Where does war in Ukraine and a troubled economy leave China’s common prosperity goal?

The campaign to address gaping inequality by reining in market freedom was at the top of Beijing’s agenda last year
But as new Covid-19 outbreaks and Russia’s aggression threaten to slow China’s already sluggish economy, undoing decades of economic reform is fraught with risks

George Magnus

Published: 1:30am, 23 Mar 2022

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Earlier this month, as Russian forces shelled Ukrainian cities and Covid-19 infections soared, China’s leaders gathered for their most important annual political meetings: the National People’s Congress and Chinese People’s Political Consultative Conference.

While the weighty documents and lengthy speeches hardly mentioned the pandemic, and did not mention Russia’s war at all, China – and its already troubled economy – is undoubtedly being rocked by both.

For much of the past year, Beijing’s “common prosperity” campaign dominated Chinese government rhetoric. President Xi Jinping has frequently described common prosperity as “an essential requirement of socialism”. But important questions about the campaign’s contours remain, and many observers expected them to be answered at this month’s twin sessions.

That did not happen. Instead, China’s leaders made only brief and patchy references to “prosperity for all”. In the face of internal and external instability, China’s leaders seem to be recalibrating their priorities.

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To be sure, economic headwinds are nothing new. The annual central economic work conference last December highlighted risks to China’s economy in 2022 stemming from contracting demand, supply shocks and weakening market expectations.

The main goal for the year, policymakers concluded, should be “stability”. Specifically, they sought to limit contagion from the weakening property sector and resist the temptation to overstimulate the economy.

In the past three months, however, the challenge has become far more formidable. Rising Covid-19 infections have led to a spate of lockdowns, threatening to exact a heavy toll on the already sluggish consumption and service industries.

Meanwhile, Russia’s war on Ukraine has driven up energy, commodity and food prices, which will accelerate inflation and hit Chinese exports as global demand weakens.

Police cordon off an alley after new cases of Covid-19 were detected in an area of Beijing on March 17. Photo: AFP

In this context, meeting the Chinese government’s 5.5 per cent target for GDP growth this year will probably be impossible. China’s leaders already plan to reduce taxes and fees levied on small firms, and to increase transfers to local governments. But more action to stimulate the economy should be expected.

So, the common prosperity campaign has been sidelined for now. Nonetheless, it is likely to remain a totem for Xi, as he pursues his goal of making China a “great modern socialist country” by the time the People’s Republic celebrates its centennial in 2049.

Success, in the Communist Party’s view, requires addressing the adverse consequences of 40 years of single-minded emphasis on economic growth, which have left large economic and sectoral imbalances, as well as yawning income inequality and deep regional disparities.

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If ignored, the party fears, these problems could endanger social and political stability. But rather than addressing them as a Western democracy might – with social welfare policies – China’s government is mounting a political campaign to mobilise people behind policies intended to produce a fairer distribution of income.

A remarkable feature of the campaign has been the tightening of state control over private firms, and the stipulation of a more orderly “expansion of capital”. Private firms have faced a blizzard of new regulations involving antitrust, data privacy and security. Technology, data and finance platforms have been the primary targets.

But the education, health care and housing sectors, as well as any company operating in the gig economy, are also in the government’s crosshairs. In housing, state enterprises are re-entering the market for the first time in 40 years to purchase the assets of overextended property developers.

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China’s recalibration of industrial policy and corporate governance may well rein in some private-sector excesses. But, by asserting the political control it craves, the party risks destroying the incentives for the innovation and productivity that China needs.

Despite the advantages enjoyed by state-owned enterprises in China, private firms have been the more powerful engine of economic development. As Vice-Premier Liu He noted last year, the private sector accounts for more than 50 per cent of taxes, 60 per cent of GDP, 70 per cent of innovation, 80 per cent of urban employment, and 90 per cent of new jobs and companies.

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Common prosperity denies the market-oriented policies that have enabled China’s rise and marks the formal end of the era of reform and opening up launched by Deng Xiaoping.

But at a time when Covid-19 border controls and perceived complicity in Russia’s aggression are already threatening to exacerbate China’s isolation, the common prosperity campaign is at risk of being undermined at home and overtaken by events abroad.

George Magnus, a research associate at the University of Oxford’s China Centre and SOAS University of London, is the author of Red Flags: Why Xi’s China Is in Jeopardy. Copyright: Project Syndicate