Among China’s elite, Xi’s push for ‘common prosperity’ provokes uncommon angst

Chinese president Xi Jinping vowed this week to “adjust excessive incomes,” putting the nation’s super-rich on notice that the state is preparing to combat economic inequality by redistributing private wealth.

On Tuesday, according to state media, Xi told officials at a meeting of the Chinese Communist Party’s central financial and economic affairs commission, which he chairs, that the government should “regulate excessively high incomes and encourage high-income groups and enterprises to return more to society.”

The financial and economic affairs committee usually debates matters of macroeconomic and financial policy; the focus is on growth. But at its Tuesday gathering, according to state press accounts, the main item on the agenda was achieving “common prosperity” 共同富裕 (gòngtóng fùyù).

The committee noted, according to this report in the Financial Times, that “while the party had allowed some people and regions to ‘get rich first’ in the early decades of China’s reform and opening period, it was now prioritizing ‘common prosperity for all.'”

Xi’s remarks, per the FT, signal that the state’s 10-month campaign targeting China’s largest tech companies “is rapidly expanding to encompass broader social goals.”

The larger question is whether the combination of Xi’s rhetoric and the tech clampdown indicate China is making a fundamental break with the market-led, growth-above-all emphasis that has long defined what former leader Deng Xiaoping wryly dubbed “socialism with Chinese characteristics”—and, if so, whether that shift poses a threat to China’s continued growth.

It’s unclear what measures China’s leaders are contemplating to tackle inequality. Many analysts think the menu of policy options includes taxes on property, inheritance, and capital gains. (Remarkably, such taxes, though common in the West, don’t feature in China’s socialist economy.) Pimco Asia’s Carol Liao tells Bloomberg Beijing may also pursue enhanced social security programs, as well as incentives for charity and more government transfers to poorer regions. The government has selected Zhejiang province as a pilot zone for new initiatives.

What is clear is that wealth and income inequality remain acute concerns in China. Overall living standards have improved dramatically in the country. But China’s Gini coefficient, a measure of inequality, increased to 70.4 in 2020, from 59.9 in 2000, according to Credit Suisse—and the pandemic has widened the gap.

In 2020, China claimed 1,058 U.S. dollar billionaires, more than any other nation in the world, according to the latest Hurun Global Rich List. (The U.S. ranked second with 696.) China accounted for 20% of global sales of luxury products last year, according to Bain & Co.

And yet, as Premier Li Keqiang acknowledged last year, more than 600 million people, or over 40% of China’s population, have a monthly income under $140.

Xi has extolled the importance of “common prosperity” since he came to power in 2012. But investors paid keen attention to his remarks at this week’s committee meeting because it was the first he has publicly chaired since party leaders returned from their annual policy retreat at the seaside resort of Beidaihe.

Beijing has ratcheted up the pressure on China’s tech tycoons since November when Xi scuttled the planned $37 billion initial public offering of Jack Ma’s Ant Group after Ma criticized China’s financial regulators. In July, regulators cracked down on ride-hailing giant Didi Chuxing after it ignored warnings to postpone a $4.4 billion U.S. listing. Two weeks later, the government effectively torpedoed China’s $100 billion “ed tech” industry with an edict forbidding Internet companies engaged in online tutoring to earn profits.

The regulatory blitzkrieg has triggered an epic selloff of New York-listed Chinese companies, erasing more than $1 trillion in market capitalization since February. China tech stocks extended those losses in Asia trading Thursday with Ma’s Alibaba Group Holdings sinking to an all-time low of HK$160 on the Hong Kong exchange. Video game giant Tencent Holdings, food delivery leader Meituan, and video streaming platform Kuaishou Technology slid 3%, 7%, and 7% respectively.

To date, neither Xi nor the party’s other senior leaders have given the slightest indication that they have even noticed, let alone are troubled by the global selloff.  

Chinese tech tycoons, though, are paying attention. On Wednesday, Tencent announced that it will donate $7.7 billion (slightly more than its second quarter profits) to aid the government’s wealth redistribution efforts. And as Fortune’s Yvonne Lau points out, over the past eight months, five of China’s richest tech billionaires have pledged at least $13 billion of their personal or corporate fortunes to charitable foundations and initiatives, a sum that far exceeds previous years’ totals.

More Eastworld news below.

Clay Chandler
clay.chandler@fortune.com

This edition of Eastworld was curated and produced by Yvonne Lau. Reach her at yvonne.lau@fortune.com  

Eastworld News

Return of Malaysia’s UMNO

Ismail Sabri Yaakob, Malaysia’s former deputy prime minister, is set to take over as the country’s new prime minister after Muhyiddin Yassin stepped down on Monday. On Thursday afternoon, 114 parliament members arrived at the national palace to verify their support for Yaakob. Once Yaakob's new leadership is confirmed, it will mark the return of the United Malays National Organization political party, which had governed Malaysia for 60 years before its 2018 election defeat due to corruption allegations surrounding the 1MDB scandal. Reuters

