In recent years, there has been a significant increase in income and wealth inequality in China, partly the result of the market economy creating vast wealth for a relatively small number of entrepreneurial people. Deng Xiaoping, China’s paramount leader in the 1980s and 1990s, is alleged to have said that “to get rich is glorious” (although it is said that a better translation is “let some people get rich first”), which was a dramatic reversal of traditional Communist orthodoxy. Deng’s statement was meant to encourage people to seek riches as part of the development of the market-based economy. However, lately the government has taken steps to limit the growing power of China’s affluent. It has especially sought to limit the power of technology companies and to curtail their growing footprint in global capital markets. It has also sought to limit the power of private educational companies that are seen as providing an unfair advantage to the children of the affluent. Evidently, the rise in inequality is increasingly seen as a problem.
Last week, authorities indicated that, going forward, promoting income equality will be a key policy. At a Communist Party leadership meeting, a statement was released vowing to “strengthen the regulation and adjustment of high income, protect legal income, reasonably adjust excessive income, and encourage high-income groups and enterprises to give back to society more.” Communist Party leadership said that it will seek a balance between “efficiency and fairness.” This sentiment was promoted at the highest levels of the Chinese government.
What this means in practice is still hard to say. It could mean further efforts to limit the power of private enterprise, especially in the technology sector. That, in turn, could have a negative impact on entrepreneurship and innovation. The result could be a slower economic growth in the future. Nonetheless, the new policy could entail more social spending aimed at levelling the playing field for those with lower levels of skill, education, and income. If so, it could have a positive effect on the consumer economy, which the authorities are keen to expand. In recent years, a disproportionate share of economic growth stemmed from investment and exports rather than consumer spending. The government has indicated a desire to reverse this trend.
By Ira Kalish – Deloitte Insights