Reducing income gap a populist move by Xi

China’s mercurial President Xi Jinping has unleashed a major shift in the country’s development paradigm by announcing a new concept of “common prosperity” which means more equal income distribution among various sections of the Chinese society. Since Deng Xiaoping’s opening up of the Chinese economy in 1979, the high-income inequalities have been a persistent feature of the Chinese society with its Gini coefficient widening to 70.4 in 2020 (figure above 50 denotes high level of income inequality).

The income redistribution is to be achieved by coercing private technological, educational, gaming and other industries to cough up huge sums of money to state regulators to “serve the country”. Alibaba’s Jack Ma has donated about $500 million, Evergrande group $470 million, Tencent $400 million and other companies in tech, education, real estate and other fields varying sums. Rich individuals are also being asked to make these transfer payments. Zhang Yiming, founder of Tik Tok, is giving about $77 million of his own money to establish an education fund; Lei Jun, the maker of Xiaomi smartphones, has provided about $2 billion to eradicate poverty.

Xi and his team have designated specific provinces and cities, which will be made “models of common prosperity” with greater earnings and social welfare entitlements for the middle and underprivileged classes by gradually raising their annual income to about $11,580 by 2025. Common prosperity has been acclaimed by Xi and party ideologues as the “original quintessence” of socialism. Additional arguments have been preferred to justify that this “cross-cyclical adjustment” is necessary for pursuit of a stronger manufacturing sector, reduce the debt, bubbles in the real estate sector and income inequalities against a declining working population.

In the past, China’s economic growth has relied considerably on investment in infrastructure and property sectors, raising high debt levels. The contribution of manufacturing to China’s GDP has declined over the past four years from 30% in 2015 to 27.7% in 2019. Xi’s state planners believe that higher contribution of manufacturing is integral for China to become a “moderately prosperous” society and a modern socialist country.

The private entrepreneurs are a worried lot and wondering whether Xi has abandoned Deng Xiaoping’s another policy dictum to favour efficiency over equality. Concerns are being raised that the tech sector, which created thousands of new well-paid jobs, may not be able to do so, worsening the urban employment situation. The education sector has already been banned from raising fresh capital or going public which will impact its profits. The regulators have launched investigations into the monopolistic and anti-competitive behaviour of big tech players to check data security in view of their listings in foreign stock exchanges. The share price of many of these tech companies has plummeted, causing huge losses to foreign investors, many of whom are now discarding Chinese stocks altogether.

New restrictions have been imposed on the real estate sector by banning private equity funds from raising money to invest in residential development, halting land auctions in major cities and raising mortgage rates. Policymakers are now recalling Xi’s old slogan that “houses are built for living and not speculation”. According to industry watchers, the output of construction sector is expected to decline by 4% in 2021.

There are growing concerns that this state meddling will sap the vitality of China’s vibrant private sector. According to certain Chinese historians, the idea of common prosperity is purely utopian and may lead to another ‘Great Leap Forward’, referring to the 1958-62 Maoist campaign, which engineered widespread economic collapse and millions of deaths. Zhou Qiming, a professor at Zhongnan University told reporters that “depending on the rich to donate to the poor is not sustainable” and a better approach would be for Beijing to expand the economic pie so that workers can find more jobs and bargain for higher wages.

China’s economic growth is already facing headwinds due to fresh outbreaks of Covid. The declining strength of China’s workforce due to the country’s faulty one-child policy adopted in 1980 is adding new pressures against raising its economic growth. China is getting old at a time when the world is facing a backlash against globalisation and is becoming more protectionist; it means that China will have to work much harder than others to achieve higher income levels.

Concerns have also been raised about who would supervise the vast sums collected from the business conglomerates. Given the lack of robust judicial or civil society oversight, contributions are often routed through government-controlled organisations whose track record for transparency and efficient resource utilisation is often doubtful. Some critics have stated that contributions from the rich may not necessarily be used for the benefit of the poor.

The private sector in China contributes more than 50% of total tax revenue, more than 60% of its GDP and more than 80% of urban employment. President Xi’s top economic adviser, Liu He has tried to underplay the adverse impact of these regulatory crackdowns by saying that there are no changes in the “principles and policies for supporting the development of the private economy”. But his boss, President Xi Jinping has made it clear that the Chinese Communist Party (CCP) must do more to “guide and supervise” the country’s businesses with clear rules, effective regulations and greater policy transparency.

Xi is trying to rebrand the CCP’s image domestically by reducing income gaps and shifting to higher quality development. His critics say Xi is trying to squeeze the rich to punish his rivals who are backing rich private conglomerates. They argue that he is seeking popular support like a “second Mao” in the run-up to the 20th party Congress in 2022 where he is expected to seek a third term as the President. Given the huge miseries that Mao caused, many are wondering if these measures would have a similar destabilising impact on the Chinese society.