This piece was coauthored by APCO Greater China Office Intern Julian Snelling.
At a speech delivered in August 2021 to China’s top-level economic policymaking body, President Xi Jinping stressed the importance of achieving “common prosperity.” While not new, this term has regained significance in recent months, with calls to “promote social fairness and justice,” “adjust excessive incomes” and “encourage high-income groups and businesses to return more to society.”
As a guiding principle, common prosperity originally referred to a Maoist egalitarian ideal whereby national wealth and prosperity would be shared among all people equally. Deng Xiaoping however saw common prosperity as the ultimate – rather than immediate – objective, understanding that market-oriented reforms and opening the country to foreign investment would inevitably lead to socio-economic inequality. Xi Jinping’s recent revival of the term signals another shift in the trajectory of common prosperity, seeking to develop a prosperous society overall rather than uniform egalitarianism.
This context offers insight into the development of common prosperity and the changes it might bring to China’s economic policymaking, regulatory landscape and business environment.
WHY IS CHINA RENEWING ITS FOCUS ON ACHIEVING COMMON PROSPERITY?
During the past four decades, China’s economy has experienced unprecedented growth. A rise in real incomes helped to lift an estimated 850 million people out of poverty, allowing China to officially claim victory over absolute poverty in early 2021. This growth, however, has been uneven. Significant income and regional inequalities have intensified, posing a direct impediment to China’s transition from its previous investment-driven manufacturing-led economic growth model, towards one driven by domestic consumption.
While the government has endeavoured to address these challenges since the 2010s, it recently doubled down on such efforts. Regulators started targeting the country’s paid after-school education and tech sectors for exacerbating societal inequalities. A raft of new regulations, directives and fines have targeted some of the country’s biggest private companies, including a recent instructive ordering food delivery platforms to guarantee above minimum wage pay and insurance for their workers.
While specific details on achieving this goal remain scare, renewed emphasis on common prosperity signals that addressing social and income inequalities will become one of China’s long-term guiding principles as it targets its Second Centenary goal of building a “strong, democratic, civilized harmonious and modern socialist country” by 2049.
HOW WILL COMMON PROSPERITY AFFECT MNCs?
While there have been no clear signals of any planned top-down structural income re-distribution reform, a so-called “tertiary distribution” mechanism is being touted as a key component of the common prosperity initiative. Tertiary distribution refers to poverty alleviation and other social activities carried out by private actors through donations, social funds and volunteering.
Subsequently, responding to the call for common prosperity, China’s private sector pledged to increase philanthropic efforts and social responsibility programs. For example, Alibaba announced it would invest RMB 100 billion (~USD 15.6 million) into a newly established “Ten Initiatives to Promote Common Prosperity” fund. The fund focuses on five priority areas and including developing technology to support the digitalization of underdeveloped areas and support for the growth of micro, small and medium-sized enterprises. Likewise, Pinduoduo pledged to allocate all its profit since going public (~RMB 10 billion) to launch an initiative supporting the salaries of China’s poorest rural workers.
The biggest implication for MNCs will be their need, regardless of sector, to align themselves with the government’s wider socio-economic agenda and demonstrate their ability to make a positive impact in addressing social and economic inequalities. Beyond enterprises, individual entrepreneurs as well as government agencies have also pledged support to charities, funds and various social initiatives. Donations from Chinese billionaires reached a record of USD 5 billion by August 2021, exceeding total donations in 2020 by 20%.
Furthermore, the People’s Bank of China stated on August 20 that it is important to “make promoting common prosperity the starting point and focus of all financial work.” As a result, MNCs will need to be vigilant and responsive to possible changes in both government focus, as well as consumer attitudes as the national common prosperity drive develops. Notably, MNCs in the luxury and high-end consumer goods sector should closely monitor any signals indicating a possible reform of China’s consumption tax system. MNCs, across industries, should understand the ways in which their products and services can help to achieve some of the objectives associated with the common prosperity agenda, and should consider how they can adopt such objectives into their wider ESG strategies.