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ESG Focus: China Must Prosper Or Perish

ESG Focus | Jun 15 2022

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

China Must Prosper Or Perish

China President Xi Jinping launched the nation's six-point "Common Prosperity" plan with a series of strong-arm tactics that alarmed markets, but the plan's overlap with the UN's Sustainable Development Goals is startling

-Prosper or perish – the ESG imprimatur
-Six-point prosperity plan versus UN Sustainable Development Goals
-Ideological ramifications
-Will China’s social initiatives be replicated in the West?

By Sarah Mills

Global financial markets are reeling as the Ukraine War and covid lockdowns in China exacerbate inflationary pressure in the West.

In a previous article, FNArena explored the extent to which recent global tension could be attributed either to the rise of China as a dominant world power; domestic policy; or ESG (aka economic) ambitions.

In this article, we examine China’s six-point Common Prosperity Plan and compare it with the United Nations Sustainable Development Goals and draw our own conclusions.

A Quick Recap

China announced its Common Prosperity Plan in 2021 – a move that angered its own east-coast power brokers and was accompanied by an unpleasant show of power, the government arresting Jack Ma, halting the listing of Ant Group, scuppering Didi just two days after listing and taking aim at other sectors of the internet “gig” economy. 

The government also rejigged tax laws and took strong steps to rein in the housing infrastructure bubble (which had been remarkably slow in coming).

These moves wiped trillions of dollars off financial markets – the repercussions of which are as yet unclear. There would have been winners and losers but as yet, the losers have not been fully exposed.

The crackdown on the infrastructure bubble also triggered a sharp decline in China’s normally stellar gross domestic product (GDP), forecast to average roughly 3% in 2022.

To top it off, this year the government enacted strict lockdowns/restrictions in the economic powerhouse cities of Shanghai and Beijing, paralysing supply chains. This was despite protestations from the World Health Organisation that the relatively benign omicron variant did not warrant such drastic action.

Meanwhile, eye-watering inflation in the US, exacerbated by supply-chain challenges in China, have reminded the West of just how dependent it is on China for its economic stability, and S&P Global expects it will take decades to shift this entrenched supply chain dependence.

Meanwhile, China’s President Xi Jinping shifted his rhetoric from “prosperity” to “stability”, in a bid to stem the nation’s economic slowdown and placate domestic power brokers and the populace heading into his re-election this year.

Observers believe this is more of a tactical retreat than a true policy shift and that the Common Prosperity Plan remains intact.

Prosper or perish – the ESG imprimatur

But most of the above actions can be explained through the government’s attempt to position itself for the new ESG regime.

The “S” in ESG is the one element of the trio that clearly offers preferential economic treatment to Western economies over emerging economies, given the former have both the economic infrastructure, social infrastructure and standards, and governance infrastructure necessary to meet ESG requirements. 

The West clearly has an entrenched advantage owing to the capitalists’ deliberate elevation of living standards as a protection against communism during the Cold War.

The West is also reasonably well-placed in that it has run down legacy (non-circular, non-digital) manufacturing by outsourcing it to emerging economies over the past few decades, and is ready to rebuild anew.

There are also strong economic competitive advantages to having a large well-heeled middle class that can drive domestic consumption and growth.

This represents an existential threat to China as a global powerhouse. Conversion to renewables and circularity is a relatively easy task for a country with China’s manufacturing scale, than is the more intractable task of addressing social inequality.

Should the world’s capital suddenly drain from the nation into other more “prosperous” economies as the world establishes a new global infrastructure to accommodate a fourth industrial revolution built on circularity, the country could fall as fast, if not faster, than it rose.

This casts the recent supply chain challenges in a new light. To what extent is the West ready to disentangle itself from entrenched dependence on China’s supply chains by pouring investment into new circular infrastructure, and to what extent will that shift be constrained by China’s hold on the supply of chips and widgets.

But back to the “S”. Even should China succeed in converting its manufacturing to circularity before the West, it still has the social scores to contend with.

The ESG regime is designed to show preferential treatment to those nations with greater equality and redistribution of wealth – at least until the transition is completed – partly to provide stability and partly as an equaliser.

Social scores are also aimed at eliminating the competitive advantages that many countries enjoy through utilising slave or sub-market priced labour.

It’s a matter of prosper or perish.

Common Prosperity Plan and the UN Sustainable Development Goals

Enter President Xi’s Common Prosperity Plan.

Is it a form of economic policy, communist policy, or economic aggression? 

In my view, China has 17 very good economic reasons to implement the Common Prosperity Plan, and they are called the United Nations’ Sustainable Development Goals (SDGs).

As a centralised, non-democratic government, China is likely to use all the means at its disposal, including strong-arm tactics, to achieve this. 

The six-point plan is as follows:

  1. Increase equality, co-operation and inclusiveness in development
  2. Focus on expanding the scale of the middle-income population
  3. Promote equalisation of basic public services
  4. Strengthen norms and adjustments for high-income earners
  5. Promote the common prosperity of people while meeting their spiritual needs
  6. Promote the common prosperity of farmers and rural economies.

Now let’s compare that with the SDGs that specifically relate to the six-point plan.

SDG 1: No poverty

SDG 2: Zero hunger

SDG 3: Good health and wellbeing

SDG 4: Quality education

SDG 8: Decent work and economic growth

SDG 9: Industry, innovation and infrastructure

SDG 10: Reduced inequalities

SDG 11: Sustainable cities and communities

SDG 12: Peace, justice and strong institutions

The alignment is startling. More than half of the 17 SDGs relate directly to Xi’s prosperity campaign (the rest relate to the environment and gender, and there is an overlap with a 10th goal; that of sustainable cities and communities). And theoretically, the crackdown on corruption can align with the governance directive.