Prepare for more restrictions

Chinese Internet giant Tencent warned investors that more restrictions on China's Big Tech companies are coming. On Wednesday, Tencent reported its slowest quarterly revenue growth since early 2019. While its net income for the quarter was $6.5 billion, beating expectations of $4.7 billion, sales of its core video game business only grew by 12%, marking the slowest pace since Q3 2019. Tencent shares have plunged over 40% since January due to Beijing's tightening control over Big Tech and sectors like online gaming. Also on Wednesday, China's Ministry of Industry and Information Technology said that 43 apps, including Tencent's WeChat messaging app, illegally transferred user data. The state agency ordered the parent companies to make rectifications by Aug. 25 or face punishment. Bloomberg

Bye bye crypto 

Cryptocurrency exchanges are halting their services in South Korea as the government ramps up stricter regulations surrounding digital currencies. U.S.-based platform Bitfront announced it will phase out its services in Korea, while Hong Kong-based FTX said last week that it has removed Korean from its available platform languages. Binance, the world’s largest crypto-exchange platform, is also ending its Korean-language support and payments in Korean Won as of this month. On September 25, South Korea will enforce new rules requiring virtual asset trading exchanges to get state approval and partner with domestic banks in order to operate in the country. Korea Economic Daily

Drinking curbs hit China’s favorite liquor stocks

China’s clampdown on the country’s business drinking culture has sent domestic liquor stocks on a downward spiral. Shares of Kweichow Moutai, the world's largest liquor firm by market capitalization, plunged 10% since last Tuesday when China’s anti-corruption watchdog criticized workplace drinking behavior. Wuliangye stock, a Moutai competitor, has similarly dropped 8% since the Tuesday announcement. Yet, experts say Moutai’s size—it has a $313 billion market cap—and its track record of surviving past crackdowns means it may be able to withstand the new shocks. Fortune

1,006 civilians

Over 1,000 civilians have died since Myanmar’s military coup began this February, according to a new report by the Assistance Association of Political Prisoners, an activist group that records killings by security forces. In February, Myanmar’s army overthrew then-leader Aung San Suu Kyi and her party the National League for Democracy, which prompted the start of mass protests country-wide. COVID-19 infections in Myanmar have also soared in the past six months, confronting international donors with a tough choice: to either work with Myanmar’s military government or watch helplessly as the country’s infections spiral out of control. CNN

Markets and Movers

Tim Hortons – Tim Hortons China—the Chinese business of the iconic Canadian coffee chain—is set for a Nasdaq listing via SPAC merger with blank-check firm Silver Crest Acquisition even amid tightened scrutiny from Chinese and U.S. regulators. Expected to complete in Q4 this year, the deal will value the firm at $1.7 billion—and also test the waters for linking U.S.-listed SPACs with Chinese companies in an era of heightened regulatory scrutiny from both Beijing and Washington.

Coinbase Japan – U.S.-headquartered crypto platform Coinbase is teaming up with Mitsubishi UFJ Financial Group (MUFG) to launch a Japanese cryptocurrency exchange. The Japanese platform will allow MUFG account holders to buy and sell digital currencies. Coinbase Japan currently has a staff of 30 and is seeking additional hires for its product development team. Coinbase operates in 19 Asian countries including Hong Kong, India and South Korea, according to its official website.

Karrot – Karrot, an e-marketplace app, has become South Korea’s latest unicorn valued at $2.7 billion after a $162 million fundraise. Backed by a SoftBank venture arm, Karrot’s investors also include DST Global, Aspex Management and Altos Ventures. Karrot will use its new funds for new hires and international expansion. The app has 15 million active monthly users; it allows users to buy and sell second-hand items and search for job and property listings, as well as offering services like petcare and laundry. Karrot Pay, its digital payments service, will launch later this year.

Yitu – Chinese artificial intelligence firm Yitu Technology is exploring a Hong Kong public listing after stricter regulatory requirements left its planned $1.2 billion Shanghai STAR IPO up in the air. The company is seeking a $4 billion valuation in its Hong Kong share sale. Known as one of China’s ‘4 AI dragons,’ Yitu was founded in 2012 and its investors include the likes of Sequoia Capital and Hillhouse Capital.

Baidu – Chinese Big Tech firm Baidu has raised a $1 billion, two-tranche, USD sustainability bond—its first-ever environmental, social and governance (ESG) transaction. The company says the funds will be used for ‘general corporate purposes’ including debt repayment and financing ESG projects. Chinese firms have raised over $121 billion in USD debt funding this year to-date, just below the $126.6 billion raised during the same time last year, according to Dealogic data.

Final Figure

300,000 

The U.K. government estimates that as many as 300,000 Hong Kong residents will use the British National Overseas (BNO) passport to leave Hong Kong. One consequence: billions of dollars in retirement funds trapped in the city. In January, Beijing announced that it would no longer recognize BNO passports as valid documents, meaning those that left Hong Kong using the passport have been barred from withdrawing their Mandatory Provident Fund retirement savings from Hong Kong accounts. The MPF trustees, which include major banks and insurance companies like HSBC, AIA and Manulife, say that they're complying with regulatory requirements. Before Beijing's new January rules, Bank of America estimated that MPF outflows from Hong Kong migration to the U.K. would total $6.9 billion in five years. In the year ended June, nearly 90,000 people left Hong Kong for the U.K. and other countries.