Does China’s goal of common prosperity leave room for the super-rich?

Jacky Wang is an entrepreneur in China, but like many of his peers he is trying to recalibrate what that should involve.

This year, he has bought two Mercedes-Benz cars and given 3 million yuan (US$470,000) to a social cause, after being urged to donate by his local government in the eastern province of Jiangsu. His cement company has been performing averagely, but he has spent money rather than plough his funds into business growth.

“I know business prospects may turn good this year, because China wants to bolster the economy by investing in infrastructure,” said Wang, 47. “I should increase investment in my plants and work hard, but I just want to ‘lie flat’.

“If it wasn’t for the hundreds of workers depending on a job to feed their family, I would simply shut down the factories and live my life.”

Lying flat, or tang ping in Chinese, means doing the bare minimum to get by. Wang said he had struggled to adapt to fast-changing policies in the past two decades, ranging from stricter environmental requirements to the latest goal of “common prosperity”, focusing on reducing wealth disparity.

“I understand that the policies mean well, and I completely support them,” he said. “I just feel distracted, discouraged and at times frightened – it’s hard to concentrate on my own business. I have found the business environment harsher, and can’t help wondering whether China still needs capitalists.”

Last August, President Xi Jinping declared that common prosperity was to be a major focus, with the aim of all citizens sharing the opportunity to be wealthy.

For China’s ruling Communist Party, the catchphrase is nothing new. It depicts common prosperity as an ultimate goal of Chinese socialism, to provide a bulwark against absolute poverty and polarisation – which capitalism creates, according to this school of thought.

But since Xi’s announcement, there has been a blizzard of regulation aimed at private firms, tycoons and celebrities. Technology, finance, data platforms, the entertainment industry and private tutoring have been targeted, and more than US$1 trillion of market value has been wiped from Chinese company stocks.

Stiff penalties were issued for tax evasion by celebrities and alleged abuse of market dominance by internet giants, leaving the private sector jittery.

Such was the panic caused that top leaders sought to explain their intentions. In the latest attempt, Vice-Premier Liu He, the top economic adviser to Xi, pledged on Wednesday that future regulation would be transparent and predictable, and said “rectification work of large-platform companies will be completed as soon as possible”, following a massive stock sell-off over the previous two weeks.

It followed several other comments by officials aimed at soothing the private sector and market investors. Liu wrote in party mouthpiece People’s Daily in November that common prosperity did not entail robbing the rich to give to the poor. In January, Xi, too, defended the idea, saying at the Davos Economic Forum that the drive was not a pursuit of egalitarianism.

In another bid to tone down talk of a regulatory crackdown, People’s Daily said on Tuesday, quoting several Chinese economists, that “antitrust is not equal to capital antagonism”, adding that “the curb targets capital irregularities, instead of all capital activities” and that capital was still needed in China’s “high-quality economic development”.

However, concerns have yet to be dispelled. Entrepreneurs are looking for clarification, and reassurance that, under an agenda of common prosperity, they still have a place in China’s economic development.

“The worries of private entrepreneurs are valid, because the communist regime has an inherent antagonism against capitalism,” said Chen Daoyin, an independent political analyst and former professor at the Shanghai University of Political Science and Law.

“While they are still needed as job creators, taxpayers and innovators who bear trial-and-error costs, they will encounter more restrictions in sectors that the party deems crucial to its rule, such as those concerning ideology, cybersecurity and financial security.”

The last major communist-ruled nation, China claims to uphold the philosophy of Marxism, which states that communism will eventually triumph over capitalism.

In the 1950s, during China’s economic restructuring, capitalists were beaten, humiliated, and had assets confiscated or their businesses turned into government-owned entities. Later, they were purged during the decade-long Cultural Revolution from 1966, launched by Mao Zedong to reassert his control over the party and crush capitalism.

‘It’s a headache’: China’s local officials grapple with ‘common prosperity’

It was not until the late 1970s that China, by then led by Deng Xiaoping, adopted a more pragmatic and fact-driven approach to development. The confidence of entrepreneurs was boosted as Deng declared: “Poverty is not socialism.”

Since then, the private sector has boomed, helping China to grow into the world’s second-largest economy, and the political status of entrepreneurs has improved accordingly.

Rong Yiren, a billionaire entrepreneur who founded state-owned conglomerates at the party’s behest, served as vice-president from 1993 to 1998, even if that position was considered largely ceremonial. Many private entrepreneurs have made their way into elite political groups such as the national and local legislative and political consultative bodies.

Thanks to the “economic miracle” of recent decades, China has more ultra-wealthy people than any other country.

