Xi Jinping’s New Wealth Redistribution Plan Unsettles Investors

August 24, 2021 Updated: August 27, 2021

Commentary

Chinese leader Xi Jinping explained his theory of Politics in Command Economy as creating “a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful.”

In a 2016 speech, he told business leaders that in addition to making money, they had to love the motherland and love the Communist Party. He is now putting the finishing touches on a system where companies will serve the interests of the state, participating in initiatives such as the Rural Revitalization Strategy and the Belt and Road Initiative. In return, the state will support the activities of these companies, in a profit-sharing partnership.

Industrial policy seems to be at the core of Xi’s new economy, as the country edges closer toward state capitalism. He is expanding the role of state-owned firms, calling for the central government to have greater control over the private sector and private investment, while allocating market share for such domestic industries as semiconductor chips and electric vehicle batteries.

He is also encouraging the creation of more “mixed ownership” firms, where private companies purchase equity stakes in state-owned companies and vice versa. Although the words partnership and cooperation are being used, China’s recent policy changes suggest a preference for the public sector over the private sector. This seems a reversal of the Deng Xiaoping economic liberalization and privatization policies of the 1980’s that led to the Chinese economic miracle, transforming China from one of the world’s poorest countries, to the second richest.

These measures, according to Xi, are being taken to increase the country’s self-sufficiency and overall prosperity. His new vision for a prosperous and more egalitarian China means having those who have already achieved economic success, taking care of those who have not. At a meeting of the Communist Party’s Central Committee for Financial and Economic Affairs, Chinese leaders determined that common prosperity is key to completing the construction of a modern socialist country. To this end, there are plans to tighten regulations on high income, adjust excessive income, and have high-income groups give back to society.

The term “common prosperity” is reminiscent of the draconian economic policies taken by Mao Zedong during the Cultural Revolution. Xi’s economic policies have also been compared to Mao’s “politics in command.” In the previous century, Mao redistributed wealth from the rural elite, wealthy landlords and farmers. Today, it seems the money will be taken away from wealthy entrepreneurs and tech giants, who Xi accuses of creating socioeconomic problems that could destabilize the nation.

Deng also used the term “common prosperity” when he opened China to Western investment. He had a policy of allowing some to get rich sooner, but with an end goal of every Chinese person improving their standard of living.

Now, those who got rich sooner will have their wealth redistributed. Xi said that the redistribution was necessary because the number of wealthy in China exceeds the number of wealthy in America, while much of the country, particularly the inland, western, and rural areas, lags behind. Xi’s new goal is to create a greater degree of “social fairness” by raising more people out of poverty and increasing the size of the middle class. Naturally, these policies will put more pressure on the wealthy, as property and inheritance taxes are expected to be implemented.

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Customers and real estate agents looking at several building models at a real estate exhibition in Jiashan County, in eastern China’s Zhejiang Province on Oct. 19, 2012. (AFP/Getty Images)

Zhejiang Province, an area with extreme income inequality, has been designated as a pilot location for wealth redistribution. The goal is to increase annual income by 45 percent, to 75,000 yuan ($11,563) by 2025, and to increase its urbanization to 75 percent. To this end, workers are being instructed to engage in collective bargaining, while listed firms were told to increase cash dividends to shareholders, and farmers are being encouraged to be more entrepreneurial. Additionally, corporations and wealthy individuals will be given tax write-offs for charitable contributions.

Xi hopes to realize his vision of greater prosperity and equality by 2049, the 100th anniversary of the Chinese Communist Party’s takeover of China. But, in order to allay fears of repressive economic policies, similar to what happened during the Cultural Revolution, Xi explained that he was merely going to “reasonably regulate excessively high incomes” and encourage the wealthy to give something back.

In the wake of Xi’s recent statements about wealth redistribution, financial analysts at ING believe that tax rates in China are about to rise, including income tax, property tax, and corporate taxes. Recently, China has increased regulation on fintech, gaming companies, ride-hailing apps, and private education, all of which suggest the regime is taking a more active role in the economy, tightening its control and increasing its revenues. In the long term, these policies may be in place in order to avoid having China’s future growth derailed by its growing portfolio of non-performing assets, which, in 2020, already stood at 3.02 trillion yuan ($466.9 billion).

