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Full steam ahead for Common Prosperity

If the Central Committee for Financial and Economic Affairs, which met yesterday under the chairmanship of President Xi Jinping, had held its meeting three weeks ago, much of the guessing-game played by foreign investors since then could have been avoided. It is now clear what is going on: China is transforming its “Socialism With Chinese Characteristics” economic development model, with the primary aim of reducing inequality.

This is how it happens sometimes in China: policies are launched that wipe trillions from stock market valuations, and only a couple of weeks later are they explained, often by an oblique reference.

The official document released after the big meeting is worth reading in its entirety. Here is the version supplied by CCTV. Reading between the lines, it appears to make three key points. First, to get rich is still glorious. Second, to get obscenely rich is not so much. Third, wealth is protected by the law, but obscenely rich people had better start thinking about how they can give it back. “Common prosperity” is now the primary goal for all.

Or, put another way (by the SCMP): The meeting vowed to “strengthen the regulation and adjustment of high income, protect legal income, reasonably adjust excessive income, and encourage high-income groups and enterprises to give back to society more.”

It also urged the country to “properly deal with the relationship between efficiency and fairness”.

Readers might be forgiven for thinking this is just political banter, of the sort regularly espoused by left-leaning groups around the world. But this is the committee, chaired by the president, responsible for setting economic policy in China. This is going to happen.

Or rather, it is already happening. Wealth is being destroyed on a previously unimaginable scale in China by new regulations that have achieved what yesterday’s meeting intended. Tech billionaires have been humbled, venture capitalists have had dreams shattered, and entrepreneurs have had private schools confiscated. In the process, the country’s wealth gap is being addressed.    

The committee’s minutes do not put it that way, of course. The official report makes studious mention of the rule of law. It frames the new policy shift in the context of the Reform and Opening era, noting that the Party had deliberately allowed some people to get rich first. But then it makes clear that the country is going in a new direction, and, in fact, has been since the 18th Party Congress (when Xi came to power in 2012). Here is a rough translation of the key paragraph:

Since the 18th National Congress of the Communist Party of China, the Party Central Committee has placed the gradual realization of common prosperity for all people in a more important position, adopted effective measures to protect and improve people’s livelihood, win the battle against poverty, build a well-off society in an all-round way, and create good conditions for promoting common prosperity.

There is no need for panic. The Party is not talking about confiscating land or anything like what it did back in the 1950s. It just wants to see an olive-shaped income diagram for its population, i.e., with a fat middle and small points at the top and bottom. And it doesn’t want to reduce wealth, per se. It wants those who have gotten rich first to “help others up”. It wants to “implement precise policies to promote more low-income groups into the ranks of middle-income groups”.

The Party also wants to, however, “clean up and standardize unreasonable income, rectify the order of income distribution, and resolutely ban illegal income”. In case anyone was wondering.

The Party can do this, it says, while it “protects property rights and intellectual property rights, protects legal wealth, and promotes the standardized and healthy development of various types of capital”.

Make no mistake, however, it is doing this with a goal in mind: “To promote the common prosperity of the people’s spiritual life, strengthen the guidance of socialist core values, and continuously meet the diverse, multi-level, and multi-faceted spiritual and cultural needs of the people”.

In other words, China is going to take a more socialist approach to its economic development. It is still going to use standard wealth-transfer mechanisms like those used by capitalist societies, such as “taxation, social security, transfer payments, etc”. Yet it is clear from the document that the Party expects everyone to play their role in this endeavor.

Especially, it seems, the rich.

This is not to comment on the morality of what is being done. Western countries have development challenges of their own. Wealth gaps in developed economies are in dire need of being addressed. This is just to acknowledge that there can no longer be any confusion or alleged ambiguity among foreign observers about what is driving the current regulatory changes in China. The Central Committee for Financial and Economic Affairs has laid it out, clear as can be.

Common prosperity is where it’s at. Everyone needs to get with it.

Although it would have been great for foreign investors to have known this before the recent round of crackdowns, it is also understandable why the cart was put before the horse. In making such a big announcement, it is likely the person doing the announcing decided to clear it first with his, ahem, board of directors. It is plausible to believe that a group of elderly gentlemen who enjoy the summer breeze at Beidaihe appreciated a preview of the policy before it was launched.

Yet it is nevertheless a bit puzzling why this needed to happen now. The last time such a major shift was announced, it happened at a Party Congress. Why could this not have waited for the 20th, which is scheduled to take place a year hence? Unless, as the official release says, this is not anything dramatically new, but merely an adjustment of a policy direction that has been under way since the 18th Congress?  Perhaps it is only clueless foreigners who will be shocked to hear of this change now.

That doesn’t seem likely. This is big. This is an announcement that China has decided to address inequality the best way it knows how: by telling everyone to get with the socialist plan. Anyone who thinks that the wealthy are simply being asked to do their patriotic bit must not have a full appreciation of how effective the Party’s coercive capabilities are. This is all about reining in the disorderly development of capital. And it appears to be just getting started.

What will likely come next? That is the golden question. It seems likely that what has been seen so far is an indicator of further regulatory action coming from a wider range of ministries, all aimed at the “three mountains” of property, healthcare, and education. But it also seems likely that action is coming directly against the financial sector. It is logical to assume that the entire supply chain of financial services supplied to companies and individuals as they struggle to get gloriously rich is going to face intense scrutiny. Wealth management products aimed at protecting excessive wealth from the Party’s redistributive capabilities? IPOs that seek to enrich founders beyond reasonable dreams, and which reward bankers with excessive fees? All of this is likely going to start attacting more serious attention.

Common prosperity. It is best to get used to the buzzword, as it is likely to be used a lot from now on.

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