Solving Sino: Towards Common Prosperity

• Global
• Alibaba, CCP, China, Tencent
• September 13, 2021

In the latest instalment of the “Solving Sino” series, in which The Creative Accountant is getting to grips with the CCP and how things operate in China, he looks at how Big Tech firms in China are having to contribute towards the social priorities that have been identified by the government.

“We cannot let an unbridgeable gulf appear between the rich and the poor.” – Chinese President Xi Jinping

President Xi Jinping is in pursuit of “common prosperity” – a vision aimed at narrowing China’s wealth gap and redirecting resources towards poorer communities. While China’s economy has grown at a blistering pace, averaging an annual growth rate of 10% over the past 30 years, not all citizens have benefitted.

China is one of the most unequal countries in the world. The World Bank estimated China’s Gini coefficient, a statistical measure which quantifies the amount of inequality that exists in a population, at 0.385 in 2016. The United Nations considers a Gini coefficient of 0.4 to be a “warning level”, i.e. a level that risks overall social instability. The United States, which China has passionately aimed to differentiate itself from, had a Gini coefficient of 0.414 in 2018.

[the_ad id=”3223″]

This is why Xi sees reducing the income gap as both an economic and political imperative: social unrest could stain his report card as he prepares to secure a third term as the CCP’s general secretary beginning next year.

As always, there’s a plan to go along with it. Xi has earmarked the Zhejiang province, China’s third-wealthiest province and base of many of its most successful tech companies, as a “common prosperity demonstration zone”. Essentially, Zhejiang will serve as a test site for new policies designed to reduce inequality, following a detailed 52-point plan for 2021-2025 released by provincial authorities.

The plan covers a range of targets, including those firmly on the CCP’s radar, such as income, employment, housing, education, and public health.

As discussed in the first part of the series, the CCP’s main considerations for all future planning, including the Zhejiang development, can be categorised as follows:

• The population that will inhabit its future cities
• The economy that will sustain the population, and
• The regulations that will best guide this economy

Population

A key tenet of the plan is the creation of an “olive-shaped social structure” – in which the middle class makes up the bulk of the economy and relatively few citizens exist at the extremes of wealth or poverty.

The plan aims to increase the per capita disposable income of Zhejiang residents to ¥75,000 (just under R165,000) by 2025, over 40 percent higher than current levels. Additionally, labour compensation is planned to account for more than 50 percent of GDP.

In terms of education, the aim is to achieve a gross enrolment rate in higher education of more than 70 percent, and the average years of education for children to reach 15.5 years.

Healthcare, another big focus for the CCP, also plays a central role in the plan. The aim is for average life expectancy to be more than 80 years old by 2025 and for the proportion of personal health expenditure versus the total health expenditure to be below 26 percent.

[the_ad id=”3235″]

Economy

In the wake of the Big Tech crackdown, and China’s escalating sternness regarding fair competition, philanthropy has been embraced as a way to show the CCP that you’re willing to contribute towards its common prosperity goals.

Alibaba, which was fined $2.8 billion for anti-competitive behaviour, pledged $15.5bn over five years on 10 initiatives ranging from technology investment to support for small businesses. Tencent pledged $15bn, double its allocation for social responsibility programs.

It’s not only companies digging into their pockets for spare change. Billionaires, many of whom are tech entrepreneurs, are giving back too. Since January, five high-profile tech billionaires have pledged at least $13 billion of their personal or corporate fortunes to charitable foundations and initiatives. Colin Huang, founder of online grocery platform Pinduoduo, which was fined in March for improper pricing practices that hurt small businesses, topped the Hurun China Philanthropy List 2021 with donations totaling $1.9 billion.

With the CCP watching over the donors’ shoulders, the acts may not be entirely selfless. If the funds have the desired impact though, the intention will be an after-thought.

Regulations

The CCP has emphasised its rejection of a “European welfare state” model of redistribution, with an economic official describing “welfarism” as a “trap”. Instead, it believes that state welfare won’t be necessary if it ensures that workers are healthy and qualified, which is why affordable and accessible education and healthcare are such key elements across China’s various plans.

In terms of taxation, China currently has an annual tax on commercial property but not on residential assets. Discussions regarding a property have been gaining steam, but policy makers are wary as more than 70% of China’s household wealth is tied up in the property market.

The aim of the tax would be to keep housing prices in check but, if set too high, it could be devastating to the economy and the middle class that China is hoping to empower.

Outlook

Policy choices in Zhejiang will be important to keep an eye on in the run-up to 2025, and successes could have implications for how China structures its 15th Five-Year Plan. Part of the aim of this series is to give readers interested in China, and long-term investing, a heads up regarding important trends.

Editor’s note: Chinese Big Tech firms are effectively making “donations” to secure the CCP’s tolerance of their existence. After Chinese tech dominated the last decade, will healthcare investments dominate the next decade?

[the_ad id=”3234″]