Macro Insights Weekly: China’s “common prosperity” agenda


A major and sustained shift in China’s policy direction is underway, with tax and regulation measures targeting inequality.
Taimur Baig, Radhika Rao06 Sep 2021
  • The mood has changed in Beijing
  • Income and wealth distribution measures have begun and will likely sustain
  • But they could hurt innovation and entrepreneurism, leading to a more equal, but less rich, nation
  • To balance that risk, China has to pursue policies that leave the entrepreneurial spirit undamaged
  • Capital gains tax on stocks/bonds trading and tax on inheritance could be on the cards
Photo credit: Unsplash


Commentary: China’s “common prosperity”

This year, China celebrated the eradication of extreme poverty. Four decades ago, as per World Bank definition, 88% of the Chinese population lived below the poverty line, while today no one does. This translates into 850 million people being lifted poverty since then, an astonishing and unique achievement in history. High economic income and jobs growth, rise in asset prices, and increasingly generous transfer from the government contributed to this outcome, although the authorities were all along cognizant of the associated issue of inequality. Consider the following two quotes:

Premier Deng Xiaoping, 1986. “Our policy is to let some people and some areas get rich first to drive and help the backward areas, first advanced areas later have the duty to help the backward areas.”

State Council Premier, Li Keqiang, 2020. “The average per-capita annual income in China is RMB 30,000 (USD 4,193), but there are over 600 million people whose monthly income is barely RMB 1,000 yuan (USD 140), not enough to rent a room in the Chinese cities.”

Income inequality exists in capitalist and socialist societies alike. By World Bank’s estimates, China’s Gini coefficient, a widely used measure of income inequality that varies between 0 (complete equality) and 100 (maximum inequality), has declined from 44 to 28 in the past decade, thanks to rising wages and more generous transfers. This puts China in a more favourable position than many Western economies. China’s wealth distribution, as opposed to income distribution, is also not as lopsided as India or the US.

Regardless of what these estimates suggest, the mood in Beijing has changed. As the plethora of new regulations and pronouncements point out clearly, further wealth redistribution through government intervention is going to shape the coming years and decades for China.

There is no free lunch in this respect, however. China’s success in the past decades has been only partly due to planning and intervention, with a very large chunk of value addition and productivity gains coming from innovative entrepreneurs. If the coming rules and regulations get in the way of that aspect, it could hold back economic dynamism and growth. This could result in a more equal, but less rich overall, outcome.

How could the authorities balance the need for growth with the imperative of a more equal nation? Revenues needed for income redistribution could come from taxes that leave the entrepreneurial spirit undamaged. In our view, this would include capital gains tax on stocks/bonds trading and tax on inheritance.

What else could be on the agenda? China has considerable scope for increasing rural transfers. Additionally, regulation of monopolies, abolition of Hukou system of household registration that favours city dwellers, investment in education, and rural land reform would help address inequality.

The devil, however, is in the details. Tremendous data collection, analysis, and good governance would be required to identity, target, and disburse to create a more equal society. Time will tell if the authorities are up to it. In the meantime, expect a major and sustained shift in China’s policy direction.

Taimur Baig


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Taimur Baig, Ph.D.

Chief Economist - Global
[email protected]

Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]


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