After Defeating Extreme Poverty, Common Prosperity is China’s Next Big Challenge

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As COVID-19 was wreaking havoc on the global economy, China navigated the crisis almost unscathed. As if it were not enough, the Chinese Commuist Party (CCP) declared the defeat of extreme poverty in China in 2021 (McDonald, 2021). Despite these unparalleled accomplishments, the Chinese government is not sitting back. To the contrary, it is taking decisive steps aimed at reining in the side-effects of capitalism, while reinforcing socialism with Chinese characteristics (Hongpei and Xuanmin, 2021). These include specific measures —for instance capping the maximum weekly time that underage children can spend playing on their devices— as well as wider strategies such as dual circulation (国内国际双循环) and common prosperity (共同富裕).

Common prosperity appeared on the agenda of a meeting chaired by President Xi Jinping in August 2021. Although in the past the party allowed some people to get rich first, the conclusions of the Central Financial and Economic Affairs Commission highlighted the need to "reasonably regulate excessively high incomes'' (People’s Daily, 2021). And, even though it might look simple to understand, this is actually an extremely complex notion, since it has to deal with Chinese society and economy.Truth be told, the term itself did not make its first appearance in August. Common prosperity was first mentioned by Mao Zedong, founding leader of the People’s Republic. The term was later modernized by Deng Xiaoping, who accepted the hard task of modernizing the country after the disastrous Cultural Revolution. Deng’s support was fundamental for renewing this concept, as it was his idea that to reach common prosperity for everybody, someone had to get rich first. Following the opening of China to international trade under Deng’s rule, a great period of investments began, which corresponded to a great increase in China’s wealth, making it what it is nowadays: one of the most advanced countries of the world. However, , such development has also brought many downsides, such as social and economic inequity.

A clear signal of this inequality can be drawn by Chinese working culture nowadays. Many Chinese companies, especially those from the high-tech sector, have forced their employees to work following the 996 program,meaning that they work for 12 hours per day for six days a week. This has allowed businesses to hoard wealth, while the work-life balance of employees has been shattered. Xi Jinping shared his own understanding of common prosperity on 求是 Qiushi, the flagship journal of the Communist Party of China Central Committee, in an essay signed by the President himself (Qiushi, 2021):

Realizing common prosperity is more than an economic goal. It is a major political issue that bears on our Party's governance foundation. We cannot allow the gap between the rich and the poor to continue growing—for the poor to keep getting poorer while the rich continue growing richer. We cannot permit the wealth gap to become an unbridgeable gulf. Of course, common prosperity should be realized in a gradual way that gives full consideration to what is necessary and what is possible and adheres to the laws governing social and economic development. At the same time, however, we cannot afford to just sit around and wait. We must be proactive about narrowing the gaps between regions, between urban and rural areas, and between rich and poor people. We should promote all-around social progress and well-rounded personal development, and advocate social fairness and justice, so that our people enjoy the fruits of development in a fairer way. We should see that people have a stronger sense of fulfillment, happiness, and security and make them feel that common prosperity is not an empty slogan but a concrete fact that they can see and feel for themselves.

The China Communist Party (CCP) and Xi have decided to follow this path because of social, political and economic reasons. Socially, common prosperity would allow the government to decrease the gap between the richest and poorest in China. As a matter of fact, China’s richest 1% earns as much as the poorest 50% (Figure 1). Moreover, more than 600 million people live with less than 1600 euros per year (12,000 RMB). On the other end of the spectrum, billionaires in China are more than 1000, more than in the United States (Hurun Global Rich List 2021, 2021).

In economics, inequality across countries is measured using the Gini index. Unequal societies report a value closer to 1, whereas more equal societies a value close to 0. The Gini index in China has been steadily increasing and is now higher than in the US and Europe (Figure 2). One way to reduce the Gini index is through taxation and redistribution (healthcare, education and pensions among other benefits). This allows the Organization for Economic Cooperation and Development (OECD) countries to reduce inequality by 30% on average, while this value stops at 8% in China. Yet, China’s strong decentralization may be a significant hurdle. Pensions are managed at the provincial level and healthcare at city level or lower. Without a proper safety net, people tend to save more in view of the uncertain future ahead of them, lowering household consumption and thus GDP growth.