But at the same time, China’s wealth gap has widened, almost matching that of the United States. The Gini coefficient, a measure of income inequality, stood at 0.47 in 2020, according to Chinese government statistics – only narrowly lower than the US’ 0.48 and much higher than those of Japan, South Korea and most of Europe.

The coefficient ranges from zero to one, and the higher the reading, the greater the inequality. A level of 0.4 is usually regarded as a threshold for inequality.

Against this backdrop, Xi last year vowed to narrow a stubborn wealth gap that could hold back the country’s progress and erode public confidence in the party leadership. He urged the rich to “give back more to society”, and promised to lift farmers and working families into the middle class.

During Xi’s presidency, the government has directed more resources to the study and fostering of Marxist tradition and the works of Mao. In 2020, Xi wrote in party periodical Qiushi that China’s foundation “can only be a Marxist political economy, and not be based on other economic theories”, and that “the dominant position of public ownership cannot be shaken”.

Private companies, including those with foreign investment, have long complained about being discriminated against in market competition. China’s constitution says that state-owned enterprises should make up the main part of the economy, but that “other types of ownership” are also to be supported.

Privately owned firms contributed 60 per cent of China’s total tax revenue, 47 per cent of foreign trade value and 56 per cent of fixed-asset investment in 2020, according to a report by the All-China Federation of Industry and Commerce. They also employed more than 80 per cent of China’s urban workforce, it said.

China’s middle class frets about the future under Xi’s ‘common prosperity’

The government work report delivered by Premier Li Keqiang at the beginning of this month’s annual legislative meeting, “two sessions”, stated that China would “support and guide the well-regulated and sound development” of private capital, step up supervision and prevent monopolies.

The campaign to curb what Xi has called the “disorderly expansion of capital” is expected to remain a dominant theme this year, in spite of Liu’s pledge to mitigate its impact on the economy and the market, according to analysts.

Ding Shuang, an economist at Standard Chartered, said it was still unclear what Beijing’s “endgame” would be.

“The regulation is unlikely to reverse,” he said. “[Regulators] will still do what they want, but they will give others a more clear [message] about what they want to achieve.”

Larry Hu, economist at Macquarie Capital, said that although the peak of regulation was probably over, it would not mean “zero regulation”.

“Even this year, we could see more regulatory measures,” Hu said. “Common prosperity remains the long-term policy priority. When the economic pressure eases, policymakers could perhaps afford to tighten regulation again.”

Meng Lei, China equity strategist at UBS Securities, said that even if Liu’s latest remarks could help boost market sentiment, investors were waiting to see if there would be meaningful action in terms of regulation loosening.

“Industrial regulation hasn’t been loosened meaningfully so far this year, with some even tightened further,” Meng said.

Beijing’s internet regulator said this week it had deployed a special task force to the offices of social media platform Douban to rectify “serious online chaos”, in an escalation of the drive to control internet content.

Tencent, meanwhile, faces a potential fine that could be at least hundreds of millions of yuan, for violating central bank regulations on its WeChat Pay mobile network, The Wall Street Journal reported on Monday, citing people familiar with the matter.

George Magnus, a research associate at Oxford University’s China Centre, said: “Regulation aimed at private firms is likely to continue this year, if less frenetically.”

“A central feature of the ‘common prosperity’ campaign is to end the ‘disorderly expansion of capital’ – the excesses of private firms and entrepreneurs – and regulate capital according to a traffic-light system of encouragement, restriction and refusal.

“A significant recalibration of industrial policy is under way in which the primacy of state enterprises will be strengthened further, and private capital will be aligned with the interests of the party – or, in effect, be brought to heel.”

The state sector has been prioritised in China’s economy since the party began its rule in 1949. Gigantic state-owned firms dominate lifeline industries from telecoms to railways to oil production, as Beijing wields influence and controls the economic system through them.

Despite their reputation for lower efficiency, state firms are favoured in the allocation of subsidies, bank loans and government projects, with private firms left at a disadvantage in market competition.

Zhao Xijun, a finance professor at Renmin University in Beijing, said private entrepreneurs would still be required, because they were the ones who “make the pie”, by creating wealth for the economy.

“As long as China wants to develop the economy, private entrepreneurs are needed, although the focus is tilting more towards ensuring that the rich fulfil social obligations and the poor are supported,” Zhao said.

Peng Peng, executive chairman of the Guangdong Society of Reform, a government think tank, said entrepreneurs could show support for the agenda of common prosperity by making donations, ensuring the payment of tax, hiring the elderly or disabled, and contributing to poverty-alleviation and countryside revitalisation initiatives.

“Meanwhile, policymakers should take every chance to clarify that it’s not going to extinguish the rich, to stabilise entrepreneurs’ confidence,” Peng said. “If entrepreneurs choose to lie flat, it would be disastrous for the country.”