For decades the aim in China has been the pursuit of growth, building the world’s second-largest economy from a relative backwater on the international stage. Now, the promise from Beijing is to enlarge the economic pie and divide it well.
President Xi Jinping announced plans this month to spread “common prosperity” in what is one of the world’s most unequal major economies, signalling a shift from his predecessors’ pursuit of growth and heralding a tough crackdown on wealthy elites – including China’s burgeoning group of technology billionaires.
Yet the shift comes at a delicate moment. Signs of pressure are emerging in the Chinese economy as it embarks on Xi’s mission, fuelled by the coronavirus Delta variant and raw material shortages.
Figures published on Wednesday show factory output went into reverse in August, slumping to an 18-month low, while the main survey of the services sector showed it took an even greater hit and contracted for the first time since last March.
The spillover effects were felt across south Asia, where countries from Malaysia to Vietnam have come under pressure, not just from falling trade with China, but their own recent coronavirus attacks and the chaos in the shipping industry that has stranded containers many miles from where they are needed, leaving firms badly short of raw materials.
Only the economies of Japan, South Korea and the city-state Singapore have shrugged off the spread of Covid-19 to maintain their recovery from lockdowns earlier in the year.
China, as the first country to succumb to pandemic-fuelled recession and the first to emerge, is however now spooking international investors, fearful that a summer blip in growth could herald a longer-term slump lasting into 2022.
Diana Choyleva, an economist and respected China watcher, believes growth will weaken in the third quarter to 0.9% from 1.3% in the three months to 30 June, “dragged down by manufacturing and export headwinds and China’s struggling small and medium-size businesses”.
She said the Xi’s determination to reduce China’s growing wealth gap was a dangerous move in the midst of a resurgent disease.
“Xi Jinping has embarked on an ambitious but uncharted path as he aims to make good on the party’s promise of a socialist system that does not put the needs of the few over the needs of the many,” said the director of Enodo Economics.
“But he is taking the risk that his comprehensive income and wealth distribution agenda will undermine [what has] powered China’s strong catch-up growth over the past 40 years.”
According to World Bank data, China has one of the highest measures of inequality after the US. It comes after the pursuit of economic prowess, decades in the making since president Deng Xiaoping first moved to open up the country to global trade in 1978, with the acknowledgment that to do so would have to “let some people get rich first” to help poorer areas in the long run.
Under the shift orchestrated by Xi, focus will be on the quality of economic growth, with potential implications for other countries around the world.
Billionaires in general, and the mega-wealthy beneficiaries of the tech industry in particular, have scrambled to appease the party with charitable donations and messages of support.
Nasdaq-listed e-commerce website Pinduoduo said earlier this year it would donate its second-quarter profit and all future earnings to help with China’s agricultural development until the donations reached at least 10bn yuan ($1.5bn). The move prompted its shares to jump by 22%.
Hong Kong-listed Tencent, reading the same signals from Beijing, set aside 50bn yuan for welfare programmes supporting low-income communities, bringing this year’s total philanthropic pledge to $15bn.
Nonetheless, China is moving to restrict domestic companies from listing on US stock exchanges, in a move threatening to restrict the growth of tech firms that had come to symbolise record Chinese economic growth rates and the emergence of rich company bosses.
Rana Mitter, a historian and director of the University of Oxford China Centre, said Xi’s “common prosperity” rhetoric stemmed from genuine concern that previous economic models had created growth at the expense of inequality.
“Party officials also fear that the tech giants and the people who run them are out of control and need to be reined in. And then we must add Xi’s determination to be nominated next year for a third term, that changes to the constitution now allow,” he said.
Mitter warns that Xi is constructing a broad populist agenda that will make his bid for a third term in power unstoppable.
“He might not be facing a general election, but he wants social media to be behind him, cheering on policies that bring tech billionaires, property magnates and even film stars down to size,” he added.
Natwest’s China economist, Peiqian Liu, said Xi’s attempt to close the wealth gap “marks the beginning of bureaucratic-level reforms whereby local government officials will no longer be pressured to achieve lofty GDP targets; instead, they will be assessed by a variety of indicators to achieve higher quality growth.”
He said it was unclear exactly how far reaching the reforms will be, though they are likely to “focus on improving the social safety net, improving labour productivity, reducing systemic financial risks and achieving more balanced growth in the long run”.
He added: “As a result, we see some downside risks for real GDP growth in the short and medium term but we expect the growth momentum to be more balanced and sustainable. We also expect the policymakers to put more emphasis on risk management, especially the debt risks and data security.”
Some analysts believe evidence of weaker growth rates will lead to China’s central bank easing borrowing rules to allow a mini-credit boom. With more borrowing by consumers and small businesses, the pain of increased taxes can be absorbed and the economy can return to higher levels of growth.
Mitter said Beijing faces a more fundamental problem as it considers how to balance the virus and the need to maintain economic growth.
“One of the difficulties at the moment is reading how Xi will answer the question: what is the economic future if your plan is to eliminate the virus.
“For instance, will China’s huge middle class be able to go on foreign holidays? The expansion of foreign holidays has not only kept a large number of people satisfied, it has given Beijing huge influence in neighbouring countries,” he said.
“If the virus means tourists and business people cannot travel and you don’t have easy connectivity for trade and leisure, then you need to consider a radically different economic model.”