A Look into China’s Common Prosperity Model

The Qing dynasty lasted from 1636 to 1912 (about 276 years). The famed Roman Empire survived close to 500 years. Even the Byzantine Empire, one of the longest surviving empires, lasted 1,123 years before being overthrown by the Ottoman Turks in 1453. But what do these historical dynasties have in common?

They all prove one point. That ultimately, no empire, civilisation, country or nation can last forever.^[1]

In fact, if history has taught the world anything, it is that most states eventually decline after a period of time known as the golden age, which is a period of great happiness and prosperity. This is coupled with a period of great cultural, intellectual, scientific and political achievements. But policymakers should be aware of both internal and external risk factors in order to safeguard the continued existence of a nation for as long as possible. Thus, it is important to draw from these historical examples to assess which stage a country is currently at and identify the factors that can negatively impact it. A potential factor? That of excessive growth at the expense of longer-term sustainability. This is a problem experienced globally. This article focuses on how China has attempted to deal with this issue.^[2]

While China has been able to grow its gross domestic product (GDP) by more than 10% every year for close to three decades, through a “growth at all costs” model,^[3] sweeping reforms in China in 2021 saw the Chinese government making a call to prioritise social wellbeing (otherwise, what is known as “common prosperity”) over short-term performance in risky assets.

This arose due to the government’s concerns over a rapidly ageing population, elevated debt levels and a delicate geopolitical backdrop.^[4] More importantly, the emphasis on achieving common prosperity was aimed at reducing inequality levels in China.

At a broad level, common prosperity refers to inclusive growth, with more robust social safety nets put in place, and a narrowing of the divide between different socioeconomic groups, including between rich and poor and those living in urban and rural areas. For companies, their aim would be to contribute to “societal good” rather than profitability at all cost.

To set the policy in motion, the Chinese government needed to take on the task of defining both technical standards and moral parameters for business activity. In the process of doing so, some actions with far-reaching consequences have since been made.

Even before the United Nations Climate Change Conference in 2021 (COP26), which saw the signing of a global pact that set solid targets to combat climate change, the Chinese government had already set an ambitious target of reaching peak emissions by 2030 and carbon neutrality by 2060.^[5] This already signalled a significant impact on China’s supply chains.^[6] But with China’s latest policy restrictions on private enterprise, which began in 2021, the market value of some of the largest companies in China have been significantly affected.

The Effect of Common Prosperity Policies on China’s Real Estate Companies

The Chinese government introduced the “three red lines” policy in August 2020, which laid down three thresholds for property developers. They include a 70 percent ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract; a 100 percent cap on net debt to equity; and that they must have a cash to short-term borrowing ratio of at least one.^[7]

This policy was to prevent overleveraged private developers from taking on new loans and at the same time, cool the property market of over-inflated prices, which soared due to widespread speculative buying. A key concern was that home prices in China had surged six-fold over the past 15 years, making living in new cities such as Shenzhen less affordable than London.^[8]

As debt obligations increased, developers began charging more to cover their interest burden, ultimately driving prices higher. Failure to rein in excessive credit and shut down insolvent borrowers now could cause long-term damage in the form of a housing bubble.

With the introduction of these lending curbs by the Chinese government, a Chinese property company, the Evergrande Group, found itself in a liquidity crisis, leading to the company defaulting on its loans. The group was able to grow to become one of China’s biggest companies by borrowing more than USD$300 billion.^[9] But now, it looks as if this form of debt-fuelled, investment-heavy growth model adopted by developers in the past needs to be gradually replaced by a more sustainable-focused policy, ensuring that developers maintain a strong liquidity ratio.

The Effect of Common Prosperity Policies on China’s Tech Sector

Throughout 2021, China came down hard on its tech companies.

In February, the Chinese government announced new anti-monopoly rules for tech companies. Such measures were intended to ensure that companies did not use algorithms to encourage users to overspend or affect public order in any way.

With such rules, China’s tech giant Alibaba (Ant Group), found itself being issued a USD$2.8 billion antitrust fine in April. Subsequently, it was ordered to restructure itself with direction from China’s central bank.^[10]

This was done in a bid to protect the public from falling into excessive spending or developing an addiction to such online commerce platforms. In addition, excessive consumerism could also lead to the depletion of natural resources and pollution, which would be antithetical to long-term sustainability.

These new rules also require companies with data of more than one million users to seek regulatory approval before listing overseas, while permitting regulators to block their listings on national security grounds.

In July, Didi, China’s ride-hailing giant, launched its USD$4.4 billion Initial Public Offering (IPO) in the US, only to have Chinese regulators ban the company from app stores in China.

Such actions were intended to protect personal data and national security, including the dominant global trend towards more localisation of data.^[11] For instance, a case could be made that the free flow of data to antagonistic regimes threatens a country’s national security, and it is the responsibility of the government to control data to protect its citizen’s privacy from external factors.

Then in August, the Chinese government also banned persons under 18 years old from playing video games for more than three hours each week to prevent gaming addiction.^[12] Furthermore, in September, they prohibited cryptocurrency transactions and mining.^[13]

These implementations seemed to focus on socioeconomic trends that could result in societal instability. For instance, the Chinese government was concerned about the mental and physical health impact video games have on children (hence the term “spiritual opium” coined by Chinese state media),^[14] which may result in gamers neglecting other aspects of their lives. In addition, excessive cryptocurrency speculation could also disrupt the country’s economic and financial order.

