China will reform its tax and household registration systems, push anti-trust enforcement and improve public services to reduce the national wealth gap, President Xi Jinping told the Communist Party’s financial and economic affairs committee in an August 17 speech.
His ideas were set out in an article based on the speech and are now viewed as a blueprint of the dramatic changes the leader is imposing across the country.
The article said China would push forward its “common prosperity” drive step-by-step and would not repeat the income disparity problems seen in some developed countries after their industrialization.
Mainland academics said China must launch a property tax, reform its capital gain tax system and impose heavy duties on luxury goods and services. However, some economists and analysts said China would suffer short-term pains in its property and technology sectors before it could benefit from long-term reforms.
The phrase “common prosperity”, which some have viewed as a certain move away from capitalism and towards more socialism, was actually first mentioned by former Chinese leader Deng Xiaoping in the 1980s.
According to Deng, China should open its economy and allow some people, mainly on its east coast, to “get rich first.” After some decades, people in these areas would be able to help those in the remaining part of the country. By that time, China could achieve its goal of “common prosperity.”
When the Communist Party celebrated its 100th anniversary on July 1 this year, Xi said in his speech that the party would “make more notable and substantive progress toward achieving well-rounded human development and common prosperity for all.”
He did not explain it with concrete actions but said China would “uphold and develop socialism with Chinese characteristics” and “promote the building of a human community with a shared future.”
Xi said at the party’s financial and economic affairs committee meeting in August that China would strengthen the middle class, increase the income of underprivileged groups, regulate unreasonable income and curb illegal income. Xi said the country would protect intellectual property rights and encourage people to “get rich” through legal means.
He also encouraged creating conditions that are more inclusive and fair for people to get a better education, improve their development capabilities and build up “third distribution” or charity systems.
On October 16, Qiushi Journal, a party theoretical publication, published an article written by Xi to further elaborate the logic of his “common prosperity” drive.
“China will achieve its common prosperity goals by several stages. By the end of the 14th Five Year Plan (2021-2025) period, the gap between residents’ income and actual consumption levels will be gradually narrowed,” Xi said.
By 2035, the common prosperity drive would achieve substantive progress with all people being able to enjoy basic public services, the leader said. By the middle of this century, the gap between residents’ income and actual consumption levels would be narrowed to a reasonable range, he added.
Common prosperity should be based on four principles, namely encouragement of hard work and innovation, the upholding of a basic economic system with a public-owned economy at the core, the avoidance of welfarism and a step-by-step approach, Xi said.
“Common prosperity should be promoted following the people-centered development philosophy and high-quality development,” Xi said, stressing the balance between efficiency and fairness, as well as the construction of a set of institutional arrangements on a coordinated three-tier income distribution system.
The article outlined six areas of concrete action China would take in the future. These included the increase of fiscal support in China’s underdeveloped regions, the acceleration of reforms in monopolized industries and the development of small-and-medium-sized enterprises; the push for low-income people, including high-school graduates, workers from rural areas and frontier staff in state-owned-enterprises, to enter the middle-income group; improvement in education, healthcare, elderly and housing services; tax reform, the encouragement of donations for charity, the strengthening antitrust enforcement and the ban of illegal income generated from insider trading, fraud and tax evasion; an emphasis of nationalism, collectivism and socialism in education; and the increase in farmers’ income and the improvement of the living environment in rural areas.
“Common prosperity will not be achieved simultaneously for all the people. Different regions and groups of people may enjoy different levels of prosperity and on various timelines,” he concluded.
Shi Zhengwen, director of the Center for Research in Fiscal and Tax Law at the China University of Political Science and Law, said it was expected that China would accelerate the reform of its tax system this year to achieve its common prosperity goals
“Pilot programs of the property tax are expected to be seen in three to five cities this year,” Shi said, adding that local governments could use this new tax income to improve public services and redistribute wealth.
Some high-income people evaded tax by hiding income from capital gains, including interest, dividends, bonuses and property transactions, he said. Regulations should be launched to prevent tax evasion, Shi added.
Luo Zhiheng, deputy dean of the Yuekai Securities Research Institute, said Chinese laborers’ marginal income tax rate was currently at 45% but the capital gains tax rate was only 20%, which should be increased.
Besides, Luo said it was necessary to expand the coverage of the consumption tax from wholesalers to retailers while consumers of luxury goods such as private jets and high-end services in private clubs should face heavy duties.
However, some economists and analysts warned that although China would benefit from its long-term common prosperity drive, it would inevitably suffer from short-term pain in many sectors.
Christina Zhu, an economist at Moody’s Analytics, said potential homebuyers were being held back by the increased uncertainty caused regulatory crackdowns on a range of private industries and authorities’ broader pursuit of “common prosperity.”
“The sweeping crackdowns on China’s booming sectors such as technology, private education, gaming and entertainment, are likely weighing down property sales as employees in those sectors are relatively well-paid and represent a large group of potential homebuyers,” Zhu said. “Recent regulatory moves dented the sense of security for high-income earners, making them more conservative in property investment.”
The repeated mentioning of “common prosperity” and the government’s push to rein in perceived as excessive income would likely be headwinds for the real estate sector for the foreseeable future, she added.
The Chinese government had identified “three mountains” – property, education, and healthcare – that it believes are the key to reversing income inequality, said Paras Anand, chief investment officer, Asia Pacific, Fidelity International.
In the short term, the three mountains would become tougher to invest in for profit as they would form the planks of the common prosperity paradigm, Anand said.
“The recent actions of the Chinese government give bureaucrats and regulators greater powers to fight income inequality far more proactively. Investors might be experiencing short-term pains at present,” Anand said.
Over the long run, new regulations targeting the three mountains should increase disposable household income, which will in turn lead to increased spending on consumption and services in China, he said.