3/16/22 Digest New Format! The Official Word on Common Prosperity
View this email in your browser
Insider Digest 3/28/22: The Official Word on What Is Common Prosperity
Housekeeping / Announcements / Fun:
We are revamping our website and this newsletter too! I understand that it’s difficult to remember to log into the Circle community and read the posts as they come up, so we’ll be sending the full length posts as they are written, as well as do a better job of keeping you updated on what’s being discussed in the Discord. This is based on some feedback that we’ve received. Do reply and let me know what other changes you are interested in seeing.
Thanks to everyone who participated in the newest TBC Investment Syndicate deal, co-syndicated with Kevin Xu’s Interconnected.blog! We are super happy to say that we are oversubscribed, but were able to guarantee everyone their desired allocation, thanks to Kevin’s great relationship with the founders. We already have the next deal lined up, so do consider joining us if you are an accredited investor. You can apply to join the syndicate.
3/21/22 The Official Word on What Is Common Prosperity
I read the official book on Common Prosperity (published Jan 2022) so you don’t have to! Well, I raced through it, because as you might expect, it was kind of a bore. But I’ve tried to pick out the most interesting / unexpected / important points so you can get a better understanding of what the government officials are aiming for, or at least claim they are aiming for, as I think many of these goals are going to sound rather aspirational, and a lot are repetitive from what we know are existing issues that plague Chinese society. Nonetheless, there are a few new points, which I highlight at the end:
What exactly is Common Prosperity?
China is still in the beginning stages of socialism, and hasn’t yet become a middle-income society, so it cannot sacrifice “prosperity” to achieve “common,” as that will simply return the country to a time of “common poverty.”
It is about growth and distribution. Growth is self-explanatory but if distribution is unequal, and opportunities are unequal, then this actually presents obstacles to wealth. Thus, must continue the role of “the market” in resource allocation, and also improve the role of the government to create more equal opportunities for competition, and decrease inequality in secondary / later distributions.
The goal is to double GDP per capita by 2035 and become a middle developed country
Official data says China’s GDP per capita is just 16% of US in 2019, and domestic consumption per capita similarly lags behind (although it exceeds Japan’s)
Urbanization is 61% in 2019 but still far behind the 80%+ in developed countries
Similarly lagging in human development and human capital index
Wealth Gini coefficient is too high (0.8), even higher than income Gini coefficient (0.4). And while urban-rural disposable income is a difference of 2.56x and has been declining, it has not declined nearly quickly enough. It actually seems to be OK if you compare it to developed nations (US is over 0.8), but if the government thinks it's too high, then it's too high ...
How are we going to achieve the high-quality growth of Common Prosperity?
To give more resources to low-income earners and prevent them from sinking back into poverty; increase their income channels. While sinking back into poverty is not yet a problem for China, the book mentions this quite a few times and it does seem like it is a worry for the policymakers.
Lower barriers between regions, push for rural development and urban-rural development together.
On the basis of upholding efficiency, maintain fair distributions; including tax reforms, capital tax framework, to help increase the middle class and effectively adjust high-income taxation; increase precision of taxation, social benefits, etc.
Increase investment in human resources for education and healthcare.
Establish scientific and effective antitrust rules, maintain market competitiveness, weaken wage premiums in monopolistic industries and the disruptions of monopolistic capital on market mechanisms. This was the most detailed I’d seen it written out re: anti-monopoly ... it is not just regulating the industries, but also down to the wages and capital sources, none of which we’ve seen yet.
Use the 3 Distributions to "Raise Bottom, Expand Middle, Limit Top"
The 3 distributions, in case you forgot, are 1) by the market forces, 2) the government (using taxes, etc.), and 3) by individual intent (philanthropy etc). You'll find below that actually most of the policies below have to do with #2, even though most people are understandably freaked out about #3, thinking that they will be "asked" to give their wealth away.
This is exactly what you think it means .... use the 3 distributions to increase income level of low earners, expand the number of middle-income earners, and moderate high-income earners in order to create a more sustainable system
Raise bottom: improve basic infrastructure and services such as education, healthcare, elder care and living situation. Housing is for living in, not speculation. Rural land contracts should be extended for another 30 years after expiration in order to ensure food security.