Key Takeaways for Singapore

Back in 1992, China’s Paramount Leader, Deng Xiaoping, praised Singapore for its developed economy and stable society, a result he attributes to the nation’s tough stance on law and order.^[15] In fact, Singapore is the “only country that China’s top leaders have publicly acknowledged as a learning model”.^[16] While the comparison between China and Singapore is inherently difficult due to different political systems, and different social and domestic risk factors, there are some overlaps. Hence, a look at China’s current applications of the common prosperity model provides some perspectives on how Singapore can incorporate some of the beneficial aspects of these ideas in its policy-making decisions.

The buzzword “common prosperity” is not new. In the West, it is broadly termed as “socialism”.^[17] Either way, they both are facets of policy approaches where reliance is placed on the state to set things right and to safeguard a quality of life that is not beyond the means of the average working class person. This could result in a myriad of outcomes such as ensuring that its population are not subject to corrosive work stress, high mortgage, or excessive cost of living.

However, the Chinese government’s current approach sees a shift from western models of capitalism towards an economy aimed at promoting longer-term sustainability. The impetus towards a more sustainable form of economic growth, while incorporating “Asian values” of governance,^[18] could become a reference point for future policymaking.

Additionally, it appears that the next phase of growth in China will be driven by companies that contribute to societal good, such as those in the areas of healthcare, education and technology, and whose growth will not be pursued at the expense of environmental protection and longer-term sustainability.

When reflecting on these developments and potential learning points, what can be said of Singapore today?

Professor Tommy Koh, a veteran diplomat, and ambassador-at-large at the Ministry of Foreign Affairs, argued that critics should be welcomed, provided that they love their country and are not out to destroy Singapore; he termed this group of people “loving critics and critical lovers”.^[19] In that vein, dissenting views must be objective, balanced and responsible, and help to improve Singapore society.

In any society, the cost of living is always a major concern for the population, and this is an issue that is not unique to Singapore.^[20] Nonetheless, income inequality in Singapore was reported in February 2022 to be at a 20-year low.^[21] This was due to massive government transfers and schemes aimed at supporting the country’s lower-income groups.^[21] In addition, the government also tightened its monetary policy in April 2022 to help combat inflation.^[22] This demonstrates that the Singapore government is attuned to solving difficult issues faced by its population.

It may be argued that some policy outcomes may give rise to the perception of less civil liberty at the outset. But on deeper inspection, it can be seen as a necessary sacrifice needed for the sake of promoting sustainable economic development and the assurance of continued national security. These would pave the way for greater national development and an improved standard of living, in a secure and progressive environment.

Achieving this harmonious unity and balance between economic development and civil liberty has always yielded much success for Singapore. There could be policies that may be uncomfortable initially, such as the “Ethnic Integration Policy”^[23] and “Bilingual Education Policy”.^[24] But if these policies promote social harmony and stability by fostering social cohesion and building a unique Singaporean identity, then some trade-offs are necessary to ensure a collective good.^[25]^[26]Additionally, it is also important to be aware that any shortcomings generated by these policies are constantly being reviewed by the government. Any ill-effects are mitigated through remedial actions. This can be observed through the recent implementation of the Ethnic Integration Policy buyback scheme,^[27] which would allow HDB to buy back flats from owners who face genuine difficulties in selling their property due to the Ethnic Integration Policy.

If history is a guide, no one can predict how long an independent country can continue to exist in its current form. But it is true that some nations survive for a far longer period of time than others, and we should strive to keep Singapore going for the longest time possible.^[28] One way this can be achieved is by continuously learning from policymaking best practices adopted by other countries.

This article is written by Ben Chester Cheong, Lecturer (Law Degree Programmes), SUSS School of Law. He also serves as an Of Counsel at RHTLaw Asia LLP.

[1] The National Desk (DEC 2021) An average empire survives 250 years: Is America at death’s door

[2] CNBC (AUG 2021) China calls for curbs on ‘excessive’ income and for the wealthy to give back more to society

[3] NIKKO AM (NOV 2021) China: Regulate to innovate

[4] STANDARD CHARTERED (DEC 2021) China's 'Common Prosperity'

[5] THE STATE COUNCIL PEOPLE’S REPUBLIC OF CHINA (OCT 2021) China maps path to carbon peak, neutrality under new development philosophy

[6] GREEN BIZ (MAY 2021) China’s 5-year plan and its impact on sustainable business

[7] THE STRAITS TIMES (OCT 2021) China’s three read lines for home developers

[8] BLOOMBERG QUINT (OCT 2020, updated JAN 2022) What China’s three red lines mean for property firms

[9] BBC NEWS (DEC 2021) Evergrande: China’s property giant misses debt deadline

[10] BBC (FEB 2021) China’s tech giants face new anti-monopoly rules

[11] CSIS (JUL 2021) The real national security concerns over data localisation

[12] CNA (AUG 2021) China limits children’s online gaming to three hours a week