Warning of Income Gap, Xi Tells China’s Tycoons to Share Wealth
As the country’s leader prepares for a likely third term, he is promising “common prosperity” to lift farmers and working families into the middle class.
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Xi Jinping has declared that China’s Communist Party will work toward “common prosperity,” and he has pressed businesses and entrepreneurs to give back more to society.
Xi Jinping has declared that China’s Communist Party will work toward “common prosperity,” and he has pressed businesses and entrepreneurs to give back more to society.Credit...Ju Peng/Xinhua, via Associated Press
By Chris Buckley, Alexandra Stevenson and Cao Li
Sept. 7, 2021
Four decades ago, Deng Xiaoping declared that China would “let some people get rich first” in its race for growth. Now, Xi Jinping has put China’s tycoons on notice that it is time for them to share more wealth with the rest of the country.
Mr. Xi says the Communist Party will pursue “common prosperity,” pressing businesses and entrepreneurs to help narrow the stubborn wealth gap that could hold back the country’s rise and erode public confidence in the leadership. Supporters say China’s next phase of growth demands the shift.
“A powerful China should also be a fair and just China,” Yao Yang, a professor of economics at Peking University who endorses the shift in priorities, said by email. “China is one of the worst countries in terms of redistribution, despite being a socialist country. Public spending is overly concentrated in cities, elite schools and so on.”
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UBS House View - Daily US
What China’s vision of “common prosperity” means for investors
China’s President Xi Jinping defined his vision for “common prosperity” as affluence to be “shared by everyone, both in material and cultural terms.” This means raising household incomes, improving the social welfare system, and narrowing wealth inequality.
by UBS Editorial Team01 Sep 2021
CIO thinks the focus on lifting disposable incomes, growing the middle class, and supporting employment is positive for China’s long-term consumption growth. (ddp)
Investors are already feeling the effects of this seismic change, as the regulatory clampdown on the education sector and measures in the housing sector are rooted in these ideals. The scrutiny in the social media, internet and gaming sectors are seen as part of efforts to support the development of a healthier and more balanced economy.
But while such structural changes may keep volatility elevated in the short term, we believe it will result in a healthier, more balanced Chinese economy. We think it’s wrong to assume that Xi’s vision of “common prosperity” will lead to a vast redistribution of wealth. The “common prosperity” strategy includes three “distributions”:
Increasing wages, improving labor conditions, workforce protection. Xi said the ideal income distribution would be shaped like an olive—tiny at the top and bottom, but large in the middle. China’s current Gini coefficient is 0.47, above the UN’s international inequality threshold alert line of 0.40. To increase the middle income, the government wants 30% of the low-income rural population, migrant rural workers living in the cities, and most of the elderly in this category. The goal here is to raise the incomes of low-wage workers and ban illegal income streams to narrow the income gap.
More and higher taxes, transfers and other measures. This aims to promote social equality through taxes, social security, government transfers, etc. This may include introducing capital gains tax, inheritance tax and wealth tax or various measures to target hidden incomes, undocumented overseas and internet income, and transfers to less-developed regions and groups.
Philanthropy. This is about encouraging charitable contributions and social welfare from firms and wealthy citizens. The government said it wants to “encourage high-income individuals and companies to give back more to society.”
So, we think the focus on lifting disposable incomes, growing the middle class, and supporting employment is positive for China’s long-term consumption growth. Despite the present headwinds to the ultra-luxury segment, we believe the future policy direction is supportive of the general consumption upgrade. We see China’s consumer durables and services as key beneficiaries and are among our most preferred sectors.
Technological innovation and self-sufficiency remain important strategic goals for China. We believe the recent anti-trust and cybersecurity policies are aimed at creating a fairer and safer environment for the industry to develop. Hence, despite the near-term uncertainty, we think China’s internet platforms continue to offer medium- to long-term growth prospects.
We also continue to favor the greentech sector for its long-term structural growth prospects. Greentech initiatives, including local carbon emissions peak plans, could be a focus for China over the next few decades as it moves toward a more sustainable model for economic development.
We hold a least preferred view on the real estate sector as policy scrutiny on financing and property prices could continue to weigh on near-term price performance. We are also defensive on the property bond sector due to the newly proposed controls on housing and land. We prefer short-dated bonds from green-labeled developers.