Governments will need to prioritize this spending in infrastructure and basic social security, but also invest in key technologies. The way it is written in the book, key technologies is point #1 and infrastructure sending is point #2, but not clear to me that it is necessarily in order of importance.
Expand middle: create the so-called olive shaped distribution. Increase urban housing, improve returns from rural land, financial assets and gains, have lower income earners go into higher income jobs. Tehcnical workers and SME / solopreneurs will be crucial here, so lower taxes, improved business environment and more market-oriented financial services are needed. Revamp of hukou system also necessary. Middle income earners should pay less taxes.
The government's role here is much more clear, encourage entrepreneurship.
Limit top: change personal tax rates, capital taxes, institute property tax, consumption tax, etc. Encourage high earners contribute to society. Increase oversight of monopolistic businesses and SOE income distributions. Eliminate insider trading, stock market manipulation, other financial crimes, tax fraud etc.
The digital economy is an increasingly important part of the business environment and explorations should be done re: digital taxes, data taxes, etc.
On Market vs. Government
There should be clear boundaries between the market and the government, and seek to provide the market with stability and predictability. Recognize the importance of digital platforms and the new economy in economic development, while ensuring market integrity and protecting laborers. I know all of us are looking forward to seeing this happen in reality, and not just in theory!
On Antitrust and Common Prosperity
On a very superficial level ... monopolies prevent the "cake" from getting bigger, and prevent SMEs in the same industry from thriving, as well as others up and down the value chain. They fundamentally alter the fairness of wealth distribution.
Platform companies increase employment, but also have been a factor in increasing income inequality.
Policy wise, need to increase oversight of platform economy.
Employees must be protected.
Oversee how platform economy distributes their income, stop anticompetitive / antitrust behaviors, use external oversight to spur self regulation. Oh boy, this doesn't sound super friendly, but it's also not that different from what's been said before.
On How Technology Will Help
Rural development. Digitize rural China (ie 1st industry). Use "Internet + Agriculture" and other new models to give more economic surplus to farmers.
Improve supply-side and use technology to improve traditional industries (2nd industry). Blah blah, same old re: new energy, materials, biotech, semiconductors, etc.
Improve services (3rd industry) using technology. Feeling kind of redundant here ... yes you can use technology to improve everything!
Businesses & the 3rd Distribution
It should be voluntary. Specifically businesses should seek to service underserved customers on the fringe, and improve employment outcomes for rural residents by helping with agriculture, tourism, ecommerce, food processing, etc. Finally, focus on training technical talent. The massive Tencent and Alibaba funds make much more sense given this background.
Why Zhejiang for the Pilot?
On the whole, Zhejiang has a very high GDP per capita, urbanization, disposable income, and lower urban-rural income disparity than the rest of the country (1.96 vs. 2.56x nationally). It's also very market-oriented, with 76% employed in private enterprise. They're basically picking an easy pilot zone to ensure success?
Two phases:
Visible progress by 2025, in factors such as increased middle class, lower urban-rural divide, etc. Some learnings can be replicated across the country.
By 2035, basically realize common prosperity, reach developed country status in terms of GDP per capita, etc.
Zhejiang is also advanced in its digital economy. It will need to figure out how to enact the income distributions and bridge the digital divide in the so-called new economy. It will also endeavor to strengthen and employ digital methods to govern. This was an interesting point, that Zhejiang was also picked because of its advanced digital capabilities.
Zhejiang already has a plan to double per capita middle class income in one decade.
By the way, after common prosperity is "proven" in China, China wants to export these methods to the rest of the world.
Specific Problems: Inequality in Education and Healthcare Exacerbate Inequality and prevent "Whole Development"
Migrant workers still cannot get education for their children easily in their adopted city and the workers themselves cannot easily get social benefits
Urban vs. rural residents experience large discrepancies in education (20% higher investment in cities), healthcare (2x higher on per capita basis in cities) and basic infrastructure (urban online rate is 43% higher than in rural)
Wealth Gini coefficient has been over 0.7 since 2010, now at 0.8, by 2015 the top 1% owns 30% of wealth, top 10% 67%, and bottom 50% just 6% (down from 16% in 1995).
Vocational education is another big area that needs to be reformed and optimized.
