The swift and unexpected regulatory crackdowns taking place in China, on everything from private tutoring to online gaming, have roiled global equity markets and led some to question whether President Xi Jinping is stoking a second Cultural Revolution. Rather than a return to Maoist economics, however, the recent regulatory storm is better understood as an effort to consolidate popular support through a largely superficial campaign to reduce inequality. The Chinese leadership will need to be far more proactive in areas such as welfare policy, taxation, and free movement of people if it is serious about so-called “common prosperity.”

Economic development has helped China, by some measures, become the world’s largest economy and a technological and military force to be reckoned with. But Beijing’s narrow focus on growth has also contributed to myriad social ills: yawning regional, wealth, and income inequalities, environmental degradation, declining fertility rates, and a palpable sense of pessimism among urban youth. Segments of China’s population, from delivery workers to near-retirees, have expressed frustration about China’s cut-throat job market, and young people have begun “lying flat” in defiance of long work hours and declining social mobility.

Xi appears attuned to these pockets of discontent and has spoken on multiple occasions about the risks of the “separation between the Party and the People.” In an appeal to the Party’s socialist roots, Xi has called for bridging the “insurmountable gap between the rich and poor.” Unlike his recent predecessors who paid lip service to redressing economic inequality, Xi appears willing to accept high costs such as the recent declines in the market value of leading private companies — and potentially a big hit to their profits — if it means signaling that fairness is a priority.

Xi’s nod to the left masks a broader trend underway in Chinese politics since the 19th Party Congress in 2017, and reinforced at the 5th Plenum in 2020; no longer is the Chinese Communist Party (CCP) staking its legitimacy on GDP growth, but instead on high-quality development that balances efficiency with fairness. For the first time in the PRC’s 72-year history, the 14th Five-Year Plan omitted economic growth targets in favor of broader goals like innovation, welfare, sustainability, and national security. China’s success at achieving “moderate prosperity,” in other words, has given way to a new focus on “common prosperity.”

While many Chinese citizens may welcome aspects of Xi’s reforms, it is already clear that the regulations will do little to meaningfully raise living standards for the average Chinese. Some new initiatives, such as improving worker safety and stabilizing housing costs, could ease pressure on low and middle income earners. But other policies, like pressuring celebrities to pay more in taxes and encouraging entrepreneurs to give more to charity, will do more to make the rich poorer than the poor richer.

This is a problem because substantive policy reform is needed to uproot China’s deep-seated economic disparities. Unbalanced economic growth, as well as questionable political and economic choices, have led to very wide wealth and income inequality. Just months before President Xi declared “complete victory” over extreme poverty in China, Premier Li Keqiang highlighted that over 600 million Chinese citizens still live on less than 1,000 yuan ($140) per month. As in many developed countries, the value of assets in China like houses and corporate equities has compounded for decades, while the share of income earned by the bottom 50 percent has fallen dramatically.

The Chinese leadership will need to be far more proactive in areas such as welfare policy, taxation, and free movement of people if it is serious about so-called “common prosperity.”

What makes China different from many other unequal economies is that the government does surprisingly little to smooth out the extremes of wealth and income through taxes and transfers. Despite its official status as a socialist country, China’s social safety net ranks among the least comprehensive of the world’s major economies. In the past, Xi called for reforms to the national pension and healthcare schemes, but progress has been slow. China’s unemployment insurance programs still cover less than 10 percent of those looking for work. Whereas developed countries generally budget about 8 percent of GDP for health expenditures, China spends only 2 percent of its GDP on healthcare.

Perhaps even more surprising is the regressiveness of China’s tax system. The bottom 50 percent of income earners effectively pay more in taxes than the top fifty percent. Beijing collects just over 1 percent of GDP in personal income tax, as opposed to the United States’s 10 percent. Capital gains taxes are poorly enforced, and despite perennial discussions about property tax reform, the current regime remains largely underdeveloped. This necessitates a reliance on value-added and payroll taxes, two methods of fundraising that disproportionately hurt the poor and working classes. Without higher and more progressive taxation, Chinese authorities will find it difficult to fund public services for the country’s poor and aging populations. 

Finally, China’s household registration system produces wide economic disparities between urban and rural areas. Essentially an internal passport, the hukou system deprives Chinese citizens of access to public benefits outside their area of registration. This means that over 200 million rural migrants currently working in cities are not permitted to buy property, send their children to public schools, or access medical care; they are essentially second-class citizens. The Chinese that choose to remain in rural areas lack quality job opportunities and access to good public services, including schools and healthcare. Left unreformed, the hukou system will continue to deny vast swaths of the Chinese population equal opportunity for economic advancement.

Though some have presented the Party’s regulatory initiatives as a “profound revolution,” they are better read as populist policies that funnel growing frustration away from the government and toward the business and entertainment elites. Browbeating billionaires simply won’t address structural imbalances in China’s economy. Should the Party fail to meaningfully level the economic playing field, its professed concern for people’s welfare could lead to more questions about its legitimacy in the future.

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