Evaluation: Widespread prosperity and coverage implications

City view of Shanghai. /CFP

City view of Shanghai. /CFP

Editor’s note: Wang Tao is the chief China economist at UBS Investment Bank. The article reflects the author’s opinions and not necessarily the views of CGTN.

Common prosperity has become a key theme in China’s policy documents and recent speeches by senior leaders. What does it entail and what are the likely policy implications?

Common prosperity is not a new theme. The 18th National Congress of the Communist Party of China (CPC) in 2012 stated that China should stick to “the path of common prosperity,” calling it “the fundamental principle of socialism with Chinese characteristics.” This marked a turn from earlier years when the government encouraged “some people, some region to get rich first.”

The 2013 reform blueprint of the Third Plenary Session of the 18th Central Committee of the CPC specified ways to achieve common prosperity. They include supporting labor income growth, pushing for more equal basic public services, reforming the income distribution system through tax reform, social protection enhancement and transfer payments; expanding the size of the middle-income population and narrowing the regional, rural-urban and sectoral income gaps.

The 13th Five-Year Plan in 2016 implemented some specific measures to further the objective of common prosperity, including reducing poverty, expanding the coverage of pension and health insurance and reforming personal income tax and consumption tax.

But its importance has increased in the 14th Five-Year Plan (2021-2025) and beyond. The 19th CPC Central Committee in 2020 set out China’s long-term development plan to become an advanced modern economy by 2050 after the country has achieved a “moderately prosperous society in all respects.” China, it said, is to make “solid progress” towards common prosperity by 2035 and “basically achieve” common prosperity by 2050. 

In our view, this means a more equal society with better social welfare as the country becomes richer and more advanced. 

Chinese President Xi Jinping emphasized in a January 2021 speech and again in August that common prosperity is not just an economic objective, but also about the CPC’s “governing foundation.” That said, the top leadership has repeatedly emphasized that common prosperity is not egalitarianism, and is an objective that will be achieved in multiple phases over time, and through experiences from regional pilot programs. 

In line with this long-term plan, the 14th Five-Year Plan called for the formulation of an action plan to facilitate common prosperity, highlighting the increased emphasis on the theme and imploring various governments to roll out accompanying policy measures.

Read more:

Addressing inequality: Zhejiang Province for common prosperity

A view of Hangzhou City, east China’s Zhejiang Province. /CFP

A view of Hangzhou City, east China’s Zhejiang Province. /CFP

What’s new and what has not changed

The government’s common prosperity drive calls for:

1) increasing labor income share and creating channels for various property income growth, including through capital market investment;

2) increasing the provision and equity of public services;

3) enhancing the social safety net;

4) reforming income distribution – including through tax reform, expansion of the middle-income population, and increasing the income of low-income earners;

5) encouraging the development of the so-called “third distribution” – charity and donations. 

What’s new in the 14th Five-Year Plan is the assertion of the government’s “principal role” in providing basic public services while the 13th Five-Year Plan said that any service that can be purchased by the government should not be operated by the government. 

However, the private sector is still being encouraged to provide “inclusive” services in non-basic public service areas. This shift is consistent with recent regulatory changes in public service areas, including education.

In addition, the 14th Five-Year Plan mentioned restricting income from “monopoly and illegitimate competition,” expanding from the 13th Five-Year Plan’s restricting “income using power and administrative monopoly,” again consistent with recent regulatory tightening on internet platform companies.

Read more:

Special coverage: China battles digital monopolies

A residential property in Yaojiayuan, Chaoyang District, Beijing. /CFP

A residential property in Yaojiayuan, Chaoyang District, Beijing. /CFP

What policies can we expect?

Consistent with the government’s long-term plan, we should expect reforms and policy changes to support household income growth, increase of public services including healthcare and education, expand pension and other social welfare, adjust income distribution through tax reform and regulation, and encourage the corporate world to play a bigger role in common prosperity.

As emphasized in the August meeting of the Central Finance and Economics Committee, we expect these changes to be gradual and the emphasis to be more on increasing household income and improving basic public services and social protection rather than major income redistribution. 

Indeed policy guidelines for Zhejiang’s pilot program are very much along these lines. Of course, there is a risk that policies could take a more populist turn from the general guidelines provided by the 19th CPC Central Committee. Even so, we do not expect major personal income tax reform soon or a quick implementation of a nationwide property tax. 

More details are as follows:

Income policies: Support for employment growth will remain a top priority, and this means continued backing for private sector development, small- and medium-sized enterprises, and services, which are the main contributors to employment and the key to increasing the share of labor income. 

In addition, the government will work on improving the labor protection and wage growth mechanism. Meanwhile, to create more channels for household property income growth, we expect gradual land use rights reform in rural areas and further development of capital markets. 

To help expand middle income group population, the government said it would focus on college and vocational school graduates, skilled labor and migrant workers. For example, the 14th Five-Year Plan aims to provide subsidized vocational training for 75 million person times, of which 30 million are for rural residents. 

