Chinese billionaire Desmond Shum, who now lives in the UK.  Extravagant banquets for his business clients often included “$1,000 just for a soup made of fish maw, the air bladder of a large fish.”  He also showered his business contacts with luxury watches, but in Shum’s words “This was pocket change to the people who accepted them… It wasn’t so much a bribe as a sign of our affection.”

As I wrote in an earlier post (13.5 tons of hidden gold: Can Xi stop corruption?), corruption has long been a problem in China. 

Xi has been fighting this sort of corruption since he came to power.  According to consultant Richard McGregor, in the first six years after Xi rose to power in 2012, “the authorities have investigated more than 2.7 million officials and punished more than 1.5 million others.”  But corruption endures.  An article in Foreign Affairs entitled “The Robber Barons of Beijing” provides many recent examples, including the “former minister of railways [who] was charged with taking $140 million in bribes, not including the more than 350 apartments he had been given. The head of one state-owned lender allegedly kept a harem with over 100 mistresses and was arrested with three tons of cash hidden in his home.”

Many of these excesses grew directly out of China’s single minded focus on economic growth.  Xi’s new common prosperity initiative reflects a change in priorities designed to “open up channels for upward mobility, form a development environment with participation from everyone, and… divide the cake well, forming a reasonable distribution pattern for the benefit of all.”

Although the term common prosperity has been used by the CPC since the 1950’s, in his August speech to the Central Committee for Financial and Economic Affairs, Xi expanded and redefined it.  The government is now “promising to reduce inequality and make life better for ordinary people, and many of the moves seem to have genuine popular support.”

A number of the goals listed in Xi’s speech sounded like they could have been ghost written by Bernie Sanders, including:

  • “reasonably adjust high incomes 
  • prohibit and suppress illegal incomes. 
  • improve the pension and medical care assurance systems
  • expand the size of the middle-income groups as a proportion of the population
  • increase the income of low-income groups”

How exactly will Xi do this?  No one knows, including Xi.  The common prosperity initiative is not a well defined list of policies; it is instead a broad general framework for China’s future. 

But, keep in mind that, as Chinese state media outlet Xinhua put it, “Common prosperity is not egalitarianism. It is by no means robbing the rich to help the poor as misinterpreted by some Western media.”

The first steps toward common prosperity can be seen in a running list of crackdowns in mainland China published by SupChina, a New York based news organization.  On the day this post was published, that list included 19 separate crackdowns.  But by the time you read this, there may be 20 or 30 crackdowns in this list, since “the government’s targets have expanded dramatically in just the last month.”

Several of the crackdowns focus on high-income individuals.  For example, ten days after Xi gave his speech in August, “the State Taxation Administration announced a probe into people who have avoided taxes. Regulators have already fined a number of pop stars and actors for tax evasion and have even ordered broadcasters to wipe the content of blacklisted celebrities — their names and faces — from the Chinese internet.”

In a second example, “Beijing has explicitly encouraged high-income firms and individuals to contribute more to society via… charity and donations.”

A third crackdown involves China “sharpening its scrutiny of the country’s red-hot real estate market by tackling unbridled borrowing that has fueled concern about financial risk.”  This crackdown is behind the current liquidity crisis at Evergrande.  In case you haven’t been reading the business section lately, Evergrande is one of the 500 largest companies in the world, with about 200,000 employees.  It is also “China’s most indebted developer, with more than $300 billion worth of liabilities… [In September the company] warned investors of cash flow issues, saying that it could default if it’s unable to raise money quickly.”  And if it did fail to make an interest payment, that could lead to “cross-defaults on all of the company’s $19 billion worth of bonds in international capital markets.”  In the worst case, this could start an international economic meltdown, as Lehman’s bankruptcy did when it triggered the 2008 Great Recession.

Within the last two weeks, Evergrande has made overdue interest payments of $83.5 million and $47.5 million, each one day before the final deadline for default.  Given China’s lack of transparency, no one is entirely sure where this money came from.  But there have been reports that “Chinese authorities had urged Evergrande’s founder, Hui Ka Yan, to pay the developer’s debts out of his personal wealth.” If true, that would be a great example of the success of the common prosperity goal of encouraging the rich to give back.  Can you imagine an American billionaire such as Mark Zuckerberg using his own personal money, to prop up Facebook if it faced financial problems?  Me either.  But, of course, China is different.

Beyond the financial efforts to reduce inequality, it is important to keep in mind that “Common prosperity… is not just an economic issue… [It] refers to affluence shared by everyone both in material and cultural terms.”

As noted in the first sentence of this post, Xi’s definition of common prosperity included improvements in “spiritual [moral] lives.”  I don’t think Xi was referring to increasing church attendance on Easter or improved chanting of Mahayana sutras.  Rather he used the phrase to refer to day to day motivation and lifestyles, in the same sense that he has referred to video games as a kind of “spiritual opium.”  More about the cultural side of the common prosperity coming soon in a future post…

3 thoughts on “China’s new initiative to reduce inequality

  1. Pingback: China’s campaigns against laziness and video games | Understanding China, five minutes at a time

  2. Pingback: Reducing income inequality:  China vs US | Understanding China, five minutes at a time

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