Hong Hao: What Foreign Investors Don’t Get About China’s ‘Common Prosperity’ Goal
During the early days of China’s reform and opening-up, late state leader Deng Xiaoping repeatedly emphasized the term “common prosperity.” At a meeting in December 1990, he said: “We have been discussing ‘common prosperity’ since the inception of reform and opening-up. One day in the future it will become a focal topic. Socialism is not about a few people getting rich while the majority stays poor. The foremost advantage of socialism is common prosperity, and it is one of the essences of socialism.”
At a recent meeting of top policymakers, common prosperity was discussed in further details. Transfer payments, tax and charity were all discussed during the meeting.
Amid the tightening oversight of internet platform unicorns, many companies chose to expand their donations to help achieve the goal of common prosperity in remote and less developed areas. Yet, market gyrations engulfing many of China’s biggest tech firms into epic volatility have caused much confusion among investors, leaving some foreign investors heading toward the exit.
But we are far less pessimistic, and are confident that the prospects beyond the immediate term have indeed been improving.
Disparity in income and wealth distribution has contributed to insufficient demand and deflation, as well as other social issues that will likely become more glaring in the future. Since 2017 when the “principal social contradiction” was redefined, the ratio between the top and bottom incomes in China has stabilized, after rising for over a decade, which means income inequity has indeed stopped worsening. China has started to work toward this common-prosperity goal since then, not today. It is a process that has been ongoing for some years.
(Editor’s note: The “principal social contradiction” is a political jargon in China. In 2017, it was redefined as the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life. Previously, it was one between the ever-growing material and cultural needs of the people versus backward social production.)
If so, why is the market suddenly so concerned about “common prosperity”?
We would argue that this term has been misconstrued by foreign investors. As there are different “China markets” as represented by U.S.-listed Chinese companies, as well as Hong Kong-listed and A-share-listed companies, we can gauge who has gotten the wrong message by simply contrasting the index performance of these different groups of companies.
There is significant divergence in performance between different measures — the ChiNext Index and the Nasdaq-100 Index are at the top and continue to make new highs, while U.S.-listed Chinese internet companies, as measured by the KraneShares CSI China Internet ETF, and the MSCI China Price HKD Index are underperforming.
As the ChiNext Index is mostly traded by domestic investors, while U.S.-listed Chinese tech firms are held by many foreign investors, such divergence in their performance suggests that the latest developments in China that augur well for the country in the long term are somewhat misconstrued by foreign investors. Some even were hasty to declare China “un-investable.” Respectfully, we disagree.
Common prosperity is not redistributing the existing accumulated wealth involuntarily. It is more about devising a fairer process in which the fruits of economic development can be shared by more Chinese people who have contributed greatly to the revival of China’s economic and cultural prominence. And there are many ways to achieve this goal, such as a capital gains tax and some other forms of redistribution and transfer payment in the future.
The interpretation of foreign investors versus domestic ones, as seen in the diverging performance between the indexes held by different groups of investors, corresponds to the different beneficiaries of the changes toward “common prosperity,” with domestic investors being the clear winners going forward. No wonder A-share indexes have remained mostly unfazed amid the turmoil in offshore Chinese stocks.
We believe that the Hang Seng Index has reached an important low after last week’s sell-off. While a second low is possible, long-term investors should start thinking about the long term, and deploy capital accordingly.
Hong Hao is managing director and head of research at Hong Kong-based Bocom International Holdings Co. Ltd.
This article has been edited for clarity.
Contact editor Lin Jinbing (email@example.com)
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