China’s ‘Common Prosperity’: Understanding the Background, Implications and Opportunities for Technology, Consumer and Luxury Companies

“We should build a world of common prosperity through win–win co-operation.”

President Xi Jinping addressing the United Nations, 2017

Since the 1970s China has lifted nearly a billion people out of poverty, the biggest reduction in poverty that the world has ever seen.  China now has the second-largest consumer economy in the world and is a major market for global consumer and luxury companies.  It has all but eliminated extreme poverty but income and wealth inequality remain high.

Towards the end of August, consumer and luxury companies with exposure to China saw a significant sell-off.  LVMH, the global leader in luxury, was down 12%.  The moves came on the back of Chinese government initiatives to combat economic inequality and redistribute income and wealth over the next five years.  Coming at a moment when President Xi is expected to serve a third term in office, it has reminded investors of the government’s previous anti-corruption campaign and has raised concerns about a similar government crackdown.

The goals of the plan to create ‘common prosperity’ are to address income inequality, narrow the income gap between rich and poor, and ward off potential social instability.  These reforms are important for the Chinese economy, and over the long term should also be of benefit to us as investors in luxury brands.

How common prosperity could be achieved, and why

Given the potential impacts of the policy, it is important to understand what the Chinese government means by ‘common prosperity’ and how and why it intends to pursue it.  Below we have included a summary table setting out the key policy aims and how they will be tackled.

The Chinese government will shift its governance priorities towards balancing growth and sustainability and will seek to tackle social inequality and security through a major regulatory reset.  We have already seen the government taking action in areas like technology and education, offshore holding companies and overseas IPOs.

The government has identified social welfare, taxes, charity and inclusive education as means to achieve this shift in society and to increase middle-income households’ share of the economy.  This is different to the approach China has taken over the past 40 years of economic reform, during which ‘socialism with Chinese characteristics’ was about setting growth and wealth generation on their own course, with regulations and the taxation framework operating in the background.

Of course, real and perceived inequality of income and wealth, but also of opportunity and prospects for achieving a better life, is a global issue that is one of the great challenges of our time.  Popular pressure is increasing on governments in the US, Europe and elsewhere to reduce inequality, whether through elections or other means.  Seen from this perspective, Xi Jinping’s equality initiatives to address regional, urban/rural and income gaps have much in common conceptually with Boris Johnson’s calls for a levelling up between north and south in the UK by channelling taxpayers’ money to initiatives in education, social care and innovation.

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