China now has more than twice the number of billionaires than the United States, it’s Gini coefficient, the measure of how extreme the wealth-poverty gap is in a society, is not in a good place, and after four decades of following Deng Xiaoping’s policy of “letting a few people get rich first,” China is suddenly shifting eras. The new policy was laid out in detail by leader Xi Jinping, who said that the goal now is wealth redistribution and “common prosperity”. It is no longer about providing the conditions for smart, entrepreneurial and well-connected people to become wealthy and thereby driving overall economic growth.
In terms of the masses and overall social stability, this looks like a good move, and aims to provide a foundation for the party’s goal of getting another 100 years under its belt. Those in Command clearly want to create a China which is relatively prosperous, and no more. Once people get prosperous beyond a certain point, they tend to start thinking independently. The basic motivation of the middle class anywhere in the world is the preservation of the value of their assets, and it appears the new direction will allow for that at the lower end of the middle class scale. And above that? Deal with it. Work within the system or not at all.
How does this play into the role of private enterprise in China’s economy? Because it will surely have an impact on the sense of motivation of investors and entrepreneurs to build a future on which they can aspire to get rich, I tell you, rich. Can China’s economy still provide enough of what is needed if it slows down to the point where SOEs and carefully manicured private enterprises are effectively all there is? It’s a real question, not rhetorical. We don’t know. But Those in Command control all aspects of the economic and finance system and have a greater ability than in any other system to manage the process. If there is a brick wall out there built of all of the inconsistencies and inefficiencies of the China system, does that allow them to get round or over it?
The future of China that was sort of hinted at during the 1990s and 2000s, was one in which the country was increasingly integrated into the world, and the middle class played an ever-growing role in the system to reflect their growing wealth and confidence. That was the purpose of the “Three Principles” from the early 2000s. All gone now. The wealth redistribution announcement, which China’s not-stupid top companies and billionaires have leapt to support, effectively formalizes the sidelining of the middle class for the foreseeable future. And as long as the economy performs at a level that creates enough money to keep things growing at a rate that will allow for continued social stability, there will be quiescence.
An obvious step to take to achieve wealth redistribution is a property tax, as we have discussed before. The authorities have tried on several occasions to implement the law and the market reaction has always been so ferociously negative that plans have had to be shelved. This would be the time to do it based on the new policy, but on the other hand, the property market is an even more important part of the system now than it ever was, and it cannot be allowed to get shaky. Watch this space.
In other obviously related news, Tencent announced it had earmarked the equivalent of $7.7 billion to assist the government in creating “common prosperity”, and the Chinese government has taken a stake in two more major private internet/media companies – ByteDance and Weibo.
Have an ostentatiously frugal weekend.