With the selection of the new top leadership and the upcoming new year of 2023, especially the imminent Central Economic Work Conference after the meeting of the new Political Bureau of the CCP Central Committee in early December, the outlook of China’s future economic policies has become an important aspect for the outside world to observe China’s development. Ordinary Chinese, who have been battered by the Pandemic for three years long, overseas investors and local entrepreneurs, and the wider middle class are all waiting to see the new administration’s economic course. Both the Politburo meeting and the Central Economic Work Conference are extremely important for China’s policy makers, and the December meetings are the first time the new leadership team has laid out the economic governance prospects for the world, not just for next year, but for at least the next five years of the administration. But these meetings sometimes reveal little or even very vague information, and it is difficult to judge the exact direction of economic policy through such information, and the specific situation must be taken seriously.
Given the formation of such a leadership group, it should be said that the goal of the Supreme leader’s established economic policy line will not be swayed. The general guideline is common prosperity. However, the leadership of the new government has yet to test its ability to coordinate with departments and provinces and has not demonstrated its capability to analyze and cope with the changes in the international and domestic geopolitical and economic pattern. At this time, it may be more important to pay attention to the uncertainty of the economic policy environment to achieve the general goal of common prosperity. The certainty of the leadership itself and the willpower to follow through with the supreme leader’s policy intentions seem unquestionable. With years of experience in local government, these top policymakers believe that they are not suspicious of these uncertainties. However, the uncertainties in the external policy environment are also quite complex.
1. The bleak fiscal revenue outlook
Before the COVID-19 pandemic, China had already shown signs of weakening economic growth momentum, not to mention the brutal ravages on the country’s economy over the past three years. Beijing’s crackdown on technology, education and real estate industries has had a broad impact, depriving many in the middle class of a lucrative source of income and straining local government revenues. The sudden pandemic, the prolonged lockdown across the country, made it impossible for people to do normal economic activities, but at the same time the government’s public health expenditures skyrocketed, in fact nucleic acid testing alone drained the financial capacity of local governments. Some local governments have begun to package shelter isolation facilities and nucleic acid testing projects to issue bonds, which shows how difficult the fiscal environment is. The government has always been a direct participant in the development of local economy in China, and it is worth observing whether the local government, which lacks fiscal revenue capacity, will rush to the local economy first or to the distribution plan of common prosperity in the post-COVID-19 era.
2. Diplomatic and military spending has increased year after year
In recent years, the international political and economic order has experienced turbulence, both the United States and China, which have had an unprecedented impact on the international geopolitical pattern. China has stepped up its global strategic expansion, and its diplomatic reach has become more extensive and in-depth. From distant Africa to the Middle East, a traditional accident-prone region, China has greatly increased its interest in participating in regional affairs, whether in terms of economic or strategic cooperation. Coupled with the decade-old Belt and Road Initiative, this has put enormous pressure on China’s human, material, and financial resources.
The tension over the Taiwan Strait is the biggest uncertainty for the future of the situation in China and the Asia-Pacific. It is not only related to the pattern of East Asia, but also to the change of the world pattern. To deter Taiwanese independence, China’s military build-up will not slow down. Its navy and rocket forces are hugely expensive, but the Chinese government is unlikely to back down from an arms race with America across the strait.
This uncertainty will not only put pressure on China’s defense spending but will also have a profound impact on supply chains in the Asia-Pacific region, such as advanced technology industries including the semiconductor industry among the United States, Japan, South Korea, Taiwan and mainland China. The layout of these industries is an important support for China’s economic and technological development, as well as the most important field linking China with the world economy, which can promote China’s industrial transformation and upgrading.
3. Huge numbers of low-income people
Premier Li Keqiang has publicly revealed that 600 million people in China earn less than 1,000 Yuan a month. There are actually 900 million people earning less than 2,000 Yuan a month, according to some research institutes that added to the premier’s figures. The situation has even worsened during the Pandemic lockdowns. With the realignment of the global industrial chain, China’s low-income people are likely to be hit harder. Of course, this status quo is also the basis of the common prosperity policy, and people may instead be interested in the government to introduce a new income distribution system. Once the vast majority of the population feel positive for the distributive policy of common prosperity, a small number of wealthy and well-educated upper middle class will lose their influence on the direction of economic policy. The apparent widening gap between rich and poor increases the social distaste felt by low-income people. And most of them have no deep understanding of the country’s fiscal pressures and the scale of government debt.
4. Social instability
In a recent meeting with European leader, Chinese president Xi Jinping indirectly addressed the frustrations of the country’s young and middle classes over the containment of the virus, which is mainly in response to recent demonstrations in several major cities and abroad. But mass unemployment and uncertainty about the future of the middle class, whose incomes are falling, are not mass sentiments that will disappear anytime soon. These bad feelings are the basis of mass social movements. The supreme leader may also think that this is the original purpose of promoting the policy of common prosperity for sure. Indeed, the future course of economic policy will test whether these groups are satisfied.
How to treat the middle class has become an important reference for judging the course of China’s economic policy in the next five years. Among them, the policy regarding the real estate market is the most important aspect to observe the direction of the economic path.
Since November, China has sent out aggressive policy signals to rescue the property market. Yet this is a murky decision made at the time of the transition, and it is hard to say whether it will carry over into the new Prime Minister. If the focus of the new administration is to enforce a comprehensive approach to common prosperity, it is politically impossible to allow the central bank and local governments to spend heavily on the real estate industry. The rescue policies of the past two months were focused on the supply of capital, including loans and cuts in the reserve requirement ratio (RRR), and offshore lending by the big four state-owned banks to property developers to repay debts. None of this is necessarily sustainable.
The exploitation of the real estate market is the area of greatest concern to local governments, as it relates to land finance and credit policies. The consumer market is related to the reform of the tax system, as well as regulations on sales and transfers. If the market is affected by the policy of common prosperity, it will involve the distribution system. If the central government rakes up the property distribution model — which could include encouraging collective financing to build houses or even an utter distribution model — to explore the goal of common prosperity, it will seriously affect the reform of land supply, tax policy and property rights system.
Property tax is an important indicator of all these policy moves. The article on promoting common prosperity published by Qiushi Magazine in October still stressed the need to actively yet prudently advance real estate tax legislation and reform and do a good job in pilot work. Property tax aimed at the rich class is helpful to raise the fiscal revenue and conforms to the requirements of the common prosperity guideline. Pilot programs of this tax reform were launched a decade ago in Shanghai and Chongqing. If the central government aims to roll out the new tax by 2025, there will be a lot of challenging experimental policies in the next three years. It is also unclear how provincial governments would report to the central government on this matter by then.
But in any case, common prosperity concerns every aspect of social system reform, as well as the vital interests of the vast majority of low-income people and would have a great influence on the economic policy line of China. The uncertainty of the policy environment for this overall goal is an important factor in observing China’s development trend.
Dr. Shujian Zhang is the executive director of Asia Pacific Regional Development Institute of Hong Kong, and Editor-in-Chief of Jouranl of Regional Development and Sustainability.