Going after the private sector: Xi on a mission - SOAS China Institute

//Going after the private sector: Xi on a mission

Going after the private sector: Xi on a mission

A smartphone displays the Alibaba market value. – Photo credit: Marco Verch under Creative Commons 2.0

By George Magnus | 24 August 2021

Mao Zedong waged war, so to speak, against the capitalist class in China. Deng Xiaoping and later leaders marched to a different tune, allowing people and private firms under the ‘reform and opening up’ slogan to get rich. Xi Jinping looks to be turning the clock back. Under the slogan of ‘common prosperity’, he is looking to emphasise the ‘socialism’ in ‘socialism with Chinese characteristics’. This is language that until now many saw as little more than rhetoric because China is, after all, the epitome of state capitalism, which everyone knows, right? Well, maybe not, after all.


Social equity and trying to tackle inequality are all very well, but context is important. Socialist systems are typically good at penalising the capitalists to court popularity. Yet, as I shall try and show at the end, they are liable to stifle economic dynamism and productivity growth if their purpose is to simply to penalise, and allow politics to be in command, to use a Mao era slogan. Elbowing aside the need to nurture incentives and institutions to advance development is all too easily done, deliberately or otherwise, in a campaign to show political firmness against the well off.


First, the crackdown on private firms


The last months have been very revealing. The crackdown campaign against tech, finance and data platforms that started with the abrupt cancellation of what would have been the world’s largest ever initial public offering of Ant Financial Group, an offshoot of the tech giant Alibaba, has been followed by a regulatory firestorm aimed at private firms. The value of Chinese firms listed on the Hang Seng Tech Index and the Nasdaq Golden Dragon index has fallen by about 50% since the peak in February. I wrote about this crackdown and what it means for China in the Financial Times here and more recently for the New Statesman here and you can see a full report and timeline at the SupChina website here.


The crackdown on private firms and entrepreneurs has so far been focused on firms and activities where the authorities have concerns about financial stability, antitrust, and about data security and data privacy where new laws are coming into effect on 1st September and 1st November, respectively. Other targets of the party have included what are deemed to be frivolous activities such as music streaming and gaming, or activities negatively associated with inequality, such as private tutoring and conditions of gig workers. While every firm and sector has its own regulatory tale for justification, the bigger picture is one where the government is using regulation and law to bring entrepreneurs  to heel and private firms under the control and influence of the party. It is expected that healthcare, pensions and social welfare, and real estate, for example, could be next in the regulatory cross-hairs.


Now, the promised campaign against high earners


In the last week, though, this crackdown has been joined by a renewed emphasis on social equity and inequality, following Xi Jinping’s chairing of the Central Committee for Financial and Economic Affairs. Xi has been giving a bigger airing to ‘common prosperity’  – a slogan that is really about an agenda for the realisation of social goals – since the beginning of the year. It is, as Xi stated after the meeting the ‘essential requirement of socialism’, and must guide China’s next phase of development towards becoming a ‘moderately prosperous society’.


A translation of the official summary of the meeting can be found here. While lacking in detailed policy measures, the report talks about the need to improve the lot of the middle class and ordinary people and calls for stronger efforts to co-ordinate primary distribution (of income), redistribution, social welfare, and increased taxation. High income earners would be targeted, illegal and ‘unreasonable’ income would be ‘cleaned up’. It is thought that there may be not only higher income tax rates for the better off, but also new forms of long-promised but never delivered taxation such as property taxation and inheritance tax, and new initiatives to expand the levels and inclusivity of social welfare.


This, at least, is the ‘hot take’ consensus on the government’s outlined agenda, but we shall have to see how much of this agenda sees the light of day, whether strong vested interests will prevent more radical taxation of wealth and income as promised, and if the targeting of the capitalist class will let otherwise financially well-endowed party officials and members off the hook.


Writing on the wall


The writing was on the wall for the private sector over a year ago, when Xi addressed a Symposium of Entrepreneurs in July 2020. In front of mostly domestic entrepreneurs but also business folk from other countries with operations in China, he urged them to ‘continuously  improve themselves in patriotism, innovation, integrity, social responsibility and international vision. In this exhortation, which you can read a report about here, he insisted that companies have not only economic and legal, but social and moral responsibilities too.


More business people should have noted what Xi was saying, namely that the private sector was gong to have to succumb to the ideological and political lead of the party, and cultivate compliance with and obedience to party goals in these key areas. There were references also to the party’s desire to recruit more private business people into the party’s networks, offering them ideological education and expecting private firms to support national strategies.


