If you’ve been studying China’s economic policies and the yuan, the term “common prosperity” has probably come up a few times.
If you want to learn exactly what common prosperity means, how it could affect China and the yuan, and gain some insight into other Chinese economic policies, continue reading this detailed guide.
What is Common Prosperity?
Common prosperity is China’s economic term for narrowing the wealth gap amongst its citizens. China will implement this idea of achieving prosperity for all its citizens through new policies, reforms, and innovations.
A pilot program is currently ongoing in the Zhejiang province in China, with plans to narrow the income gap by 2025 through the three concepts of development, allocation, and sharing (by increasing property and inheritance taxes).
The main goal of common prosperity is to form an “olive-shaped social structure.” In this plan, the middle-income households would make up the majority of the economy and lower the high disparity of incomes between rural and urban areas as well as regions.
China’s ultimate goal is to ensure that all Chinese citizens have:
- Better lives
- Equal opportunities for education
- Affordable health care
- Equal access to public services
- Social security coverage for China’s elderly population
China views common prosperity as an essential piece of socialism and expects certain benefits from implementing it; examples include:
- Improvements in China’s economy
- Promote innovation within China
- Promote equality amongst China’s citizens
- Greater international competitiveness
How China Plans to Achieve Common Prosperity
President Xi Jinping has referenced the goal of common prosperity much more frequently in 2020 and at an even higher frequency in his 2021 speeches.
Ji’s increase in the use of “common prosperity” is more than likely a signal for a shift in the government’s policies.
In fact, in August 2021, the Chinese government vowed to adjust high incomes, encourage philanthropy of the rich, and pursue other means to get China’s income distribution into the “olive-shape” structure they desire.
The government’s primary goals are to:
- Share wealth
- Achieve high-quality growth
- Reduce income gap
- Provide equal access to basic public services
- Narrow urban and rural income gap
China has just over a dozen policies that are cracking down on both businesses and individuals to bolster common prosperity.
Here are the targets of some of these crackdowns:
- Cryptocurrency exchanges
- Cryptocurrency miners
- Businesses that heavily use algorithms
- Fintech companies
- Ride-share companies
- Real estate companies
- Tutoring and education companies
- Gaming companies
- Cloud computing companies
- Excessively high-income individuals that avoid taxes
- Social media companies
- Eccomerce companies
Large Chinese organizations are poised to pledge to President Xi Jinping’s common prosperity goals.
- Alibaba is providing over 1000 billion yuan ($15.5 billion)
- Pinduoduo has plans to provide 10 billion yuan ($1.5 billion) to the agriculture sector plus their entire profits for the 3rd quarter of 2021
- Tencent is dedicating 50 billion yuan ($7.7 billion) with hopes to reduce inequality
What are the Potential Economic Impacts?
China has a lot of economic power within its borders, arguably even more so than the United States.
They also have an unfair advantage over certain other nations because China can use its vast amounts of labor to produce goods for lower prices, making it easier for China to get ahead economically.
The main goal of common prosperity is to reduce poverty across the nation through stricter regulations on the country’s wealthiest companies and individuals.
Overall, common prosperity is a way to redistribute wealth, decrease poverty, and boost the Chinese economy.
How Common Prosperity Could Effect Forex Trading
The goal of common prosperity is to strengthen the Chinese economy. If that happens, the Chinese yuan may go up in value.
Therefore, yuan holders may see an increase in their positions in the coming years. However, several economic factors are at play, making the effects of common prosperity on the yuan’s value challenging to predict.
People from China also tend to take their money out of China to invest in other countries’s markets.
Common prosperity could mean that the rich would be forced to bring back money they’ve invested abroad and inject it back into China’s economy.
China has been doing this for a while now, with its state-owned companies investing in foreign companies or industries looking to expand their businesses. However, nothing is forcing private companies or individuals from China to do the same thing.
The truth is that China needs its wealthiest citizens to take part in bringing money back into China so that large amounts of capital can be raised and used locally rather than being pumped out of the country.
The Chinese government is already expending a lot of its effort in trying to get China’s wealthy citizens to do this, but these efforts have been largely unsuccessful. However, new crackdowns can change this quickly.
Other Chinese Economic Buzzwords
Besides the Chinese economic buzzword ” common prosperity,” there are a handful of other economic buzzwords.
To best understand China’s economic future and currency value, you should also know these four key terms.
Dual circulation is when China encourages its wealthy citizens to invest their money into other countries while simultaneously encouraging foreign investment into Chinese businesses.
This will allow China to continue growing while also not having its currency inflated too quickly (which can cause inflation).
The dual circulation economic strategy was laid out and implemented by Xi Jinping in 2020.
China already has one of the world’s fastest-growing economies, but they want to push their economy even further and avoid future recessions while ensuring economic security.
House Are For Living In, Not Speculation
Xi’s statement “houses are for living in, not speculation” is a nod to the hot property market in China.
As such, since 2016, China has continually put restrictions on the property markets, with over 25 cities subjected to extreme regulations in purchase limits and mortgage lending.
China may implement future measures of eliminating or restricting property purchase as an investment (speculating) to reduce housing bubbles in certain regions (or nationwide).
However, tightening China’s property market could lead to lower economic activity – housing construction, real estate development, mortgage lending, consumer spending (for example, appliances) – which consequently affects China’s GDP growth.
Chief of Industrial Chains
The “chief of industrial chains” policy grants provincial leaders (governors, vice-governors, etc.) the power to streamline industrial supply chains.
The government especially encourages the use of these policies in industrial markets negatively affected by the COVID-19 pandemic and the U.S. trade war.
When leaders use the “chief of industrial chains” authority, they must use government financing, credit, and other resources to help strengthen their position as a global supplier.
Cross-cyclical adjustment is the policy of mitigating China’s economic problems by pushing the least-productive industries to reform.
It is a preemptive approach to smooth out fluctuation in economic growth. The CCP does not have a specific definition for cross-cyclical adjustment as it entails various small steps that yield longer-term payoffs.
Cross-cyclical adjustment is a departure from China’s countercyclical policy (increasing taxes and interest rates while boosting domestic investments) the country used in recent years.
Common prosperity is the most recent economic model for China and aims to narrow the wealth inequality of its citizens while boosting the country from a financial standpoint.
China’s common prosperity model is its attempt at addressing the country’s slowing growth rate. China has not yet achieved its economic goals but has laid out a plan of action to carry them out.
China believes that “common prosperity” may be enough for China to decrease its economy’s vulnerabilities while still protecting Chinese citizens from external factors.