Xi’s ‘common prosperity’ forces Wall Street to rethink China risks

Reforms to reduce wealth inequality bring pitfalls and opportunities for private sector.

A week after details of Chinese President Xi Jinping’s new political slogan “common prosperity” were published in a Communist Party journal, investors on Wall Street are coming to the realization that the world’s most populous country may be on a significantly different path from before.

Reducing wealth inequality and greatly expanding the middle class are the main pillars of the new era. A timeline for the program became public for the first time: “Remarkable and substantive progress” toward common prosperity by 2035.

“The rules of the game have changed,” said Leland Miller, CEO of China Beige Book, an analytics firm advising investors on China.

Taylor Loeb, an analyst with Trivium China who focuses on China’s financial markets, said the changes will not be immediate, but are certainly in store over the long haul.

“This is going to be a very long, drawn-out process, instead of a big bang,” he said.

The pillars of the common prosperity drive were first made public last week in the Communist Party journal Qiushi, which cited the details from a speech Xi made in August. The Chinese leader warned of the perils of income inequality, calling for an “olive-shaped” distribution of wealth and setting a goal of achieving “common prosperity for all” by the middle of the 21st century.

 

“In some countries, the wealth gap and middle-class collapse have aggravated social divisions, political polarization and populism, giving a profound lesson to the world,” Xi said.

Though no specific metric was cited as to what defines common prosperity, Xi’s plan focuses on assisting lower income Chinese with social assistance programs, subsidized housing, and policies to curb the rich and their “unfair wealth.” Such policies include a nationwide property tax plan – which has already faced resistance – and going after fraud and tax evasion. Xi also called for a strengthening of public welfare and charity, and for incentives for enterprises to give more back to society.

The common prosperity drive, which first made its way up the party agenda when Xi mentioned it in his August speech, follows a wider monthslong crackdown on everything from U.S.-listed Chinese companies to video games and extracurricular education services like tutoring.

“What we’ve seen, step by step, is in just about every phase of life and policy, the Communist Party reassert its power to the detriment of the markets,” said Scott Kennedy of the Center for Strategic and International Studies, a Washington-based think tank.

Investors in companies like tech giants Alibaba and Didi, or the New Oriental Education & Technology group, saw their stocks plummet and shareholders lost billions due to Beijing’s policy decisions.

Kennedy said access to capital for smaller enterprises in China is already trending downward, and private entrepreneurs will only be less encouraged to invest in China as the state’s role in the market increases.

“They may end up achieving common poverty if the state goes too far,” he said.

Still, broader investment into China from some American companies was undeterred. BlackRock, which this year became the first foreign-owned company to operate a wholly owned China mutual fund business, recommended investors increase their financial exposure to the country by as much as three times over.

 

Firms like BlackRock with a significant footprint in China are unlikely to be dissuaded by Xi’s common prosperity push, but Miller said the days of companies blindly entering the Chinese market as a default expectation from their shareholders may be over.

“The idea was, eventually we’ll figure it out, eventually we’ll make money, eventually our partners on the ground will steer us in the right direction. There’ll be some growing pains, but, you know, we’ll ensconce ourselves and we’ll grow. I think that’s an incredibly naive view right now,” he said.

The term “common prosperity” was used by Mao Zedong in the 1950s, and by Deng Xiaoping when instituting private sector reforms in the 1980s that precipitated China’s astonishing growth in the decades that followed.

At the time, Deng said it was necessary for some people and parts of the country to get wealthy first to fuel growth as a means for common prosperity, but four decades later that growth has also led to a severe urban-rural divide and wealth gap.

Xi stated a goal of solid progress in the distribution of public services like health care and education throughout the country by 2035, and it is in the poorer, more rural regions where the most progress is to be made.

Loeb said this is not the end of opportunity for business in China, but a shift toward different opportunities.

“These could be things like focusing on rural areas and revitalization,” he said, noting that Western agricultural technology companies may be a sector in a position to benefit from common prosperity policies.

Political hurdles to the flow of capital remain, however, which could negate the value of new investment opportunities for some American companies.

“The plan doesn’t make a difference if you can’t get investors or startups to come there because they can’t get their money out,” said Aaron Magenheim, CEO of the agricultural consulting firm AgTech Insight.

Ultimately, it may be the end of one reform era – in which the Chinese economy grew at an astonishing pace and millions became rich – and the start of another, in which the social components of the party’s policy are more directly tied with the Chinese economic structure.

“This is Xi Jinping saying, ‘OK, we’re there. We did this massive, incredible reform process. People got rich. We made this promise 45 years ago to the people of China. Now it’s time to make good on that promise,” Loeb said.

Author: JACK STONE TRUITT, NIKKEI Asia