All of these movements are unsettling investors as their projected returns on investments will be negatively impacted. A recent ban on for profit education companies, for example, could leave investors holding the bag. Investors hoped to earn a rate of return on their education company investments which was higher than a rate they could earn elsewhere. Now, the rate of return may be zero. Even worse, it will be difficult for these investors to sell their shares, as would-be buyers would also hope to be earning positive returns.

Xi claims to be taking these measures to protect common people from exploitation by big business. But common people are the investors and employees of these big businesses, and as such, dependent on them for their livelihoods. The COVID-19 lockdowns, the Sino-U.S. trade war, and a number of other economic and environmental factors have already driven unemployment among the young to levels not seen in many years. Further restrictions on commerce and increased taxes are unlikely to solve this problem. Meanwhile, the wealth-crackdown threatens continued investment and innovation in the country.

After the 1949 communist takeover of China, capitalists were vilified, jailed, and sometimes killed. In 1978, economic opening began, under the leadership of Deng Xiaoping. The 1989 Tiananmen Square massacre, however, showed that although the country was undergoing economic reforms, there were limits to how far the Communist Party was willing to bend. By 2001, businessmen and entrepreneurs were required to join the Communist Party. In a speech given in 2012, Xi said that the state needed to increase the number of Party bodies inside private business. Xi was signaling the beginning of tighter controls on the private sector, even though private companies had become the clear drivers of China’s economic growth. By 2013, the private sector accounted for 75 percent of all economic activity.

Just three years later, Xi began reining in both private and state companies alike, requiring them to write the Communist Party into their articles of association. This policy was then adopted by the securities regulators who required companies to include the Party in their corporate governance codes. Companies also had a Party committee, sometimes with the Party committee chairperson sitting on the board of directors. A survey in 2016 discovered that 68 percent of China’s private companies and 70 percent of foreign companies had Party bodies, while some provinces set goals of establishing Party bodies in 95 percent of private companies. The hammer and sickle is already displayed at Walmart, L’Oréal, Walt Disney, and Dow Chemicals, all of which have Party committees.

Under Xi, while China has become richer, it has also moved toward a more conservative communism, with the government playing a greater role in commerce. Heads of high-profile corporations frequently speak out in public, professing their love for the Party, ostensibly, to avoid persecution. The disappearance and subsequent sentencing of Wu Xiaohui, the chairman of Anbang Insurance Group, to 18 years in prison, and the execution of Lai Xiaomin, former chairman of China Huarong Asset Management, served as warnings to other entrepreneurs who failed to live up to Party expectations.

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Jack Ma, businessman and founder of Alibaba, at the 40th Anniversary of Reform and Opening Up at the Great Hall of the People in Beijing, on Dec. 18, 2018. (Andrea Verdelli/Getty Images)

Alibaba’s Jack Ma, who had never toed the Party line to the extent of other business leaders, famously said, “Be in love with the government. But don’t marry them.” Ma may have gone too far, however, when he accused Chinese regulators of stifling financial innovation. Ma’s family name means “horse” and the Party has said that they have bridled him. His Ant Group’s initial public offering was cancelled, after which regulators began dismantling his company. He was also removed as president of the elite business school he founded, Hupan University, and has since not been seen in public. At the time of this writing, he has not been seen in nine months.

Xi Jinping’s new economic policy of wealth redistribution is a reminder of the strict communism of Mao Zedong, when the wealthy and the entrepreneurs were considered enemies of the people. Under Xi’s leadership the country seems to be shifting toward a more complete form of communism, with the government heading a command economy. On the other hand, the new economic system could be called fascism, a form of state capitalism where the biggest and most favored companies remain in private hands, but where the state shares much of the profit, while maintaining tighter control.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Antonio Graceffo
Antonio Graceffo
Antonio Graceffo, Ph.D., has spent over 20 years in Asia. He is a graduate of Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Antonio works as an economics professor and China economic analyst, writing for various international media. Some of his China books include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."