It is therefore notable that Xi’s first actions were to take aim at unproductive infrastructure spend, such as the debt-fuelled housing infrastructure boom; education providers; healthcare providers; tax structures favouring the wealthy; and redistributing wealth from the country’s east to the country’s west.

These initiatives align with all nine of the above goals. China also claims to have eradicated extreme poverty in 2021.

But 600m people still survive on less than US$154 a month, according to recent data, and this is the gap the Chinese government is keen to close.

S&P Global says the campaign also has other aims: to move China up the manufacturing value chain, and to support birth rates and education, the latter being important for a high-tech economy. 

These aims would be funded by government at the local level and probably by State-owned enterprises (SOEs) by raising wages for SOE employees, says S&P. 

S&P Global says this may require taxes to fund projects, which will have ramifications for the tax system and most likely remove favourable tax policies and subsidies for corporations operating in China.

At the moment, the Chinese Business Tax or Corporate Income Tax applies to all companies in China, foreign-owned and Chinese-owned and is levied on company profits at a rate of 25%. 

Unfavourable tax treatment in China would likely provide further impetus (on top of environmental drivers) for the West’s shift to on-shoring.

An overhaul of the tax and social security system is also expected to impose new taxes on property, inheritance and capital gains, and on high-income groups, aimed at reducing excessive incomes and improving access to health and education.

Ideological Ramifications Of The Prosperity Plan 

The West has many reasons to be alarmed by the prosperity campaign – the least of which perhaps, is the campaign’s aim to raise China’s social scores over the next decade and build its economic might and influence in the world.

The capitalist West also harbours ideological fears.

In late August of 2021, state-owned media declared: “The capital market will no longer become a paradise for capitalists to get rich overnight … The cultural market will no longer be a paradise for sissy (effeminate) stars, and news and public opinion will no longer be in a position worshipping Western Culture”.

This may well be just rhetoric to reinforce President Xi’s power base, but in and of itself, it is alarming to the West. 

If China’s actions were merely aimed at boosting ESG competitiveness, all well and good, but the framing of the rhetoric (combined with the Chinese government’s action that year) has significant implications for the capitalist West’s aims to bring all economies under its financial dominion. 

And then there are the echoes of communism, which the capitalist West mightily opposes. This perhaps explains the US administration’s declaration that China is its No. 1 enemy.

Common Prosperity has deep roots in the Chinese mindset. 

Taylor Francis Online notes that the “Common Prosperity” mantra dates back to 1953, when Mao’s Communist Party introduced it to inspire the nation to elevate itself from poverty through the redistribution of wealth, and has distinctly communist overtones.

It has since been used to justify the structural changes arising from the nation’s rise as a manufacturing nation.

These in turn have in recent decades resulted in growing wealth disparities so the narrative has a strong appeal to an increasingly disenfranchised populace, and offers great political leverage.

“Under Xi Jinping, the emphasis on common prosperity has increased markedly alongside domestic goals relating to innovation, improved governance and ecological and spiritual salvation,” says Taylor Francis.

The academics add that it can be used to justify “strong government action against the disorderly expansion of private capital, monopolies, speculation and the costs of privately provided education, housing and potentially health”.

Professor and President of the Academy of Marxism and chairman of the World Association for Political Economy Enfu Cheng proposed last year that China should conduct experiments with the implementation of a national dividend for every citizen deriving from the surplus operating income earned on state-owned assets.

This is not alarming in itself. 

The West is toying with the idea of a basic universal income as the fourth industrial revolution builds; the Emirati receive such dividends; and Norway’s citizens benefit from Sovereign Wealth Fund flows into the economy (the latter nation recently ousted a right-wing government bent on privatisation). 

Macao has been experimenting with the idea since 2008, and most recently has been paying citizens roughly US$1,200 a year. 

China The Prince Of Pragmatism

China back-pedalled on the Common Prosperity theme recently, replacing it with that of “Stability” as the government wrestles with internal factions, most notably the wealthy east coast over wealth redistribution to the impoverished western areas. (Some also attributed the lockdowns to an attempt to wrestle the east-coast factions into submission).

But most observers read this shift in rhetoric as temporary.

China is nothing if not pragmatic. 

For example, the country recently back-pedalled on its declared intent to accelerate its transition to arc furnaces (and circular steel production) by 2025.

The government postponed that date to 2030, as commodities prices soared and the country attempted to engineer a soft landing after its infrastructure policies of 2021 in particular resulted in a sharp fall in GDP.

The Common Prosperity theme also has a military purpose in the event of geopolitical conflict.

Asia Society writes that raising living standards encourages greater reliance on China’s enormous internal market for growth and technological innovation rather than on capital-intensive growth, low-value exports and imported technology.

In this respect, even the country’s attempts to meet environmental SDGs offer overlaps with Chinese external affairs policy. 

Stockpiling resources for an accelerated green transition, for example, also creates a defensive strategy in the event of war.

Fascinating Thought Experiment

Assuming that much of the Common Prosperity campaign is related to ESG directives, China creates an interesting case study.

Is there any likelihood, one wonders, for the Chinese approach to ESG be replicated in the West and what will the implications be for western economies and markets, particularly in terms of taxes.

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