China led the way out of the pandemic economically last year and now has investors and other experts scratching their heads in their attempts to understand the bold and globally disruptive measures it is introducing into what seems likely to be a new-look economy.

The recent regulatory crackdowns and talk of common prosperity in China highlight that the authorities are not only trying to navigate through the short-term economic quagmire of the pandemic, but they are also instituting, in parallel, structural change in pursuit of achieving their long-term economic objectives.

That’s no easy task, as can be seen in a slowdown in its growth rate as a result of renewed bouts of Covid-19 infections. It has also had to conduct a PR campaign in its local media to quell external upset over its unexpected decisions to clamp down on the internet, private tutoring and gaming sectors, with more expected to come.

But are goals such as common prosperity, policy sustainability and economic balance in the world’s second-largest economy such cause for concern, or will these measures possibly teach the Western policymakers a trick or two?

In an article for the South China Morning Post this week, Frank Tang explains some of the Chinese economic buzzwords that are causing much consternation. These include common prosperity, cross-cyclical adjustment, dual circulation and chief of industrial chains.

Common prosperity most broadly describes the type of economic system the Chinese Communist Party is seeking to build as it transitions from the socialist market economy that was introduced by former paramount leader Deng Xiaoping.

In a Brookings article that assesses China’s common prosperity campaign, Ryan Hass, a senior fellow at the Centre for East Asia Policy Studies, says that President Xi Jinping recently explained that common prosperity “is necessary to balance growth and financial stability”. To achieve this balance, the Chinese Communist Party Central Committee for Financial and Economic Affairs called for “reasonably adjusting excess incomes” and encouraging high income individuals and businesses to “give back more to society”.

In seeking to redress social inequality and economic disparity, says Hass, “China’s leaders may view themselves as correcting some of the excesses of Deng’s decision to ‘let some people get rich first’.”

Instead, their vision has been described as achieving an olive-shaped income distribution, with the middle-income earners becoming the wealthiest segment of the population. To do so, the Party aims to redistribute wealth and spend on public services like elderly care, medical care, housing and social security.

Hass puts the extent of the challenge China is trying to overcome into perspective: “Beijing commendably succeeded in eradicating extreme poverty in China earlier this year. Even so, there still are still some 600 million workers who live off a monthly income of $154 or less. The fact that a poor population nearly twice the size of the full population of the United States lives alongside a wave of first-generation billionaires and millionaires who consume nearly half of all luxury goods sold globally creates complexities for social cohesion in China.”

Committing to achieving common prosperity – putting aside the possible draconian measures China may use to get there – is an admirable aim in a world where there are gaping inequalities that have widened even further during the pandemic.

Mammoth developed market stimulus programmes have predominantly served to help the rich get richer on the back of soaring equity prices and historically low interest rates. Credit Suisse’s latest Global Wealth Report found that government stimulus programmes to mitigate the economic impact of the pandemic, namely share and house price rises, have benefited the upper wealth echelons, and the less wealthy have either seen no change in their wealth or, in many cases, moved backwards. 

Credit Suisse says the net result has been a “marked” rise in global inequality.

It is significant that the measures taken to avert economic pain have merely widened income disparities. However, that wealth could prove short-lived for some because it is built on a foundation of excess liquidity. As Credit Suisse explains: “Some of the underlying factors may self-correct over time. For example, interest rates will begin to rise again at some point, and this will dampen asset prices.”

In their efforts to achieve a sustainable economic outcome as a result of their stimulus measures, the Chinese authorities began withdrawing policy support as soon as they felt the economy was on a recovery track. However, its experience highlights what the Western advanced economies must contend with eventually too – but to a far larger degree given the extent of the support they have extended.

China’s economy is showing signs of cooling more than expected. Old Mutual Multi Managers investment strategist Izak Odendaal attributes the slowdown in business activity in part to Chinese policymakers “tapping the brakes too hard earlier this year” when they started withdrawing stimulus. This has prompted them to take short-term action to buoy the economy again by cutting the People’s Bank of China’s reserve requirement ratio (RRR), which Odendaal believes will allow for more lending, and he says further RRR cuts are likely.

From a longer-term perspective, the Chinese authorities intend to pursue “cross-cyclical adjustment”, another lesser known term used to describe policymakers’ new approach to economic policy management. Tang explains that the term was first used in a Politburo statement in July and signals a shift from the current counter-cyclical policies that have been used during the Covid-19 pandemic, and other economic crises, to smaller macroeconomic adjustments that are based on a long-term outlook. He says the plan has already been put in motion, with some Chinese provinces “saving a portion of their bond issuance quote to ensure adequate investment next year”.

In all, the profound structural shift in the way Chinese authorities intend to manage their economy appears to be designed to introduce more balance in the Chinese economy: more balanced wealth distribution, proactive and less heavy-handed economic support measures and a healthier balance across the internal (consumption) and external (foreign trade) sources of growth.

The Western policymakers could do well to consider the kind of tough love measures they could adopt to see their economies through to calmer waters – and in better, more equitable shape than existed even before the pandemic. DM/BM