Xi Jinping’s ‘Common Prosperity’ Was Everywhere, but China Backed Off
By Stella Yifan Xie, Apr. 3, 2022, WSJ

China’s apparent retreat from one of its most important policy
initiatives is showing how hard it is to remake the country’s
economy and reduce inequality nearly a decade into Xi Jinping’s rule.

For most of last year, Xi trumpeted a signature program known as
“common prosperity” aimed at redistributing more of China’s wealth,
amid concerns that elites had benefited disproportionately from the country’s economic boom. The program underpinned many of Xi’s policy drives, including a clampdown on tech companies that were seen as
exploiting their market power to boost profits.

But while some aspects of the tech crackdown continue, other parts
of the program have fizzled, as China shifts its priorities toward
shoring up slowing growth.

Last year, the phrase “common prosperity” seemed to be everywhere,
in state media, schools, and speeches by Xi and others. A historic
resolution passed during Communist Party meetings in the fall, which
puts him on equal footing with Mao Zedong, used the phrase 8 times.

This year, it turned up just ONCE in a 17,000-word govt work report
on the economy delivered by Premier Li Keqiang in March.

The Finance Ministry’s latest budget report didn’t spell out
specific targets for the central govt to allocate resources to
the campaign. In Zhejiang province, which was designated as the
primary testing ground for the program, new economic plans make
little mention of policies that could put more money in the pockets
of less affluent households.

Beijing has walked back some measures related to the campaign.
The govt last month shelved plans to expand a new property tax
that could have funded social-welfare programs but faced opposition
from elites and policy makers who worried it would push property
values lower. Trial runs of the tax currently apply only to Shanghai
and Chongqing. The Finance Ministry cited “unripe” conditions for expanding it, without elaborating.

Part of the reason common prosperity is fading is that the policies
enacted spooked business owners and slowed growth when Xi needs
China’s economy to stay robust. He is preparing for political meetings expected to return him for a third term in power later this year.

But economists and scholars say it's also becoming clearer that common-prosperity goals can’t be met without more drastic—and
potentially painful—changes that Xi doesn’t appear willing to countenance.

That includes overhauls in China’s taxation and social-welfare
systems. China’s tax system is less progressive than developed
countries’, with burdens falling mostly on lower-income workers.
Raising tax rates on the upper class, who tend to be more politically connected, has faced resistance.

More fundamentally, economists say, China’s tax system doesn’t
raise enough money to fund education, health and other services
at levels implied by Mr. Xi’s common-prosperity agenda—a problem
that has led it to pressure private companies and tycoons to
redistribute money.

Personal income taxes in China add up to 1.2% of GDP, compared
with about 10% in the U.S. and U.K. Revenue from social-security contributions, at about 6.5% of GDP, is lower than the 9% average
among members of the OECD, according to the IMF.

“All those changes involve a lot of political initiatives,” said
George Magnus, an economist and associate at the China center at
Oxford University. “I don’t think the govt is willing to take them.”

The State Council, which is China’s top govt body, and the Zhejiang
govt didn’t respond to requests for comment.

The phrase “common prosperity” dates back decades. It was used
by both Mao Zedong and Deng Xiaoping to describe the socialist
ideals of reducing inequality and polarization in society.

Yet data show that wealth inequality has widened and social
mobility has stalled since China’s economy began opening to the
outside world—trends Xi views as threats to the party’s continued
rule. In 2021, the wealthiest 10% of people in China owned 68% of
total household wealth, according to the World Inequality Lab.

Signaling his attention to the problem, Xi told officials in
January last year that carrying out a common-prosperity initiative
couldn’t wait. With China’s economy rebounding strongly after the
first wave of Covid-19, policy makers saw an opportunity to push
changes they hoped would satisfy the leader’s aims.

The regulations that followed mainly involved crackdowns on
industries seen as making too much money or running too much
financial risk, without deeper change to motivate innovation or
enhance opportunity for lower- & middle-class Chinese, economists say.

Tighter regs on property developers reduced some of their risk-
taking but helped trigger a real-estate slump. Clampdowns on
tech companies and for-profit tutoring firms discouraged
monopolistic behavior but led to mass layoffs in those industries,
while billions of dollars in market value among listed Chinese
companies got wiped out.

Overall growth slowed sharply, and many economists now say China
will struggle to hit a govt target of around 5.5% growth this year.

Although tech companies and entrepreneurs pledged to donate
billions of dollars to common-prosperity initiatives, economists
say such one-off gifts don’t amount to a sustainable strategy for
long-term social changes, while damage from the crackdowns, which
suggested that private entrepreneurship was out of fashion, could
last for years.

The common-prosperity slogan “almost became a rallying cry among
some enterprises who use the term sarcastically to infer a whole
set of policies aimed at controlling or even destroying private entrepreneurship in China,” said Victor Shih, an associate prof
of political economy at UC San Diego. “I don’t think that’s the
message the Chinese govt would like to send.”

With growth slowing more than expected, VP Liu He pledged in
March that further regs would be more “transparent and predictable.”

Some economists say China could revive common prosperity after
the party congress this fall, if growth rebounds strongly.

But it's unclear whether Xi ever had any intention of taking
more radical steps to help Chinese people reap a bigger share
of growth. One of the simplest ways to do that would be by
diverting more income—and control—from the government to the
private sector, but that runs counter to Mr. Xi’s impulses,
said Mr. Magnus at Oxford and other economists.

Gan Li, a prof of economics at Texas A&M U., said another
approach might be to introduce inheritance or capital-gains
taxes on individuals, which would redirect more wealth from
richer families, but that would also likely face opposition.

Other economists say China needs to change the way local govts
are funded—yet another tough task in China’s political climate,
as it could reduce Beijing’s authority.

Right now, local govts are charged with providing many social
benefits, but they are typically heavily indebted and limited
in their ability to raise funds on their own. So they have
little incentive to underwrite large-scale welfare programs.

Instead, local officials tend to favor investing in projects
that deliver quicker results, like infrastructure, or ones
deemed strategically important to Chinese leaders, such as
achieving semiconductor independence or achieving more military
strength, said Shih at UC San Diego.

https://www.wsj.com/articles/xi-jinpings-common-prosperity-was-everywhere-but-china-backed-off-11648978380

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