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China’s Tycoons Are Getting A Serious Reality Check

China’s Tycoons Are Getting A Serious Reality Check

In yet another attempt to control its wealthy, Beijing has laid out a new plan aimed at restraining “unreasonable income”, hiking wages and giving a growth boost to the middle class.

This is China’s eternal dilemma with its wealthy: Beijing needs them for global economic power; but it also needs to be able to control them as a growing threat to the Communist Party rule. 

Earlier this week, the Communist Party’s Central Committee for Financial and Economic Affairs announced measures that would curb what it described as “excessive” incomes, while also … encouraging the wealthy to give back more to society.

The official announcement of the new measure follows a sudden flurry of charitable activity on the part of China’s tycoons, as SafeHaven.com reported last week

Details of the new plan remain vague, but previously government officials had talked about higher property and inheritance taxes, as well as capital gains taxes, among other things. 

According to a summary of the meeting published by state media Xinhua, the government pledged “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.”

Chinese leaders agreed China must pursue a goal of so-called common prosperity where people share in the opportunity to be wealthy. 

Even earlier this year, China’s president, Xi Jinping said that the wealth gap was not just an economic issue, but a political one that could threaten the legitimacy of the party. And this is the real issue at hand.  

We absolutely cannot allow the rich-poor gap to increase bigger and bigger, resulting in the poor poorer and the rich richer. We should absolutely not allow an insurmountable gap between the rich and the poor,” president Xi said.

The government chose the province of Zhejiang, home to several major private sector companies, including Alibaba Group, as a pilot zone for these new initiatives. 

Among other things, the provincial government will encourage workers to bargain collectively for wages, as well as prompting listed companies to raise cash dividends to shareholders. Furthermore, there will be a concerted effort to enhance educational opportunities for workers, and for the middle class. The short-term goal? By 2025, they expect to increase income per capita by 45%, and it will all happen at the expense of corporations that have grown too big for Beijing, which does not wish to destroy that wealth, but is more than willing to harness it for the national interest. 

In China, income inequality is wide -- the richest 20% earn more than 10 times the poorest 20%.

According to a recent Credit Suisse report, the wealthiest 1% in China holds 31% of the country’s wealth, up from 21% just two decades ago.

The wealth gap was accelerated during the pandemic when the number of new ultra-rich surged 50% compared to 2019. On the other hand, according to statistics from last year, 600 million citizens only earn about $155 a month. 

It should also come as no surprise because China is heavily cracking down on its wealthy, primarily from the tech industry, some of which have grown too big, too fast for the Communist Party to control. 

In October, Chinese regulators stepped in to block the share market launch of Alibaba-backed Ant Group. Alibaba’s founder Jack Ma’s fortunes have suffered since he publicly criticized China’s regulatory approach to the finance technology sector, directly challenging the Communist Party.

Back then, Ma boldly delivered a speech criticizing national regulators, saying “Chinese finance has no system”. Further, he compared lending practices to a “pawn shop mentality”.  

In March, Chinese regulators fined a dozen companies over anti-monopoly violations, including Tencent, Baidu, SoftBank and Tik-Tok parent company ByteDance.

They will be allowed to survive, and even thrive, but not without giving back--significantly--and certainly not without helping Beijing create a more powerful middle class to balance them out. 

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