Common prosperity: decoding the new Chinese populism
After decades of complying with Deng Xiaoping’s maxim that it’s okay for some people to get rich first, Beijing suddenly seems more inclined to eat its rich – or at least take a healthy bite of their wealth.
Following the high-profile crackdown on tech companies like Alibaba and Meituan, an August 17 speech by President Xi Jinping on “common prosperity” caught the attention of investors. Xi called for rationally “adjusting” excess income and for higher income individuals and businesses to contribute more to society. He also called for more aggressive measures to expand the middle class and the social safety net, including health and care for the elderly.
China has long been one of the most unequal large economies in the world, with a common measure of income inequality, the Gini coefficient, at 0.465 in 2019 according to official data on a possible 1.0. Wealth inequality is higher: the richest 1% own 30.6% of the country’s wealth according to Credit Suisse data, below the United States at 35.3% but well above the Kingdom United, Japan and Italy.
But rapidly falling birth rates, the coronavirus pandemic and its aftermath have made inequalities harder to ignore. The political stumbles and anti-competitive practices of tech titans like Alibaba and Tencent have also made Xi a convenient target for public anger. As a result, high net worth individuals and Internet technology companies may be under additional pressure to “donate” resources to social causes and have their tax rates rise. Property tax in China may finally become a reality, although this is less certain.
Beijing’s response to the pandemic has focused on business lending forbearance and credit growth rather than direct support to households like in the West. This has helped small businesses survive and has positioned China well for a rebound in exports. But it also meant a significant loss of income for average households and even more debt as house prices soared again. The increase in Chinese household debt over the past five years has been one of the most impressive in recent global history: one of the reasons consumption has remained stubbornly low this year, even as the revenue growth finally rebounded.
The weak recovery in services – where most students go after graduation – has also worsened the already high youth unemployment: surveyed unemployment among 16-24 year olds, which was on average 11% in 2018 and 2019, has since averaged 14%. Demographic changes compound the problem: About half of the newly available workforce each year are now college graduates, according to HSBC.
China’s growing graduate population is often cited as a key benefit, but if structural economic problems mean there aren’t enough suitable jobs, it could instead become a major source of discontent.
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Against this backdrop, Beijing’s decision to portray large, fast-growing tech companies as the bad guy seems risky. The IT, software and finance sectors have seen by far the strongest private sector wage growth since 2008, according to HSBC, roughly quadrupling to around 80,000 yuan, the equivalent of $ 12,360, per year in 2019. These are also the two sectors that employ the most recent graduates from Tsinghua, one of China’s top two universities, according to the bank. One way to tackle inequality is to crack down hard on fast-growing, high-paying sectors. But this is unlikely to do much to ease the anxiety of ambitious young graduates, especially if future internet entrepreneurs are frightened, rather than encouraged, by the large-scale onslaught.
The tech giants have clearly received the message that they are supposed to give back more. On Tuesday, internet trading company Pinduoduo announced its first quarterly profit since listing in 2018. It also said it would make a total donation – $ 374 million – to support agriculture and rural areas, and make money. even with any future profit up to a total of 10 billion yuan. Its shares rose 22% that day. On August 18, Tencent pledged 50 billion yuan, the equivalent of $ 7.73 billion, to low-income groups, basic health care and education, in addition to a separate charitable pledge of 50 billion yuan in April. Meituan founder Wang Xing donated 10% of his stake in the food delivery business to his philanthropic foundation in June.
All of this could indeed help to some extent with issues like rural poverty, but it also appears to be a practical way for the government to shift the political and financial burden of managing social issues to private actors, forcing them to act. more like the state. – owned businesses, without necessarily tackling the deep structural roots of inequalities and the rare opportunities for quality jobs.
China’s public revenue system, which relies heavily on value-added taxes and compulsory contributions to social insurance funds, is extraordinarily regressive. Effective tax rates at the lower end of the income distribution can be over 40% according to a 2020 blog post by Brad Setser, formerly of the Council on Foreign Relations. China’s household registration system, which in many cases still ties benefits to a person’s place of birth, often in small towns or the countryside, making it harder for workers to find the best jobs . And low fixed deposit rates routinely transfer household wealth to the big banks, which often lend to state-owned companies rather than the private companies responsible for job growth.
Basically, China needs a better funded, place-untied social safety net, and a financial sector that is less unfair to small businesses and households, if it is serious about tackling inequality and keeping young graduates in employment. On the other hand, blaming the tech industry without undertaking tougher tax revisions is a lot like trying to have your cake and eat it, too.
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