China’s Wealth Tax
In the last week, Jackson Hole turned out to be a non-event. The much-awaited US Federal Reserve Chairman’s speech, a sort of state-of-the-union address on the status of monetary policy, merely served to confirm the status quo.
Interest rates may turn up in the time frame that the markets seem to have consensus on (by end of 2022), and there is no indication from Mr Powell that there will be much change from that. Maybe the massive bond buying, which injects liquidity into the economy, will slow down towards the end of this year, but other than that, the markets took everything he said in stride.
Bond markets were steady at around 1.35 percent for the US Ten Year Treasury bond and the equity markets reached new record highs. And the dollar, gold and even bitcoin remain within boring, established trading ranges. No need to change any views on market direction or portfolio allocations in the wake of Jackson Hole; just stay the course. No need for a further commentary on the obvious, repeated many times in the last year and a half.
The other explosive news in the world this week is the abysmal and monumental failure of US foreign policy and military execution in Afghanistan. Again, what is there to say about that? The Americans got it wrong, wasted twenty years, 2 trillion dollars and hundreds of thousands of innocent lives. To achieve what? Nothing. Absolutely zip.
And with the disastrous pull-out, the negatives on American involvement in Afghanistan have piled up high, with geopolitical implications for another 20 years. All interesting to discuss, but in this commentary, I would prefer to confine myself to economics, business and financial markets.
As such, this week, we will continue to look at what is going on in China.
It has been bursting with news over the past few weeks.
In particular, there is the new direction that emanates from President Xi’s “common prosperity” speech. As the Wall Street Journal put it, Mr Xi’s “rhetoric on inequality is far more than just empty sloganeering.” He means business.
The South China Morning Post’s Zhou Xin put it this way:
“China’s common prosperity push is long overdue, but the rich don’t need to worry about their wealth
Xi Jinping’s rhetoric on common prosperity, which calls for the people to share in the opportunity to be wealthy, has surged this year
Notion of common prosperity dates back to the 1950s and Mao Zedong, before fellow former leader Deng Xiaoping repeatedly mentioned the idea in the 1980s
Xi Jinping has emphasised wealth redistribution within China, referring to common prosperity goals at least 65 times in speeches and meetings this year, more than double the 30 mentions in all of last year.
Beijing’s push for so-called common prosperity has fanned concerns whether China’s own Gilded Age of massive wealth creation is coming to end.
While it is probably true that money cannot have its way like it used to, it would be wrong to worry about a state-sanctioned wave of redistribution of wealth.
To start with, the goal of common prosperity is long overdue. The search for a fair society is deeply rooted in communism and China’s traditions, the two sources of official Chinese ideology.
It is a Confucian ideal of a community shared by all, and while it has never really been achieved, it has never faded as a pursuit.
Common prosperity became an empty slogan in a country that has more billionaires than the United States
Mao Zedong tried to create an egalitarian society by eliminating private property, but this only made everyone poor.
Deng Xiaoping then unleashed China’s economic potential partly by telling people “to get rich is glorious”, but this created one of the world’s widest wealth gaps.
Common prosperity became an empty slogan in a country that has more billionaires than the United States, but also has around 200 million people living on a monthly income of less than 2,000 yuan (US$309).
There is no wonder that Wall Street bankers feel China is more capitalist than the US. These comments are definitely not compliments for Beijing.
What is China’s common-prosperity strategy that calls for an even distribution of wealth?
After China completed its goal of eradicating absolute poverty, it is quite a natural development for Beijing to look at overall income and wealth structure.
Secondly, China’s pursuit is through high quality growth, instead of a class struggle. In other words, it is not targeting the rich, but placing a priority on helping low-income groups.
One particular concern is whether the government will force the rich to hand out wealth by encouraging so-called third distribution or charity, but such a worry is unnecessary.
As the party secretary of Zhejiang, the province designated to showcase how this will all work, said in July, the new drive does not mean to “kill the rich to help the poor”.
The outcome of China’s common prosperity will decide whether the country’s economic growth can be put on a sustainable track
It will also be achieved through institutional arrangements instead of campaigns, and tax could play an important part. China’s current tax regime is, roughly speaking, a friend of Big Tech and the rich, but not a friend of wage-earners and small businesses, and this must change.
More importantly, it is a whole-society project instead of pure economic policy, although the common prosperity push has far-reaching implications for China’s economic prospects.
The outcome of China’s common prosperity will decide whether the country’s economic growth can be put on a sustainable track.”
This article appeared in the South China Morning Post print edition as: Common prosperity push no threat to rich.
Zhou Xin,
South China Morning Post
30 Aug 2021
Let’s put things in perspective.
The last forty years since the Deng Xiaoping reforms have enabled the CCP to eliminate absolute poverty, which has also long been a UN Millennium Target. This major achievement was announced earlier this year with a sense of great achievement and attracted accolades from around the world. While it brought on fears of a powerful contestant in the global economy from the West, there was no question that this alleviation of poverty is widely admired by at least three quarters of the people on the planet.
The way it was accomplished is that China has used capitalism to propel the country forward. If “absolute poverty” is no longer the target, then a new target – that of “relative poverty” in the country – can now be addressed. Relative poverty is also known as inequitable distribution of wealth and income, which as the South China Morning Post article above argued, can be just as pernicious.
The old communist way of running economies in the former Soviet Union, India and many of the countries that first embraced Marx’s utopian ideals could not beat the capitalist way. In a world that has to live with the realities of corruption, power brokering and incompetence, central planning by bureaucratic elites failed miserably. It definitely failed in China too, during the early years of the post-civil war period, from 1949 to 1979.
