Since President XiJinping made his big push for “common prosperity” two months ago,there has been a lot of speculation on what it means. Implemented in the middleof a big tech crackdown, it wasn’t particularly warmly received by investors,who have lost billions of dollars. Is Xi’s campaign proof ofthe comeback of old-style Communism? Or is it a new-age CulturalRevolution? Or is China turning into a welfare state?
On Oct. 15, writingfor Qiushi, a leading Communist Party journal, Xi for the first timespelled out in detail his view on common prosperity. It’s a must-read forthose who still want to invest in China.
Sounding as if hehad been misunderstood, Xi took pains to explain what common prosperity wasnot. It is not egalitarianism, or the rise of a welfare state. It is nomodern-day “Great Leap Forward” either. That would be the catastrophic set ofreforms enacted by Mao Zedong in the 1950s to catch up with and overtake therest of the world but resulted in widespread famine and the death of tensof millions.
He also illustratedwhat he means by “common” — which shares a character with theChinese for communist. His socialist push will broaden China’s middleclass, extending it to include those without university degrees, small businessowners, migrant workers and farmers. More interestingly, he talked aboutgeographical divisions. “Don’t use different metrics to define prosperity,don’t divide into cities versus rural areas, or eastern, central, and westernregions,” he admonished in the piece.
That is a warningshot to officials in wealthy regions such as Shanghai, Zhejiang province— where Alibaba Group Holding Ltd. is based — and Guangdong province— where China Evergrande Group is headquartered. Every year, Beijingcollects more than 8 trillion yuan ($1.2 trillion) of revenue from localgovernments and then redistributes the money across China, with a strong biastowards poorer places like Guizhou. While, on average, provinces receive aboutone-third of their income from Beijing, this figure varies substantially fromregion to region. In this fiscal transfer payment system, Shanghai would be anet contributor, while Guizhou is a big beneficiary.
And so, if Xi getshis way (and he’s doing all this ahead of the all-important cabinet reshufflein October 2022), there will no longer be the Shanghai Clique, orthe New Zhejiang Army — as two of the country’s financial andeconomic power bases are called. In Xi’s eyes, there will be only one China— not a veritable collection of feudal states of varying wealth. Allthe big shots lording it about the country had better watch out, be theyprivate businessmen or highly paid bureaucrats running state-owned enterprises.
Xi has always had asoft spot for SOEs. And to buttress that, he called them the “mainstay” ofthe economy in the Qiushi article. But his essay provides little comfortfor the sprawling bureaucracies that run them. Xi demanded wealth redistributionfrom the state-run firms, calling out corruption, insider trading and executivepay that has, he says, grown exorbitantly “in the name of reform.” That isa reference to SOE attempts to incentivize better managementamong top executives.
Xi’s article, forinstance, puts Kweichow Moutai Co. in the crosshairs. Thestate-owned company, based in impoverished Guizhou province, sells itsprized fiery baijiu across China to huge profits. Last year,with an enviable 66% operating margin, Moutai generated over 50 billion yuan infree cash flow. Is that “common prosperity” then, for a province that stillrelies on the central government to pay its bills? In 2020, Beijing transferred326 billion yuan to Guizhou, accounting for about 46% of the province’sincome. Last month, the former chairman of Moutai received a lifesentence for taking 112.9 million yuan in bribes.
On Monday, sharesof Moutai tumbled 6.1%, while its peer Wuliangye Yibin Co. dipped 8.1%.Investors who had hoped SOEs would be safe havens were disappointed.
Beijing now has afull legal apparatus to capture and prosecute “tigers” — a mediadescription for high-ranking officials. A month ago, China’s top graftwatchdog issued its first set of detailed guidelines listing 101 types ofcrimes it will investigate. The agency is now inspecting 25 state-ownedfinancial units, the widest scope since 2016.
In recent months,commentators mostly talked about common prosperity as a display of classstruggle, or a re-write of China’s social contract. Xi’s Qiushi article shedslight on a third angle. As he heads toward his remaking of the cabinet nextyear, Xi is using the slogan to clean his own house — by hunting forbig tigers.