From a political perspective, common prosperity would allow Xi to affirm his power even more at a moment when the conclusion of his term is approaching. As it is widely known, this is probably not going to happen. In fact, in 2018 Xi Jinping removed the limit of the two terms that was imposed in the past, granting himself the possibility to remain President for life. Theoretically, Xi has already achieved his goal by modifying the law, but in practice this might not be enough. In order for Xi to maintain harmony, an extremely important concept in China, he not only needs to maintain power, but also convince his people that he is the best choice for the country. The redistribution of the benefits of Chinese economic growth could also reinforce the faith that Chinese society has in its President.

The times of double-digit GDP growth in China are far gone. In 2019, before the pandemic hit, GDP grew at the lowest pace in 30 years, following a declining trend (Figure 3). Besides trade tensions with the US, the Chinese economy is undergoing structural changes. Ageing population and declining young workforce, lower exports and higher imports, and increase in unproductive investment are only some of the causes of the slower GDP growth.

Compared to other advanced economies, GDP growth in China relies more on investments than on consumption. By artificially ensuring low wages, businesses and local governments profit from exports to the detriment of households. They then use these resources for —not always productive— investments. At the same time, households retain a lower share of the export profits, which restrains their potential consumption. Still, consumption is a growth factor that is more sustainable in the long term, especially for advanced economies. Consumption ensures a healthier growth because it reduces China’s dependence on investments and exports. Common prosperity could address the unhealthy reliance on investments by increasing household consumption. From this perspective, common prosperity shares some of its goals with double circulation.

Common prosperity is also meant to be a long-term strategy. Xi Jinping set the objective of reaching “solid progress” on this plan by 2035 and achieve it in fullby 2050. Even though no comprehensive project plan has been published yet,, actions have already been taken. For example, employing 996 working hours has become illegal, thus improving the workers’ lifestyle. Online and private tutoring were also dismantled, benefiting families unable to afford them. Moreover, super rich companies donated conspicuous shares of their wealth to development and social projects: for example, Alibaba donated Rmb100bn, Tencent Rmb50bn and Pinduoduo Rmb10bn (FT reporters, 2021).

To achieve common prosperity, the government is ready to use unfair means as well. One of the greatest examples in this context is the case of Jack Ma, Alibaba’s founder. In 2021, he was frequently mentioned by newspapers for two main facts: the first being his criticism of the government, and the second the upcoming initial public offering (IPO) of one his companies, Ant Group. Unfortunately for him, the government decided to send a strong signal and suspended the IPO just before he could file it. Shortly after, another episode of this kind took place. This time the targeted company was DiDi. Known as the “Chinese Uber”, DiDi is a ride-railing app founded in China in 2012. According to Chinese media, it was targeted by the Chinese authorities, namely the Cyberspace Administration of China, after being accused of violating data security protocols. As a consequence of such behaviour, the authorities decided to suspend DiDi’s app on July 2, just two days after its IPO in the US. According to experts, this was done in order to send a strong message to all enterprises operating in China: you cannot do big business without involving the government, because it might undermine China’s internal stability.

A more structured approach is underway in Zhejiang province, third in China by wealth (Bloomberg, 2021). Zhejiang is home to some of the most important and rich companies in China, such as Alibaba, based in Hangzhou. According to experts, this project will be implemented gradually, and will mainly concern investments in the field of agriculture, healthcare and education to make them more affordable. A detailed plan of 52 tasks and goals was drafted with the first deadlines coming up in 2025 (China Daily 2021). This pilot project in the Zhejiang province will reveal how common prosperity will unfold in practice and will be an opportunity to make a first assessment of this policy both for the CCP and for international observers.

Niccolò Ellena is a 24 years old master’s degree student from Prato, Tuscany. He’s studying international relations at The Catholic University of Milan, specializing in Africa-China relations. Prior to moving to Milan, he spent 3 years in Florence studying for his bachelor’s degree in foreign languages and cultures, where he focused on English and Mandarin Chinese. Driven mainly by curiosity, he also spent half of the second year of his bachelor’s degree in China, at Wenzhou University, where he studied Mandarin Chinese. Now, being close to completing his master’s degree with a thesis on the “Belt and Road Initiative”, he hopes to further continue his studies with a doctoral degree in politics, to try to understand more in depth how China and Africa are interrelated. You can find him on LinkedIn.

Giacomo Migliore is a Master graduate in International Business. His thesis compared Chinese and Italian users' behavior in respect to ePayment. He worked in a finance and tax consultancy in Shanghai. He completed an internship at the United Nations Economic Commission for Europe and is currently working as a Blue Book trainee at the European Commission. You can find him on LinkedIn.

The opinions expressed here are those of the writers and do not represent the views of European Guanxi.

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