‘Common prosperity’ in China
After a very strong 2020, China continues to be a drag on emerging market performance this year, given its slowing economy and an increase in regulation, particularly in the internet space.
In addition, last month, President Xi stated the need to create a society with greater ‘common prosperity’, which has also likely contributed to negative sentiment. It is a term being emphasised more and more, and it comes from the government’s view that society in China is becoming more unequal. The richest 10% in China own over 60% of the wealth, which is relatively unequal compared to many other major economies, though inequality is greater in places like the US, for example. Clearly, China has a lower tolerance for this kind of inequality, however.
So how is China looking to achieve ‘common prosperity’? It’s a relatively ambiguous term, and there are concerns from some that it means a return to its communist past, or a kind of ‘Robin Hood’-style redistribution of wealth. However, in reality, we think it’s about placing greater emphasis on income generation and wealth creation, rather than redistribution.
The government has a target to double GDP from 2020 to 2035, implying 5% annual growth over the 15-year period, which is no easy task. Private businesses contribute over 50% of tax revenue, 60% of GDP, 70% of innovation and 80% of employment. Quite simply, this means China cannot grow, or enjoy prosperity, without a strong and dynamic private sector – in other words, we don’t expect China to kill the goose that lays the golden egg.
While we don’t have specific policy detail at the national level yet, in June the government chose to pilot common prosperity policies in Zhejiang, China’s third richest province. Zhejiang is home to some of the most successful private companies in China, and is an interesting case study in how the government plans to deal with inequality and to treat the private sector.
Several goals have been outlined for this pilot, such as increasing wages as a percentage of Zhejiang’s GDP and reducing the urban/rural income gap. Crucially though, there are also targets to increase the number of registered private businesses and to increase college enrolments and improve access to good healthcare. Therefore, it’s actually about encouraging more rural residents to start their own businesses and greater private sector investment, supported by top-down spending on infrastructure, education and health, from a government that has the fiscal capacity to support this spending. Radical wealth redistribution or some kind of welfare state supported by higher taxes is not on the cards. The plan does call on wealthy entrepreneurs and businesses to donate more of their wealth to society, and we have recently seen some companies responding to these calls.
To conclude, while policy news coming out of China has felt relentless at times, once regulation has caught up more with international regulatory standards, we believe the private sector in China should continue to flourish and continue to benefit from the huge growth opportunity that lies ahead.
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