These things don't just resolve income issues, it's not just about material advancements but also spiritual / entire life improvements. Blah blah, I take this part as just boilerplate language as it is all very vague.
Things That Won’t Be Changing
Can’t rob the rich to help the poor because need the rich to work hard and use their example to inspire the poor. I don't think there will be "robbing," there will just be ... taxes.
Obviously ... the Party must lead. Don't ever forget, the Party is at the center of this!
China is still a developing country, so growing the size of the cake is still the most important. Of course, some of us may not agree that's what China is doing, but this is one base assumption that I think if you do not accept, you should not invest in China, period.
Final Thoughts:
I suppose China has in the last decade started to envision itself as a leader for everything, so it should be no surprise that the government would love to be an example for other developing countries. Recall that it wants to be a leader in regulation too, especially for emerging technologies, and of course innovation of all sorts.
I thought the book really clarified for me that -- assuming things go according to plan -- it is the investment in infrastructure (health & education) and then tax rates that will be doing most of the "re-distribution.” These are technically part of the "2nd distribution." High income earners should take this into account, as should businesses. The 3rd distribution AKA philanthropy I am very doubtful will have that much impact, even though that's what the media likes to report on -- the common prosperity tax that Alibaba and Tencent paid! Nope ... I think just regular old taxes and regulations will do most of the "damage."
The digital economy was mentioned a lot more than I expected! It's part of why they picked Zhejiang as the first pilot zone. There's going to be a lot more experimentation around regulating these businesses. In fact, the book barely mentions the manufacturing sector, except in the context of upgrading human capital to be more skilled. In other words, don't expect regulations to go away.
China is pro-small business, but not pro-big business. I'm simplifying a lot, but that's basically what it is. Therefore it is totally cool saying "we love entrepreneurs" while regulating the heck out of Big Tech. I'm not saying that it's any good at supporting small businesses yet, but if you believe the plan, then it wants the middle-income small business owner to thrive, and it is very suspicious of big business and their monopolistic tendencies, including SOEs. Think carefully about whether or not this helps your portfolio ... I personally think non-platform businesses are fine, but it does ultimately depend on how the regulators balance every stakeholder's interests, and platform or not, you can still be damned.
Common prosperity is ultimately about government policy. It's just a new set of playground rules, but it doesn't really tell you what you should be doing as a business person or investor.
If I really had to pick industries that have clear headwinds, it would be education (vocational?) and healthcare (everything, but senior care in particular is mentioned quite a few number of times). The other things about applying technology to each of the three sectors of the economy are vague and have been said a million times before. Lots of yawns from me in those sections.
Would love to hear your thoughts!
PS I really don't recommend the book, it is soooo dry and repetitive, but if you buy the digital version, you can Ctrl+F through the parts you are interested in, I suppose!
What You Missed on the TBCI Discord
JD lays off 10-30% across the board, much more than just community group buying:
https://technode.com/2022/03/28/jd-expands-layoffs-cuts-in-core-business-units-report/
Below we can see the list of groups affected (in Chinese). Rows 8-13, 20, 22, 23, 25, 30, 33 are all tech groups, blue is Jingxi (8 rows), red is JD.com (18 rows), purple is JD Technology, and green is JD Logistics (3 rows).
Discussion on WeChat Payments spinoff:
https://www.bloomberg.com/news/articles/2022-03-18/china-weighs-tencent-payments-overhaul-new-license-requirement?utm_source=google&utm_medium=bd&cmpId=googleInsiders give their opinions on what this could mean — it seems reasonable enough that WeChat Payments will have to be under separate license given the ongoing Alipay restructuring. It’s not clear that this is that detrimental to Tencent, unless there is a forced opening up to other payment providers.
China is beneficiary of internationally-mobile publishing scientists, although the exact methodology is unclear and implications even more murky
Have any comments or questions? See you on the Discord server!
Copyright (C) *|CURRENT_YEAR|* *|LIST:COMPANY|*. All rights reserved.
*|IFNOT:ARCHIVE_PAGE|**|LIST:DESCRIPTION|**|END:IF|*
*|IFNOT:ARCHIVE_PAGE|**|HTML:LIST_ADDRESS_HTML|**|END:IF|*
Update Preferences | Unsubscribe
*|IF:REWARDS|* *|HTML:REWARDS|* *|END:IF|*