China’s ‘Common Prosperity’ Pathway to Socialist Modernization

Within two months of the conclusion of the 19th National Party Congress in October 2017, China’s relationship with the United States was thrown into disarray. In December 2017, the Trump administration’s U.S. National Security Strategy labeled China a revisionist rival and formally re-opened the door to great power competition. In Spring 2018, tariffs were unilaterally imposed on China’s exports to the United States. In May 2019, sanctions on tech companies like Huawei landed. Even more recently, the United States enacted the draconian Advanced Computing and Semiconductors export control rule. President Xi alluded to these setbacks in his this year’s 20th Party Congress address when he noted that China had been confronted with “external attempts to blackmail, contain, blockade, and exert maximum pressure.”

It is a measure of the Chinese leadership’s determination not to be distracted by this turn of events that the passage from high-speed growth to high-quality development–rather than geopolitical saber-rattling and security competition–continues to remain the overriding national focus. As President Xi noted in the 20th Party Congress address, to “build a modern socialist country in all respects, [China must] first and foremost, pursue high-quality development … [and that] development [will be the] Party’s top priority in governing and rejuvenating China.” For those who may have expected China would be provoked into fixating on its geopolitical grievances rather than pursue its modernization-related interests, it seems like that phase has yet to come. The Chinese leadership’s focus on modernization dates back to the landmark Third Plenum of the 11th Central Committee of December 1978, where Deng Xiaoping transformed the Party’s focus from ‘waging class struggle’ to ‘socialist modernization.’ Four years later, at the 12th Party Congress in September 1982, a new ‘principal contradiction’ between the people’s growing material and cultural needs and the backward level of social production was laid out, and the practice of ‘socialism with Chinese characteristics’ in pursuit of the ‘four modernizations’ was declared as the party’s general aim. The high-growth era of China’s development had well-and-truly begun.

Thirty-five years later, a new era of modernization was ushered in at the 19th National Party Congress. At that October 2017 meeting, General Secretary Xi put forth his own ‘principal contradiction,’ between unbalanced and inadequate development and the people’s ever-growing needs for a better life, and inaugurated a ‘new era of socialism with Chinese characteristics’ that establishes a new ideological framework of inclusion, equity and sustainability-based growth. ‘Common prosperity’ is the key conceptual element of this new development and modernization-centered framework. The framework was reaffirmed at the recently concluded 20th National Congress as one of the Party’s key tasks going forward, and its constituent parts enunciated in the final resolution. These include the need to ensure that personal incomes grow basically in step with economic growth, that pay rises in tandem with increases in sectoral and economy-wide productivity; that more equitable access to basic public services is afforded to all; and that a better multi-tiered social security system is developed.

The origin of the ‘common prosperity’ concept derives from a pioneering speech by President Xi at a Central Financial and Economic Affairs Commission meeting in August 2021, which was subsequently published in the Party’s flagship journal, Quishi, later that October. In the speech, Xi listed a number of socio-economic focus areas, including the need to improve the balance, coordination and inclusiveness of development; expanding the size of the middle-income worker groups; promoting the equalization of basic public service; strengthen the regulation and adjustment of high incomes; and comprehensively drive forward rural revitalization. Fairness was to be honored just as much as efficiency in the course of high-quality development. The priority was to promote an olive-shaped income distribution structure with a large middle and two small ends. Most importantly, common prosperity was to be the prosperity of all people and the whole of society and was not to be applied in a way that divided the urban from the rural or the eastern from the central or western regions.

President Xi’s ‘common prosperity’ concept may have been part of his political campaign at the time to secure a norm-bending third term in office. Be that as it may, the concept is both well-timed and enjoys pedigree from an economic standpoint. From a neoclassical view, the unequal distribution of income at the capital-scarce early stages of development helps divert income from consumption to savings and investment, and thereby facilitates growth. Income concentration at this stage is, as such, pro-growth. At a given point in the development cycle however, this dynamic begins to turn as the trickle-down effect of income inequality holds down economy-wide average incomes and aggregate demand.

China is currently at that stage of development today where income and wealth inequalities beget deeper inequalities, impedes economic rebalancing from excess investment to consumption, and could potentially seed social instability. It is estimated that China had as many as 1,000 billionaires and 5 million millionaires, measured in U.S. dollars, in 2020. On the other hand, 600 million Chinese citizens continue to live on a monthly income of $150, as outgoing Premier Li Keqiang had once pointed out. Over the past decade-and-a-half, the country’s income Gini coefficient has lingered between 0.46 and 0.49 (a level over 0.40 is typically regarded as a red line for inequality), with the wealth Gini coefficient being even starker. Much like America’s late-19th century Gilded Age of robber barons and undisguised concentrations of wealth which gave way to the Progressive Era, China’s current Gilded Age must also give way to a more socially cohesive and economically fairer era of progressive taxation, stricter anti-trust regulation, and income transfers.

Economic expansion-enabled ‘common prosperity’ embodies the potential to rebalance the socio-economic foundations of society and nation on an efficient, socially conscious, and sustainable basis. For those inclined to worry about the malign effects of ‘welfarism,’ it is worth noting that China’s transfer payments are modest by advanced economy standards and its taxation structure mildly regressive. Furthermore, the country enjoys ample budgetary headroom to ramp up social security and welfare spending as a percentage of gross domestic product. Done right, the concept could also serve as a forceful mechanism to rebalance the economy towards consumption-led growth, with larger state-led outlays on pensions and social welfare adding to consumption as a share of GDP, thus releasing China’s urbanizing households from having to squirrel away their excess savings.

Thirty years from today, ‘common prosperity’ could well leave a mark on China’s social market economy that is as influential as the ‘four modernizations’ and the ‘reform and opening up’ program of the past forty years. For this to be the case though, the hard work of placing flesh on the bones of the concept of ‘common prosperity’ and concertedly implementing its reform plans must begin now.

This commentary was shared on Eurasia Review on December 21, 2022 and originally released on ChinaUS Focus on December 14, 2022.