All eyes have lately been on China’s economy, which is facing waves of new challenges, from a government crackdown on e-commerce giants, cram schools and the gaming industry, and its latest focus on “common prosperity” — to which major private enterprises have made considerable donations — to the energy shortages of the past several weeks. These have made it difficult to clearly see where China’s economy is headed.
Late last year, Chinese President Xi Jinping (習近平) said that he wanted to see “substantial progress” by 2035 in realizing common prosperity, and to move into the final stage of achieving “modern socialism.”
It will be interesting to see how significant this policy will be, and how it will play out for the future of China’s economy.
In 2019, China reported a Gini coefficient of 0.465, although the actual figure was probably more than 0.5. The coefficient is a commonly used measure of income or wealth inequality.
An IMF report in 2018 said that China was “among the most unequal countries in the world,” while a study by Credit Suisse found that the top 1 percent of rich people in China held almost 31 percent of the country’s wealth, up from 21 percent in 2000.
Maintaining economic development is crucial for the Chinese Communist Party’s (CCP) continued hold on power, so realizing the goal of common prosperity is not simply an economic issue, but also a major political and social issue.
In terms of the economy, the rural/urban divide and unequal income distribution hamper the economic development and transformation necessary to escape the middle-income trap and bolster consumption-led economic activity.
Politically, private enterprises that guide the economic system, market forces that supersede the leadership of the CCP and the withdrawal of the state present threats to political stability that comes with centralized power.
On the social front, income polarization jeopardizes social fairness and stability, and runs counter to the very basis of socialism.
Two stages can be identified in the development of a country’s economy: The first is to allocate jobs according to people’s skills and match their incomes with their capabilities to maximize efficiency and create the greatest amount of wealth.
The second stage is to establish a sound fiscal allocation system, as well as social welfare and security guarantees, so that inequality can be reduced through the transfer and redistribution of wealth.
The CCP has adopted an unbalanced development strategy for China, in which some people, especially those along the coastal areas, became wealthy before those in other parts of the country. This was exacerbated by the dualistic urban/rural household registration system that facilitates centralized power. This has meant that uneven wealth distribution during economic development was all but inevitable.
It was further complicated because the centralized system lacks a workable financial distribution system and fair social welfare guarantees, which has reduced the effectiveness of the second stage, slowing it down considerably.
This has necessitated a third stage, essentially a short-term emergency measure, in which high income groups and companies allocate some of the social resources and wealth they have control over through charitable activities such as fundraising, donations or the provision of subsidies.
In the name of anti-monopoly, Chinese officials are bringing the power of the state to bear, cracking down on large private enterprises, ostensibly to break up monopolies, protect consumers’ access to data and maintain order in a competitive market, hoping to deal with political and economic problems at the same time.
This is why they have made large companies, such as Tencent and Alibaba, make large donations and fall in line with CCP policy.
However, this presents a problem for the CCP. The emergency third stage cobbled up to address wealth inequality is, as the Chinese saying goes, like drinking poison to quench one’s thirst, especially when it is enforced by state intervention in a market economy that has been driven by the private sector. This intervention is likely to have far-reaching effects.
Unpredictable state interventions are not conducive to the deepening of market reforms, as companies would be unsure which direction the reforms will take. China’s economy is in dire need of transformation, but this uncertainty would only make it more difficult to achieve Xi’s vision of common prosperity.
Chuang Yih-chyi is a professor of economics at National Chengchi University.
Translated by Paul Cooper
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