In mid-September that year, the party’s Central Committee issued an “Opinion on Strengthening the United Front Work of the Private Economy in the New Era“, which called for better education of business leaders in matters of government policy and urged them to participate more in state projects.


Two days later, Ye Qing, Vice chairman of the All China Federation of Industry and Commerce (a party-run agency) added some flesh to this ‘Opinion’ arguing that entrepreneurs needed to focus on HR issues in which the party would lead staffing and recruitment. monitoring behaviour, where party representatives would supervise the implementation of enterprise compliance and management systems, and improvements in party-led union activities, such as investing more in employee motivation, training, and the labour environment. The speech is alluded to here. A translated version online no longer exists.


In effect, this was basically about the party moving to influence, if not take over, the private sector from the inside via party committees in private firms, and party representatives taking on key functions, including those close to operational management. In this way, private firms would work to protect the wider economic and social system and get better at upholding regulations and laws.


In November, the Ant IPO was abruptly cancelled following a speech made by Alibaba’s controversial celebrity founder, Jack Ma, who has not been heard of, since save for one curious appearance in a short video that had nothing to do with business. Other business leaders have been arrested or investigated or, in effect, warned to tow the party line.


What does this new mission imply for the equity-efficiency balance?


This is a complex question, and in fairness, it is early days, but everything about Xi’s China suggests a craving for control and Leninist discipline that are not compatible with good economic outcomes.


On the subject of fairness and equity, one would expect the government to have to consider comprehensive tax and benefit reforms – the tax system is highly regressive with minimal income tax revenues and a strong dependence on VAT receipts. The introduction of a nationwide property tax (finally), new forms of wealth taxation including inheritance tax, and more generous social welfare including the extension to all migrant workers would also feature. There may be a lot of pushback against some of these measures, and announced measures may be diluted before they see the light of day. The long expected property tax has run into resistance from local governments which fear a loss of land revenues, urban households, and party officials and networks eager to preserve opacity when it comes to real estate holdings. We shall have to wait and see.


There is though no doubt at all about China’s high levels of inequality. Its Gini coefficient is estimated to be lower than it was in 2010 but still relatively high, in the 43-48 area according to research by Thomas Piketty, the IMF, and others. Piketty has also noted the extraordinary rise in private wealth as a share of GDP, much of which is in real estate. In addition to income and wealth inequality, there is also a dire problem with provincial and urban/rural inequality.


There is no question though that going after the super rich would probably be popular. But it wouldn’t be nearly enough to tackle the problems of social equity and inequality.


To address that, the government would have to ensure that tax receipts raised would go directly to other less well off households, including migrant workers in urban areas without urban registration, and not into government coffers or other projects of little value to the majority of citizens. Otherwise, it would not be possible for lower income households to consume more and save less, and in so doing become more mobile geographically and job-wise.


Another major challenge in redistribution is to address the recent tendencies for wages and salaries to rise significantly for skill-intensive workers, but stagnate for the much larger cohorts of labour-intensive workers, more and more of whom are losing or leaving jobs in manufacturing and construction and joining the gig or informal sector. Indeed, so called informal employment in China has risen from 34 per cent of total jobs in the early 2000s to almost 60 per cent nowadays. For a full discussion on this phenomenon, look at the excellent Scott Rozelle paper here. It is this low wage, insecure job situation which makes China’s inequality issue so important, because as Rozelle and Natalie Hell have pointed out in their new book, Invisible China, China’s labour force educational attainment level is exceptionally low, which reduces mobility and access to the skill-intensive sector, and their plight is exacerbated by a social safety net that is less than generous.


We should certainly not make light of Xi Jinping’s determination to go after the rich and the capitalist class where he might well see the accumulation of wealth as a threat to the power and status of the party and himself. Financial and fiscal penalties, and tough regulations are pretty much a shoo-in.


Whether he will be as determined to ensure that incentives are preserved or created, and regulatory, competition, and other public institutions reformed to allow the quest for creativity and productivity to sit comfortably alongside equity is a moot point, or more likely, rhetorical. For this to occur, we have to ask what’s left of reform and opening up, if anything, how China’s structural economic headwinds are gathering in the harshest external environment it has known in a half a century, and whether in fact the crackdown on private firms and entrepreneurs is a compulsive political campaign leading China down an economic path it would not otherwise choose.

George Magnus, formerly the chief economist of UBS, is a Research Associate at the SOAS China Institute and at the China Centre, Oxford University. He is the author of Red Flags: Why Xi Jinping’s China is in Jeopardy (Yale University Press, 2018).

The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.