(Bloomberg) – To understand what President Xi Jinping envisions in his appeals for “shared prosperity,” see the ongoing pilot program in affluent Zhejiang Province, home to 65 million people and some of China’s most successful private companies.
Xi’s growing campaign to distribute wealth has sent shock waves through the economy, sparking market sell-offs and speculation that China will reverse the reforms that have raised incomes in the country – and created a class of powerful billionaires.
In fact, there are already indications of how far Beijing plans to go. In June, the national government commissioned Zhejiang, China’s third richest province, with pilot projects to reduce inequality and published detailed targets in July.
“The Zhejiang experience shows that private sector development is very important,” said Kevin Chen, director of the Center for Agricultural and Rural Development, a Beijing-based think tank. “The reason Zhejiang was chosen is likely because it has a very strong market economy.”
The Alibaba Group Holding Ltd. is located in the central coastal area. and Zhejiang Geely Holding Group Co .. Four of the ten richest people in China have set up business in the capital, Hangzhou. The private sector accounts for 66% of the provinces’ gross domestic product, compared to around 60% domestically.
The Zhejiang Plan proposes that Beijing increase incomes by investing in the private sector in poorer areas and encourage rural residents to start their own businesses. A radical redistribution of wealth or a welfare state financed by high taxes based on the European model are not in sight.
Here are six elements of the Zhejiang Plan that could quickly spread nationally:
As in most countries, the biggest gap in living standards in China is between busy cities and agricultural backwaters. At the national level, urban dwellers earn almost three times as much as rural dwellers.
Zhejiang is a relatively equal province and is growing steadily. At the end of 2020, city dwellers earned on average twice as much as their rural peers. The plan was to reduce it to 1.9 times in five years. The province has already exceeded this target, with the urban-rural income ratio dropping 1.8 times.
The province’s selection is a sign that Beijing thinks it is already on the right track, said Zeng Gang, a professor of urban research at East China Normal University who was involved in the planning. The roadmap also calls for urban inequality to be reduced and the share of wages in GDP to be increased to more than half. The goals are largely a projection of current trends, Zeng said, so “achieving them won’t be a problem”.
Zhejiang’s senior official Yuan Jiajun has called economic growth the “cornerstone” of common prosperity, and a growing economy makes it easier to reduce inequalities without conflict. Average incomes (not adjusted for inflation) in the province will rise at an average annual rate of 7.4% over the next four years – only a slight slowdown from the pre-pandemic 9% growth.
To achieve this, the plan takes up China’s already successful model of urbanization and upgrading manufacturing in high-tech areas. The province aims to be 75% urban by 2025, up from 72% in 2020, backed by government investments in infrastructure.
Rising housing costs have been a source of displeasure across China since the country created a commercial market two decades ago. Zhejiang, where house prices have risen at an average annual rate of about 6% over the past decade, doesn’t want houses to get more expensive.
“The central government wants Zhejiang to research and build a system that can effectively contain house prices so that the government does not rely on land sales and the real estate sector for revenue,” said Zeng.
This could include property taxes and measures to promote rental housing construction, including the construction of over 210,000 subsidized rental apartments. The province also plans to expand access to public services for tenants. As of now, they are limited to homeowners with state-approved provincial residence.
Rural manufacturing companies – electronics, textiles, and furniture – were Zhejiang’s main growth engine in the 1980s, but many firms moved from the countryside to the cities in the 1990s, exacerbating the urban-rural divide.
But a core business persisted, developing tourism and agriculture over the past decade to cater to newly affluent city dwellers. The Zhejiang Plan calls for support for existing rural service companies and the return of production.
To this end, the state can instruct its banks to offer lower-priced loans for rural companies, even with low returns, and instruct its companies to build rural infrastructure. State television has highlighted the German Schott AG glass factory in the south of Zhejiang as a project it would like to see more of.
Zhejiang will spend more on health and education to strengthen its workforce. She wants to lower the kindergarten costs; 70% of college-age students are expected to have a college education by 2025. The current level of around 62% is already above the 58% average in the OECD Club of Rich Nations. The plan also calls for top urban hospitals to expand into rural areas.
There should be no state welfare for healthy, skilled workers, officials say. China cannot afford to “feed the lazy,” Han Wenxiu, a senior official on the party’s top economic committee, told reporters last week, describing “welfare” as a “trap.”
Zhejiang’s Yuan also rejected welfare in a speech on the plan in July: “Common prosperity is a concentrated expression of the superiority of the socialist system with Chinese influences and a transcendence of the western modernization and welfare society.”
The plan also requires wealthy entrepreneurs to donate more of their assets to society. Zhejiang is home to at least 10 multibillionaires with total net worth of $ 236 billion, according to Bloomberg.
The wealthiest men in the province are already responsible for some great gifts of late. A foundation from the founder of Pinduoduo Inc., Colin Huang, has pledged $ 100 million to the University of Zhejiang.
Xi said that businesses and individuals are motivated by social pressures and moral obligations. Beijing can also be very convincing. According to a study published in 2020, more than 20% of publicly traded Chinese companies have donated to fight poverty since the state announced its campaign for 2016; Companies were more likely to do so when their industry was threatened by an anti-corruption investigation.