Redistribution of wealth is Xi’s great challenge; will China make the rich pay?

Redistribution of wealth is perhaps Xi Jinping’s greatest challenge. China’s political and economic stability is at stake in the future of the distribution of wealth, and the world will witness if CCP Chairman succeeds and at what price. The idea of “common prosperity” has become a major topic of political debate in China in recent months. The idea is behind the latest regulations on tech companies, say the analysts.

Common prosperity is generally understood to mean moderate wealth for all, but it is a vague slogan often used by the Chinese government. At the financial and economic meeting on August 17, Chinese President Xi Jinping spoke of “common prosperity” – moderate prosperity for all. 

Xi Jinping reached out to the growing ranks of China’s billionaires. Under a scheme called the “third distribution,” wealthy Chinese will be expected to contribute more to shared prosperity across the country by the middle of the 21st century. “We need to reasonably adjust the excess income and encourage high-income people and companies to pay more to society,” Xi said.

So will the government force the wealthy Chinese to pay more taxes, which will help resolve the resulting income inequality?

Why is redistribution of wealth in China required?

As per the open sources, income inequality in China has increased over the past few decades. Thomas Piketty from the Paris School of Economics professor estimates that the wealthiest 10 per cent received 41 per cent of national income in 2015, up from 27 per cent in 1978. At the same time, the proportion of the population with low incomes fell to about 15 per cent, down from 27 per cent in 1978. In 2021, the average income of Shanghai residents was 7,058 yuan ($ 1,090) per month, which is far more than 4,021 yuan ($ 620) for citizens in other cities in China and 1,541 yuan ($ 238) in the rural population.

The Chinese government claims that the country has won a complete victory over absolute poverty in 2020, during the peak of the COVID-19 crisis. As per the claim, the entire poor rural population of 98.99 million was lifted out of poverty. Since 2013, China has invested $ 246 billion in related changes. The 2020 claim marked the first step towards fulfilling the long-term commitments of the ruling Chinese Communist Party, which celebrated its 100th anniversary in July.

Corruption and undeclared incomes make it difficult to gauge the level of inequality in China accurately. It is assumed that the level is significantly higher than official estimates.

How does China prepare for the redistribution of wealth?

Warning the wealthy Chinese to share their wealth for the sake of common prosperity, Xi said in the meeting, “We need to reasonably adjust the excess income and encourage high-income people and companies to pay more to society.”

Beijing is preparing a “third distribution,” according to which wealthy Chinese should contribute more to achieving “shared prosperity” by 2035.

The creation of wealth in China and inequality

Until recently, China had political socialism combined with economic capitalism. China created one of the most favourable conditions for business, which led to rapid economic growth. However, with economic growth, the stratification between rich and poor grew, which could ultimately lead to discontent in society. 

The opposing forces

 The Chinese leadership understands that if capitalism continues to develop, the surging middle class population will sooner or later demand more. It may start with economic and then political freedom, which will undermine the power of the CCP. TIt can be perceived especially painfully right now when the communist Party has abandoned the change in power. Xi Jinping remains the country’s leader for a third term, which has not happened since Deng Xiaoping.

Xi Jinping says that the main thing is not economic growth but justice and stability. The Chinese authorities see a way out in reducing the difference between incomes by reducing the power of the rich. One side of this process is the struggle with the oligarchs, which the Chinese authorities are already waging. The second is the “general welfare” policy, when there is no significant gap between the rich and the poor. Hence the idea of ​​a “third redistribution” plays out.

But the Chinese government cannot completely ignore the impact of policies on wealth redistribution, given that higher taxes on high-income groups and capital gains could constrain investment and lead to outflows abroad. 

Effects of the third wealth redistribution

Although the idea is positive, such measures cannot but affect economic growth. The business will earn less, which means that it will pay fewer taxes. The budgetary spending on social support measures will continue to grow. And then, perhaps, the Chinese leadership will again have to return to the “capitalist” development path. Faced with an economic confrontation with the United States, China cannot afford economic weakness.

How do the Chinese and the world view the solution?

The Chinese media emphasizes that shared prosperity does not mean prosperity for the few, but at the same time, there is no question of any form of equalizing the distribution of money right now.

Some analysts say that it might be achieved by slowing down the privatization in education, care for the elderly, or the provision of medical services because the authorities will become more strict in monitoring the prices and availability of services.

The western world thinks it will be achieved through income redistribution, taxes, social protection and universal education. China may increase the share of a group of citizens with an average income in the economy rather than pulling down the rich.

The economic growth in China has slowed even more than the economists had predicted. There is also a decrease in the level of spending by Chinese consumers. Bejing is expected to support economic growth by reducing the required reserves ratio and other measures.

On the other hand, this year, the main focus for Beijing may be finding solutions to long-term problems like the fight against the growth of public debt and risks in the huge real estate market.

Conclusion

In my opinion, shared prosperity may not be about averaging income but about creating a fairer society where everyone will have the opportunity to succeed and accumulate wealth. The country’s authorities may rapidly improve the market economy, balance regions’ development, coordinate industry development, and support small and medium-sized businesses along with welfare measures. 

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Joseph P Chacko
Joseph P Chacko
Joseph P. Chacko is the publisher of Frontier India, portal publishing news and current affairs. He holds an M.B.A in International Business from the Maharishi University of Management, Iowa, USA. Twitter: @chackojoseph *views are Personal.
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