Tax reforms: Reforming personal income tax system is necessary given that it has a narrow base and a high marginal rate (45 percent), is regressive and collects less than 1.5 percent of GDP in revenue (1.1 percent of GDP in 2020, or 7.5 percent of total tax income). 

However, personal income tax reform that will result in increased income tax revenue will always be difficult, and any reform will be very gradual – even the 2013 reform blueprint was modest on this front. 

The recent reform in 2018 raised the income tax threshold from 3,500 yuan to 5,000 yuan per month, added deductions, and expanded the coverage to include a few other forms of mainly labor income. 

Future reforms may include more types of income as taxable income (for example, currently capital gains and dividends are not taxed) while also adding deductible items (for example, child credit or cost of child care), though we expect this to be very gradual. 

Consumption tax: It is levied mainly on alcohol and tobacco, fuel, automobiles, and some luxury items. The government’s goal is to adjust the coverage and tax rates, and gradually move the collection from production and import stage to the retail or wholesale stage to give more revenue to local governments. 

However, the latter proposal faces a serious challenge as it would shift tax revenue from poor provinces where the producers tend to be, to richer provinces where the consumers are concentrated. 

In the coming couple of years, we may see some high-end high pollution items subject to consumption tax in the future, but the overall revenue impact should be limited. 

Property tax: Legislation may see some progress in the next year or two. Property tax has been discussed for years and two pilots have been implemented in Shanghai and Chongqing since 2011, but little progress has been made towards a national property tax law. 

As China’s post-pandemic recovery continues and as the government increases emphasis on common prosperity, the legislative process may pick up pace. We believe the principle of property tax application will be such that most people will not have to pay property tax, given the home-ownership ratio of over 90 percent in China. 

Besides property tax, the government will likely work on adjusting land supply policy and increasing rental housing construction to achieve its goal of providing basic housing access. 

Public services provision: We have seen recent government actions to tighten regulations in basic public services areas to reduce the presence of profit-maximizing providers in these areas. Such policies are likely to continue to reduce costs and increase the equitability of public services. 

Meanwhile, to increase access and equitability, the government plans to increase state provision of public services, including basic education, child care and old age care, basic health care, sports and culture, and other social and community services. Some of the new construction may fall under urban development or infrastructure spending. 

Social safety net and insurance: Enhancing the social safety net has been deemed a core part of achieving common prosperity. The government plans to further increase pension coverage (from 91 percent to 95 percent to include more flexibly employed people), unemployment and work injury insurance coverage, and health insurance coverage in the next few years. 

In addition, the government will improve the system of transferring state capital to fortify the national pension, and aim to largely achieve national pooling of pension by 2025, which will make it more portable across provinces. The government will also encourage the development of a corporate annuity plan and commercial insurance.

The third distribution: The so-called “third distribution” refers to charity and donations. The government explicitly encourages companies and individuals to donate to charity causes as this is relatively underdeveloped in China. 

We think the government is more likely to encourage corporations to shoulder more social responsibilities through moral suasion and tax incentives on donations, and do not expect any rule or legislation mandating charity work or donations like India did in 2013. 

Nanjing Road, the eastern part of which is the main shopping district of Shanghai. /CFP

Nanjing Road, the eastern part of which is the main shopping district of Shanghai. /CFP

Likely impact on the economy

Common prosperity related policies could have a major impact on the economy over time, including:

Facilitating economic rebalancing towards consumption: China’s progress on rebalancing the economy has been slow in the past decade and stagnated more recently. Common prosperity policies that support employment and labor income growth should be positive for consumption, and a better social safety net can help lower precautionary saving. 

An increase in public services provision, especially in rural areas, should directly contribute to more services consumption, while a more equal income distribution should help lower the total household savings rate. 

Meanwhile, higher de facto taxes (through stricter collection or expansion of taxable income) and tighter regulation in services areas may discourage investment. The net impact on growth is difficult to gauge as it will depend on actual implementation of various policies.

Leading to sectoral adjustments: Within consumption, common prosperity-related policies may boost consumption of stables and some discretionary goods but limit the growth of high-end luxury items. 

In services, consumption of improved public services would increase but private-sector-provided services will face restrictions. 

Within investment, as the private sector faces tougher regulation in some services areas, private capital may seek opportunities elsewhere, either in government-encouraged technology, renewable energy or advanced manufacturing sectors, or even opportunities abroad. 

Meanwhile, public investment will likely increase in public services areas and move away at the margins from traditional infrastructure and construction. 

Changing household and government balance sheets: As the government tries to keep property prices stable and discourage investment from flowing into the property sector excessively, household wealth may move to build up more long-term financial assets through investment in mutual funds and insurance. 

Meanwhile, the government will have to shoulder the fiscal burden of increased public services and social welfare, with China’s aging population adding to the challenge. 

This may bring more pressure on the government to keep local government debt in check, gradually reduce the state’s other investment activities, divest shares of some state-owned enterprises or transfer an increasing amount to cover future pension liabilities.