Since then, China has forged a middle path, embracing capitalism fully, and yet never quite renouncing the tenets of socialism and even communism. The country is still, after all, run by the “Communist” Party.
What has been allowed to happen is that people who might have been executed, jailed or denounced for being “capitalist roaders” in the Mao era were allowed to flourish in the new economy since 1979. In their turn, they drove businesses with unsuppressed traditional vigour, and hence the economy, to great heights, especially since 2009 when the West ran into economic problems as a result of the Global Financial Crisis.
Over forty years, this economic system, on a public sector core taking care of vital economic activity (like infrastructure and banking) with an accompanying private sector running peripheral businesses (like technology and trade), has produced an economic miracle beyond anybody’s wildest dreams.
And excesses in the system have inevitably appeared. As pointed out in the SCMP article. It is not unique to China.
In the US, the same excesses of capitalism have emerged over roughly the same period of time. 1979 (the year of the Deng reforms) is just one year before the Reagan revolution in the US began. Before that, there was a very well-defined middle class in America. The following three terms of Republican government tore away at the fair distribution of rewards in the economy and after Trump’s tax cuts to the wealthy, and the rapid rise of the stock market engendered by zero interest rates in the wake of the covid crisis, the inequality of wealth has worsened to breaking point. The middle class in America has been collapsed into an economy with just rich, poor and poorer.
Over the same forty years, from 1980, the GDP of China has risen from less than 1/5th that of the US to exceeding it, on a PPP basis, by 2014. It has been the same class of entrepreneurs that brought about growth in both economies, but after the dust settles, the benefits of GDP enlargement have basically ended up in the hands of the top 1 percent. This is an untenable situation.
It is almost like during the same time frame in history when China eliminates poverty in its country, America has recreated poverty. And central to that strange phenomenon is the practice of capitalism.
The problem is that capitalism does a very good job at creating wealth. It stops there. It is abysmally inefficient at the next problem – that of distributing that wealth. You need socialism to do that.
There needs to a rebalancing of the fruits of economic growth in both countries. If this does not happen, social structures will likely break down. Throughout history, such disparity of wealth has been one major cause of civil strife and societal turmoil.
If Republicans are in power in the US, this problem of economic inequality will never be aired, much less addressed. When Democrats run the government, then some steps may be taken to reverse some of the disparities. Whichever the case, the country is deeply divided by vastly different viewpoints of how the economy and society should progress.
Capitalism has been interpreted as synonymous as Democracy. Socialism and Communism the same as Totalitarianism. This is a blinkered and essentially incorrect view. China is showing that capitalism and socialism can co-exist in a democratic society with elements of paternalistic government not amounting to totalitarianism. The tenets of such a system was invented by Lee Kuan Yew of Singapore, which Deng Xiaoping learnt and adopted in China.
It is not all black and white as in the American view, a simplistic system that can be run by fools, as in a Warren Buffett world. It is instead a series of complex greys that need competent leadership, with intelligence greater than eloquence, to execute pragmatically in order that the results are what society actually wants and that can move society as a whole, not segments of it, forward.
Republicans continue to like “trickle down” economics because wealth creation in such a system starts at the top, which is what they want in order to retain political control. Democrats are now moving in the direction of emulating the rest of the west, particularly European countries, where there have long been better health care, better educational financing and stronger safety nets so that the masses would benefit and then support their incumbency in power. As it stands, given stronger consumerism in the US than elsewhere, and the privatization of what should rightly be public goods, the bulk of Americans are getting more indebted, poorer and increasingly found on the wrong side of the 1-99 percent divide.
It is therefore peculiar that given that both countries, the US and China, face almost the same problems of inequality, the Americans think that whatever China does is inappropriate, using human rights as a cudgel in China bashing, and labelling anything that can be cast in the image of authoritarianism to be barbaric.
Now, we are seeing a new model of governance brought about by the very capable people who run the Chinese government. They have, till now, let the same class of entrepreneurs run unconstrained and get as rich as they possibly can, and certainly as rich as their American counterparts. Now, the CCP has defined for the billionaires what “enough” means, when most of these people don’t seem to know.
The current developments in China, as per the CCP’s new rules on common prosperity, is in fact a wealth tax. Given the fact that indeed, the Chinese government is all powerful, its policies will not be challenged. When it says that the rich need to think of recycling some of their wealth, they don’t say no; they ask how much? And of course, it will now be competitive “recycling” among the uber rich.
Tencents Holdings has started the ball rolling with a US$7.7 billion (RMB 50 billion) fund for helping to redevelop poor rural regions in China. Does this hurt the owners of the company which is valued in the trillions? Absolutely not. Other billionaires are joining in.
If anything, this development in China will make for a more sustainable economy. Maybe there will be a few pissed off billionaires, but I cannot imagine that the rest of society would not be happier for the government’s policy. The British levelled their society in the interwar years, by imposing huge taxes on the aristocrats and probably kept the nation together to this day. The Americans until now, have not shown any inclination to do the same, even though the problem is the same as in feudal England. The Chinese are not waiting.
There will still be billionaires in the world, but is there a need for multi-billionaires or trillionaires in this world whose immense wealth are basically not doing much for the rest of their countrymen? As many commentators have said, money spent by two billionaires on 11-minute-long space flights could have paid for the vaccinations of every person on earth, and spare us all from the disaster of Covid 19 turning endemic.
Who, with greater wisdom, would not have preferred money spent on vaccinations?
All in all, whether billionaires in the US and China can be encouraged to do more for their compatriots, remains to be seen.
Call it what you will, but the CCP is implementing the world’s newest wealth tax, somewhat voluntary but not really – wealth taxation with Chinese characteristics.
It helps us all, if it works.
Wai Cheong
Investment Committee
The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.
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