(Bloomberg) — To understand what President Xi Jinping envisions in his calls for “common prosperity,” look to the pilot program underway in the wealthy province of Zhejiang, home to 65 million people and some of China’s most successful private companies.
Xi’s mounting campaign to spread the wealth has sent shock waves through the economy, triggering market sell-offs and speculation that China will reverse the reforms that lifted incomes nationally — and created a class of powerful billionaires.
In fact, there is already evidence of how far Beijing intends to go. In June, the national government designated Zhejiang, China’s third-richest province, to pilot policies designed to reduce inequality, and in July, it released detailed targets.
“The experience of Zhejiang 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 probably because it has a very strong market economy.”
The central coastal area is home to Alibaba Group Holding Ltd. and Zhejiang Geely Holding Group Co., among others. Four of the 10 richest people in China have based their businesses in the capital city of Hangzhou. The private sector accounts for 66% of provincial gross domestic product, compared with around 60% nationally.
The Zhejiang plan suggests Beijing wants to raise incomes through private sector investment in poorer areas, and to encourage rural residents to start their own businesses. Radical wealth redistribution, or a European-style welfare state funded by strong taxes, isn’t in the cards.
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 bustling cities and agricultural backwaters. Nationally, city people earn nearly three times what rural residents do.
Zhejiang is a relatively equal province and getting more so. At the end of 2020, urban residents on average earned twice their rural peers. The plan called for a reduction to 1.9 times in five years. The province has already surpassed that target, with the current urban-rural income ratio down to 1.8 times.
Picking the province is a sign Beijing thinks it’s already on the right path, said Zeng Gang, an urban studies professor at East China Normal University who participated in the planning. The roadmap also calls for reducing inequality between cities and raising the share of labor compensation in GDP to more than half. The targets are mostly a projection from current trends, Zeng said, so “there will be no problem in achieving them.”
Zhejiang’s top official Yuan Jiajun has described economic growth as the “cornerstone” of common prosperity, and a growing economy makes it easier to reduce inequalities without causing conflict. Average incomes (unadjusted for inflation) in the province are projected to rise at a compound annual rate of 7.4% over the next four years – only a slight slowdown from the 9% growth achieved prior to the pandemic.
To achieve that, the plan doubles down on China’s already successful model of urbanization and upgrading manufacturing into more high-tech areas. The province aims to be 75% urban by 2025, up from 72% in 2020, buoyed by state-led investment in infrastructure.
Rising housing costs have been a source of discontent across China since the country created a commercial market two decades ago. Zhejiang, where real estate prices grew at an average annual rate of about 6% over the last decade, doesn’t want to see homes get any more expensive.
“The central government wants Zhejiang to explore and build a system that can effectively contain housing prices, so that the government won’t have to rely on land sales and the property sector for revenue,” said Zeng.
That could involve property taxes and measures to encourage rental home construction, including building over 210,000 units of subsidized rental apartments. The province also plans to expand access to public services to renters. As of now, they’re limited to home-owners with government-approved provincial residence.
Rural manufacturing firms – electronics, textiles and furniture – were Zhejiang’s main engine of growth in the 1980s, but many firms moved from the countryside to cities in the 1990s, worsening the urban-rural divide.
But a core of business remained and, in the last decade, developed tourism and agricultural economies to cater to newly affluent city-dwellers. The Zhejiang plan calls for support of existing rural service businesses as well as the return of manufacturing.
To that end, the state can order its banks to offer cheaper loans for rural businesses and direct its companies to build rural infrastructure, even for low returns. State television has highlighted the glass factory built by Germany’s Schott AG in southern Zhejiang as the kind of project it would like to see more of.
Zhejiang will spend more on healthcare and education in order to strengthen the workforce. It wants to lower kindergarten costs; it also wants 70% of college-aged students to be pursuing higher education by 2025. The current level of about 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.
With healthy, qualified workers, there should be no need for state welfare, officials say. China can’t afford “to feed the lazy,” Han Wenxiu, a senior official in the party’s top economic affairs committee told reporters last week, describing “welfarism” 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 characteristics, and a transcendence of Western modernization and welfare society.”
The plan also calls for wealthy entrepreneurs to donate more of their wealth to society. Zhejiang is home to at least 10 multi-billionaires, according to data collected by Bloomberg, with a combined net worth of $236 billion.
The province’s richest men are already responsible for some big recent gifts. A foundation set up by Pinduoduo Inc. founder Colin Huang has pledged $100 million to Zhejiang University.
Xi has said that companies and individuals will be motivated by social pressure and moral obligation. Beijing can also be very persuasive. More than 20% of listed Chinese companies donated to anti-poverty efforts since the state announced its 2016 campaign, according to a study published in 2020; firms were more likely to do so if their sector was facing the threat of an anti-corruption investigation.