Common Prosperity sidelined by short-term economic priorities?

Recent regulatory action and authoritative statements suggest that Common Prosperity – the Chinese leadership’s policy concept to champion a more balanced development model – is being de-prioritized in light of increasing economic headwinds.

Assessment

  • In a speech in late 2020, President Xi Jinping made clear that Common Prosperity would from now on be a central part of China’s “new development philosophy” – that is, a “people-centered philosophy of development”.

  • This policy push is a recognition of China’s unbalanced development model and at the same time tries to refine China’s socialist market economy with reasserted socialist values.

  • The 14th FYP mentions Common Prosperity eight times and calls for the drafting of a national Common Prosperity Action Plan as well as the establishment of the Zhejiang Common Prosperity Demonstration Zone. By 2025, “solid steps” shall be taken in achieving Common Prosperity, and by 2035 “substantive progress” is to be made.

  • To coordinate implementation, the NDRC is currently working out a Common Prosperity national action plan. In Zhejiang, officials are already one step ahead, having in Mid-February launched a local action plan for the Zhejiang Common Prosperity Demonstration Zone – the “Action Plan to ‘Expand the Middle’ (扩中) and ‘Raise the Low’ (提低) (2021 – 2025)”. By this plan, Zhejiang wants to double the size of its middle class by 2025, showing the way for national implementation.

  • The Zhejiang plan aims to accelerate reforms across eight horizontal policy areas that are major sources of inequality – from optimizing the employment system, to a better wealth management or a more redistributive tax system. For instance, regional medical insurance funds shall be consolidated and digital medical services broadened, ensuring a regionally more equally distributed supply of medical services. In terms of policy recipients, the plan targets nine distinct employment groups, with a particular focus on disadvantaged workers intending to strengthen protection and enforcement of labor rights.

  • Against the backdrop of an already weakened economy due to the tech and trade war with the United States and the pandemic, additional recent headwinds – including an energy shortage in fall, fragilities in the real estate market, and now many uncertainties surrounding the Ukraine war – are raising the challenge for economic policymakers.

  • For months now, the main emphasis has been on the “need for stability”. Premier Li Keqiang in his government work report mentioned Common Prosperity only once, and instead made clear that the “complex and severe external environment” will require greater policy support for businesses, including tax and fee cuts. And Xi’s top economic advisor Liu He doubled down ten days ago, vowing to “actively introduce policies that are favorable to the market” in a speech to financial regulators.

  • Therefore, several of the more structural and largely redistributive policies that shall ensure Common Prosperity – e.g. property tax – are likely to be put off until the economic situation is more benign. Other policies, though, such as in the fields of education or medical services, are expected to continue unabated.

Implications

  • Given the pressure to deliver GDP growth and jobs in a challenging environment, policymakers will prioritize macroeconomic stimulus policies, at least in the short term. The statements by Premier Li and Vice-Premier Liu make clear that the last thing the government wants at the moment is to stymie entrepreneurial dynamism and jeopardize economic recovery.

  • It is another reminder that officials have for months now been highlighting that this drive towards a more balanced and high-quality development is a long-term goal and that it is necessary to “make the cake bigger and better” first, and only then “cut and divide it well”.

  • Therefore, the drive towards Common Prosperity won’t disappear anytime soon. This is one of President Xi’s signature concepts and will be gradually refined and filled with concrete measures in an experimental fashion. While the approach towards private capital will likely be more cautious, the future weeks and months will show where Beijing comes down on the often contradictory objectives of both stimulating the economy while wanting to let consumption play a more important role, which would necessitate stronger redistribution.

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