China shows that inequality is not inevitable

Migrant workers Sun Chang Jie and Li Ting show the children they left behind. (Source)

Economic policies that allow the rich to get richer on the monumental hope that resources will trickle down to the poor - and the middle class - have been widely challenged, but there has been contemptibly inadequate action by governments. 

A positive sign had been that the British government of the traditionally "austerity" party had largely dumped that policy, even before it became apparent with the Covid outbreak that the state's smoothing of income was imperative. But there has been little movement beyond that. In addition, Donald Trump campaigned on taking action to rein in the 1 per cent reaping the bulk of value society as a whole was generating, but betrayed his supporters by cutting tax only for the rich elite and doing little else to lift the living conditions of the bulk of society.

So it is gratifying to observe this week how China is leading the way in the world to actively launch policies that compel high-wealth citizens and the biggest companies, particular the huge tech entities, to contribute in a more socially responsible way to the goal of diminishing the inequality that sits as a ticking bomb at the base of most developed nations.

This commitment to strengthen the common good shows that gross inequality is not inevitable, and a society that understands solidarity will make the accommodation necessary to participate in the necessary redistribution of resources.

The Business Standard reports:

At Tuesday’s meeting of the Communist Party’s Central Committee for Financial and Economic Affairs, the government detailed new strategies to target the [social elite]. Officials vowed to “strengthen the regulation and adjustment of high income, protect legal income, reasonably adjust excessive income, and encourage high-income groups and enterprises to give back to society more.”  

As Fortune put it:

Chinese President Xi Jinping vowed this week to "adjust excessive incomes," putting the nation's super-rich on notice that the state is preparing to combat economic inequality by redistributing private wealth. 

The South China Morning Post in Hong Kong quoted state media as saying "this means the country would focus on moderate wealth for all, rather than just a few". Companies would be expected to make funds available for social purposes, but on the business side new rules could control speculation through property and inheritance taxes, and target anticompetitive practices by internet companies 

A day after this announcement the tech giant Tencent Holdings said it had set aside US$7.7 billion to pursue the government's goal for "social prosperity". 

Morgan Stanley analysts said in a report Wednesday the goal was “to increase the middle-income group’s share of the economy.” The report adds:

Elaborating on the ‘common prosperity’ objective, China has affirmed its effort to rebalance the economy toward labor, tackling social inequality with redistribution, social welfare, taxes and inclusive education. 

That reference to education is linked to the crackdown on the high fees charged by private tutoring companies. It was becoming too much of a drain on families to send their children to the extra classes needed, so the poor were shut out.

Tencent said its ads business only grew 5 per cent from the previous quarter as a result of “reduced spending by companies providing after-school tutoring due to regulatory changes”. 

The news reports tell how the government is aware of some impact on growth but the impetus to act comes from the mounting inequality of incomes. "The lower-earning half of the population has seen its share of national income fall to about 15%, down from about 27% in 1978," according to CNBC.

The Business Standard elaborates:

“China’s wealth and income inequality has worsened to such a serious level that policy makers have no choice but to face it and make addressing it a priority,” said Larry Hu, head of Greater China economics at Macquarie Group in Hong Kong. Xi’s meeting “brought the issue to the highest level” and is an important signal of future policy direction, he said.

Carol Liao, China economist at Pimco Asia, said capital gains taxes are also an option, as well as other measures to improve income distribution, like enhancing social security programs, providing incentives for charity [the social prospeity fund, for example] and more government transfers to less developed regions.

At Xi’s meeting, officials pledged to provide conditions for people to enhance their education and move up the income ladder. They also called for promoting the equal access to public services by improving housing supply, elderly care and the medical system.

The government identified the eastern province of Zhejiang, home to Alibaba Group and known for its robust private sector, as a pilot zone for the new initiatives.

Last month, Zhejiang released detailed plans for raising per capita disposable income to 75,000 yuan ($11,563) by 2025, which would be a 45% increase within five years. It also wants wages to account for more than half of its gross domestic product, and to lift its urbanization rate to 75%.

To achieve those goals, the provincial government will encourage workers to bargain collectively for wages; listed companies to raise cash dividends to shareholders; and farmers to pursue entrepreneurship strategies. It will also promote the development of financial products to benefit residents.

The road map also said the government will better protect the rights of those in new forms of employment, including delivery workers and drivers working for ride-hailing companies, and implement tax benefits for philanthropic donations.

It’s also worth noting that Tencent and its subsidiaries have been pushed to reduce the time young people can play video games. 

The Chinese government's strength of purpose presents a model for all countries in showing courage against the usual powerful interests in rebalancing the world's over-flowing inventory of disordered economies.

Ω For more on this topic of morals and the market, go here and here

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