What should we be watching out for as the next step in this process?
Clearly this year’s Party Plenum, due to be held in November, will be crucial. We should see how important common prosperity becomes in terms of guiding policies. We should also look at how much common prosperity ideas percolate in provincial-government regulations in the next few months. One important query in all this is why, if common prosperity is such a well-thought and important concept for China’s direction, was it not introduced in the Five Year Plan earlier this year? In the same vein, foreign providers of services, whether it is high end restauration or education (such as English language learning or prep schools to enter foreign universities) will be curtailed.
How will this affect international business in China?
International businesses will need to contribute in the same way as Chinese private investors: donations and other types of contributions will move to the forefront of the agenda, obviously reducing their profitability. The pain inflicted by the common prosperity mantra will be more for those foreign companies which have developed a business model on China’s rapidly growing number of wealthy individuals, such as luxury goods. Those individuals will now be much more careful to display signs of their wealth, especially in the case of foreign luxury brands.
So it really is a big switch?
I do think this is a big switch. China now is more interested in social stability – through redistribution and setting the “right” socialist values in society – than continuing to grow fast.
For me, the real estate crackdown launched just over a year ago is related to this. Rapidly worsening housing affordability is clearly behind the crackdown on real estate developers through the “three red lines” policy (having a liability to assets ration of less than 70%, a net gearing of less than 100% and a cash to short-term debt ratio of more than 100%).
This is clearly a big deal given the massive contribution of real estate to growth – about 30% when counting direct and indirect channels. In other words, if Xi Jinping is ready to live with less growth to deal with the negative consequences of a too rapidly growing real estate sector on income distribution, he is probably ready to do anything.
For me the explanation lies in the fact that China was already doomed not to grow fast anymore – rapid structural deceleration is already happening – so you may as well redistribute better what is left.