China’s Xi Jinping talks of ‘common prosperity’ as the rich get richer, with little indication of how it will reduce inequality

Beijing’s campaign to eliminate absolute poverty, which started in 2015 and was said to have been accomplished last year, also coincided with a rise in inequality
Booming asset growth among China’s wealthy and urban middle class appears to have stalled efforts to help close the gap between urban and rural incomes, analyst says

Poverty in China

Sidney Leng

Published: 6:00pm, 14 Jan 2021

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Beijing’s next major economic target after poverty alleviation could be reducing income inequality, based on officials’ speeches and government documents published over the past few weeks.

But how exactly officials plan to do that is the trillion-dollar question.

In a speech delivered at the Communist Party’s Central Party School this week, Chinese President Xi Jinping reiterated the importance of “common prosperity”, saying it is not only an economic issue but also a major political issue critical to the party’s rule. And he called on the government to proactively tackle problems such as income gaps to improve people’s sense of “gain, happiness and security”.

Xi’s rhetoric followed up on his comments in early November after the party had finished drafting a blueprint for the nation’s next five-year plan, with a goal of turning China into a “great modern socialist nation” by 2035. And this commitment to common prosperity for all Chinese citizens appeared in the party’s plenum document for the first time.

And the idea is nothing new in China. In the 1980s, former paramount leader Deng Xiaoping said common prosperity was the ultimate goal in the process of letting some people and regions become rich first, to speed up China’s growth.

“Xi’s speech does confirm that the party is moving toward a greater focus on economic inequality – the logical sequel to its previous campaign to alleviate absolute poverty. It’s less clear what tools they intend to deploy to reduce inequality,” said Andrew Batson, director of China research from economic consultancy Gavekal.

“The obvious candidates are more progressive taxation and larger social-welfare payments to low-income households. But there was very strong resistance in the bureaucracy to increasing fiscal support for household incomes even during the Covid-19 emergency.”

Batson added that the bureaucracy has “long been very conservative in its approach to expanding the welfare state”.

Ironically, Beijing’s campaign to eliminate absolute poverty, which started in 2015 and was said to have been accomplished last year, also coincided with a rise in inequality. The official Gini coefficient, an index that measures income distribution, showed that, after falling for eight straight years to 2015, inequality rose between 2016 and 2018. And with the coronavirus pandemic hitting low-income people much harder than the wealthy, income inequality likely increased further last year.

The renewed rise of inequality in recent years could be partly attributed to booming asset growth, particularly in terms of real estate, among the wealthy and urban middle class, stalling efforts to help close the gap between urban and rural incomes, according to Li Shi, director of the China Institute for Income Distribution.

China’s tax regime is dominated by regressive taxes, such as the value-added tax and the consumption tax, which place greater burdens on low-wage earners because they are constant rates, regardless of income. Over the years, there have been discussions about the introduction of progressive inheritance and property taxes, which would tax the wealthy more, but such efforts have made no real progress so far.

Apart from limited subsidies to the poor, China’s social safety net programme, known as dibao , is the only social security scheme that redistributes wealth based on income. But the programme itself has gradually become part of China’s surveillance system to monitor people deemed risky by the government, and to silence dissent, in line with the party’s efforts to maintain social stability.

Under China’s decades-long investment-driven growth model, the government has chosen to finance corporate investment rather than transfer money to households. The growth rate of net income transfers to households has generally fallen over the past five years, according to official data.

At the same time, inequality remains a sensitive topic in China, with limited publication of official metrics and censorship. China banned domestic publication of French economist Thomas Piketty’s latest book, Capital and Ideology, mainly because he refused to delete all parts related to China’s rising inequality.

“If [the government] is serious [about reducing inequality], it might begin by improving various measures of inequality. The absence of time-series data on most metrics means the magnitude of the challenge is not fully clear, and measuring progress will be difficult,” said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics.

It is unlikely that Beijing will set an across-the-board target for reducing inequality, such as lowering the Gini index, Batson said. Rather, the government is likely to proceed by focusing on specific areas, such as inequality between urban and rural households.

“While public expenditure will play an important role, reform will play an equally, if not more, important role in tackling rural-urban inequality,” said Song Houze, a research fellow specialising in China’s economy at the Paulson Institute, a US think tank.

To reduce the urban-rural inequality gap, reforming land ownership in rural areas and improving income transfers to urban low-income households are critical, Song said.

China’s countryside ‘returning to poverty’ as lack of reforms help fuel urban-rural divide

China’s rural land, as well as homes built on it, are collectively owned, as opposed to urban land and properties, which are government-owned. Beijing has started to let rural residents retain more of the proceeds from rural land sales – but sales are limited to only people living in the same village or town as the seller, and they are not open to deep-pocketed urban buyers.

In Beijing’s view, one key aspect of achieving common prosperity is expanding the nation’s middle-income group, which, at about 400 million people, accounted for nearly a third of the total population in 2019. According to China’s official definitions, “middle income” is defined as having a monthly per capita income of more than 2,000 yuan (US$310).

“Bringing [the lower] income group into the middle class will require an emphasis on income redistribution to households, which will likely be a focus in the five-year-plan cycle through 2025,” Song said.

Assuming the government carries out large redistribution and reform programmes, roughly an additional 240 million Chinese people could reach middle income by 2025, bringing the total size of China’s middle class to about half the nation’s population, according to Song’s calculations.

This article appeared in the South China Morning Post print edition as: Beijing appears ready to tackle pay inequality