Targeting China’s richest 1% can reduce the wealth gap

Pursuing “common prosperity” is one of the latest strategic goals of the Chinese Communist Party or CCP.

This new initiative aims to reduce social inequality through primary income distribution, government-led redistribution efforts such as regulation, and social philanthropy. While the concept is not new, some of the necessary policies are.

Responding to an increasingly urban-rural gap, former president Jiang Zemin emphasized the need to “raise the proportion of the middle-income group and increase the income of the low-income group” to achieve common prosperity back in 2002.

President Xi Jinping reinvoked the concept of common prosperity in August 2021. Some see the idea as embedded in China’s socialist ideology.

But from a governance perspective, the new policy direction is considered timely and pragmatic as income and wealth gaps in China have worsened due to the Covid-19 pandemic.

So far, the CCP’s new initiative of reducing wealth gaps has put Chinese tech giants under the spotlight. These companies have become some of the fastest-growing in the world’s second-largest economy, with their founders among the country’s richest.

Social inequality

When Xi stressed the need to “reasonably regulate excessively high incomes” to narrow social inequality, China’s tech billionaires, one by one, pledged additional corporate and personal donations to common prosperity programs. 

Alibaba and Tencent each pledged 100 billion yuan (US$15.5 billion) toward various social programs. They were followed by Pinduoduo with a 10 billion yuan donation to help rural residents in China.

Zhang Yiming, the founder of Bytedance, donated 500 million yuan ($77 million) to set up an education fund in his home city. Wang Xing, the founder of Meituan, also donated $370 million through his own charitable foundation.

Social philanthropy aids wealth distribution by encouraging the rich to return more to society.

During the past few years, social philanthropy in China had been led by tech giants even before the latest government pressure set in.

In addition to establishing dedicated charitable funds, internet companies offer their platforms for mass charitable events such as Tencent’s annual 99 Giving Day.

Jack Ma, of Alibaba, Ma “Pony” Huateng, of Tencent and Zhang, of ByteDance, were among the top five philanthropists in China in 2011.

By international standards, Chinese technology companies do not trail their foreign counterparts in philanthropy efforts. Take their response to Covid-19 as an example.

Statistics from Foundation Maps show that Bytedance, the parent company of TikTok, is second only to Alphabet-Google in philanthropic contributions to virus relief.

In fact, Bytedance contributed a higher percentage (0.47%) of company revenues during 2020–2021, compared with Alphabet-Google at 0.32%.

Alibaba, with combined revenues amounting to just one-third of Amazon’s, committed $90 million more than the United-States based group to global programs relating to the pandemic.

Alleviate poverty

Now, under a new political environment, Chinese tech billionaires are pledging even more funds to alleviate poverty in China.

For the CCP, putting pressure on tech companies and entrepreneurs to scale up donations is a convenient tactic for the time being. But this should not divert policymakers’ attention from other important measures that are critical to improving social equality.

What China needs is more than just a continuous flow of donations, but effective programs that target new causes of wealth gaps.

For example, given that children in China are entitled to nine years of free education, access to primary school-level is less of a problem now than access to quality education in rural areas.

Poor resource allocation and management often hinder the delivery of quality education in villages. In this respect, Jack Ma’s Rural Teacher Award and Rural Principal Award – launched in 2015 and 2016 respectively – have contributed to reducing urban-rural inequality.

The awards recognize outstanding teaching and school management in villages and provide funding to support the ongoing professional development of rural teachers.

The proliferation of corporate-led common prosperity funds – in part a response to political pressure – is welcome.

After all, it is the implementation of dedicated projects and an efficient allocation of funds to tackle real causes of inequality that will promise effective outcomes for poverty alleviation.

Still, relying on the goodwill of the wealthy will only partially contribute to social equality.

Previous scandals of government-organized non-governmental organizations have, to some extent, undermined public confidence in charitable organizations. Increasing the transparency of these groups to reduce public skepticism of social philanthropy is needed.

In the long run, China should address the fundamental causes of urban-rural disparities and wealth gaps.

In addition to redistributing wealth from the rich to the poor, policies that target primary income distribution, such as reform to the tax system and broadening social benefits available to migrant workers, will be necessary.

Migrant workers

The 300-million migrant workforce in China constitutes a sizable population of low-income individuals who are deprived of adequate social benefits.

Reforming hukou – the Chinese household registration system – will have positive a impact on their social mobility.

Extending the tax scheme for luxury properties – a pilot policy that is running in Shanghai and Chongqing – and introducing an inheritance tax will be further steps to reduce wealth gaps.

Yvette To is in the Department of Asian and International Studies at the City University of Hong Kong.

This article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.