Making prosperity common – aligning companies with China’s new initiative

Analysis 20 Mar 2023

Daniel Rechtschaffen

Asia Pacific China Political and Country Risk

President Xi Jinping’s “Common Prosperity” drive has been a major theme in official discourse in China in recent years, prompting concern among companies and investors who fear aggressive redistributive policies. However, so far common prosperity has been more of a tagline than a concrete policy or plan, reflecting longstanding concerns that the government has had with numerous socioeconomic issues. While many of the policies that fall under the common prosperity rubric are not new, they will likely receive a heightened or renewed focus from regulators in the next five years.

At a macro level, common prosperity implies that China will increasingly emphasise healthy economic growth and policies that redistribute wealth instead of focusing solely on GDP targets. There has been speculation that government attempts to reinvigorate the economy in 2023 – after a sluggish 2022 – will see a softening of regulatory enforcement, particularly against technology companies. However, the government often views enforcement as critical to long-term stability and sustainable, equitable growth, making a wholesale reversal of current regulatory trends unlikely. While individual local authorities might adjust enforcement in response to local priorities, it is likely that larger, countrywide, regulatory trends linked to common prosperity will remain.

Prosperity priorities

Several broad trends in China – most of them not new – are driving the current push for common prosperity.

Income gap: The country’s increasing wealth gap widened during the COVID-19 pandemic. Income inequality has risen sharply since the 1980s reform period and has remained high since the early 2000s. In 2019, China and the US were nearly matched in income inequality.
Social inequality: While decades of rapid development have raised an extraordinary number of Chinese people out of poverty, it has also created a generation with high expectations for future prosperity. However, this generation faces a challenging environment for employment and access to welfare amid reduced economic growth. Today, only a fraction of China’s top university graduates come from rural or underdeveloped regions, rental prices in cities far outstrip average wages and social programmes like the pension system remain underfunded and overburdened.
Low birth rate: Exorbitant education and parenting costs contribute to China’s lagging birth rate. Officials hope that redistributing wealth to the growing middle class will alleviate some of the financial burden of having a second child, with the hope of addressing China’s ageing population issues.
Tax evasion: Tax authorities in recent years have increased enforcement of and supervision over tax evasion. A recurring focus has been the “sky-high” pay of celebrities – multiple tax and corruption scandals involving celebrities have increased public calls for regulators to better scrutinise tax evasion practices by high-income earners.
Unemployment rates: Unemployment reached an all-time high during COVID-19. While the national urban unemployment rate has fallen slightly from a peak of 6.2% in February 2020, youth employment (those aged between 16 and 24 years old) has continued to increase and hovered between 15% and 20% throughout 2022.

Initially heavily promoted in late 2021, government references to and media coverage of common prosperity were somewhat muted in 2022 due to an overwhelming focus by both regulators and journalists on implementing and covering China’s zero-COVID policy. Regulatory enforcement across a range of sectors also lagged as government bureaux tried to juggle the need to shore up a lagging economy and the vast resources required for COVID-19-related enforcement actions. However, Xi Jinping reaffirmed the initiative as a key priority at both the 20th Party Congress as well as the March 2023 Two Sessions – the country's most significant recurring political and legislative events.

In antitrust we trust

Xi Jinping has repeatedly highlighted that fostering a level playing field through antitrust enforcement is a core tenet of common prosperity. Recent antitrust enforcement has been characterised by a focus on sectors that the government believes has experienced what it terms “disorderly expansion of capital” due to rapid growth, and the creation of monopolies that prevent higher value growth. These sectors include technology, internet and services companies, education, gaming and real estate.

Examples of recent antitrust enforcement include:

Internet companies: The State Administration for Market Regulation (SAMR) has since 2020 issued fines and imposed other disciplinary actions on many tech giants for antitrust activities, which represents a significant shift from the previous laissez-faire approach to regulating the internet sector.
Education: In 2021, regulators moved to target off-campus tuition. The newly revised Minors Protection Law released in June 2021 banned private tutoring firms from providing primary school-level curricula to pre-schoolers. Later, the State Council issued new guidelines that greatly restricted the operations of private after-school tutoring businesses and their ability to raise capital, including from overseas.
Real estate: Despite some recent policies designed to provide real estate firms with more financing support to avoid a housing market crisis, Beijing has continued to emphasise that “houses are built for living in, not for speculation”.
Pricing: Repeated COVID-19 lockdowns in 2022 led to spikes in price gouging due to supply chain disruptions, hoarding and panic buying from citizens fearful of being locked in their homes. In response, local market regulation bureaux across China issued multiple regulations on food pricing and have continued to prosecute violations even after the zero-COVID policy was dismantled in December 2022. The government has also repeatedly scrutinised pricing of COVID treatment-related drugs and materials as well as monitoring the price of semiconductor chips in 2021 amid a global chip shortage.

Other priority sectors

However, common prosperity is broader than antitrust and will likely be expanded to other sectors. At a fundamental level, common prosperity is about raising the living standards of the less wealthy and reining in some of the perceived capitalist excesses of large companies. Thus, in addition to the antitrust examples above, other common prosperity priority sectors highlighted in local and central policy documents include healthcare (particularly infant care, medicine and elderly care), energy, green technology, agriculture, unemployment and corporate donations. Ultimately, businesses will need to understand common prosperity not just to be compliant in China, but also to be successful – they must learn how to position themselves in a way that addresses common prosperity goals.

Aligning the healthcare sector with common prosperity priorities may have repercussions for businesses. As China grapples with falling birth rates and an aging population, policymakers are aiming to make it more affordable and easier to take care of children as well as the elderly. (Demographic issues were a large driver of the recent education sector off-campus tuition reforms, demonstrating the drastic measures the government is willing to take to address the issue.) The government also plans to increase medical resources in rural and underdeveloped areas, hoping that these policies will lessen the burden on lower-income families and incentivise more childbirths in the process.

Companies should also expect continued implementation impetus behind taxation enforcement. In recent years there have been multiple instances of increased enforcement of existing tax laws against celebrities and other high-income individuals over tax evasion and corruption. There is widespread speculation that new wealth and property taxes might be implemented as part of common prosperity, although new taxes have not yet materialised and may not ever, despite discussions in late 2021 around a property tax pilot.

Finally, companies can expect increased government attention to clean energy, which aims to lessen pollution in cities, create new jobs and make green energy more affordable; food security, a major priority in recent years due to the strain that the COVID-19 pandemic placed on supply chains, increased pork prices due to swine flu and grain shortages due to the Russia-Ukraine War; and unemployment, especially among China’s youth, with subsidies for training programmes, internships, startup incentives, and apprenticeships. Youth unemployment has spiked in recent years due to a variety of reasons, including zero-COVID, macroeconomic restructuring, issues in the real estate sector and the tech crackdown.

The corporate sector will also likely feel more pressure in the coming years to donate more and establish corporate social responsibility programmes. Many recent corporate donations have focused on the initiative’s priority issues highlighted above. The Hurun China Philanthropy List 2022, released on 16 November 2022, showed that 49 tycoons in China donated a record USD 10bn to charity. The top 10 philanthropists donated nearly USD 8.7bn, representing 6.3% of their collective wealth, more than double 2021’s USD 4.03bn. Most donations went to – in order – education, disaster relief and rural revitalisation. Such donations by corporates from a range of industries have continued in the first months of 2023.