Taxes, inequality and unemployment will weigh on China after party congress

Chinese Communist Party Secretary Xi Jinping is widely expected to serve a third five-year term as the country’s leader after the upcoming party congress kicked off on Oct. 16. What will be some of the key issues that need to be addressed next?

Problems with debt, tax revenues, income distribution and youth unemployment will become serious, says Jessica Teets, a political science professor and China expert at Middlebury College.

“Slowing economic growth – due to zero-Covid – has created many problem areas for Xi Jinping,” Teets said in a Zoom interview on Monday. “These are a harbinger of even bigger problems that are still hidden from the scene.”

Just last week, China’s finance ministry said the country’s tax revenues fell 12.6% in the first eight months of 2022 from a year earlier, following tax cuts to stimulate markets, according to a report from Xinhua. news agency. For the second quarter, GDP rose 0.4% year-on-year.

Xi has recently used the term “common prosperity” as an approach to narrowing the country’s wealth gap, leading to concern and uncertainty among business leaders about what it actually means. More clarity is likely in the offing, Teets said. “I think we’re going to see a lot more discussion, resources and policies devoted to communal prosperity simply because it’s becoming such an important topic,” she noted.

Tees is the author of Civil society under authoritarianism: the China model and co-editor of Local Governance Innovation in China: Experimentation, Diffusion and Challenge. Teets is a fellow in the Public Intellectuals Program set up by the National Committee on United States-China Relations, and is currently researching policy experimentation by local governments in China.

Interview fragments to follow.

Flannery: What do you expect from the party congress?

Teets: My expectations are pretty much everyone’s. Xi Jinping will take a third term – if terms are still a meaningful way to talk about leadership.

As for who he chooses for Prime Minister or for the Politburo Standing Committee, it will be really interesting to see the distribution he gets down to the elite preferences. Will members be more for open markets versus more socialism or communal prosperity? I will try to learn from those choices which trends to expect.

Slowing economic growth – due to zero Covid – has created many problem areas for Xi Jinping, such as high unemployment among graduates. These problems are suddenly a lot more difficult to solve, including real estate debt. I think these foreshadow even bigger problems that are still hidden from the scene.

For example, if you take real estate off the table for the local government as the main source of income and instead introduce a tax rate that makes their local finances sustainable, that would solve that problem. But is that something you can do, given the economic slowdown and the fact that many people are unemployed or have less income? That’s really problematic.

I’m not exactly sure how you develop outside of that real estate model for local governments. If you can’t expand the tax base, another solution is to do more centralized transfers. But again, decreasing income means that less money has to be transferred to these provinces at the central level.

So either way, less growth will cause problems. How do they solve the root of the problem: create new sources of income for the local government? Will they use repression? That’s something I think is problematic.

Flannery: How much room is there for local policy experimentation? Four decades ago, China used cities like Shenzhen to try out new ideas.

Teets: There are a few policy areas like the environment and economics where experimentation is still encouraged, but it’s top-down. Cities or counties that want to participate in pilot studies sign up with central government, get pilot city or province status, and then get to test policies, but much of those policies are developed at the central level and then tested locally. If the central government has two or three paths they think they can take, they test ideas in selected provinces or cities and try to learn from them. Much of the vibrancy in ideas came from local policy makers trying to solve a local problem.

Flannery: Another problem in China today is the income distribution, which is behind the common wealth conversation. What is your take on that conversation? And how do you think that will end after the party congress?

Teets: I think we’re going to see a lot more discussion, resources and policies devoted to communal prosperity simply because it’s becoming such an important topic.

We used to see an income gap between urban areas and rural areas, with more migration to urban areas helping to increase incomes. Now we see much more urban poverty. That is really worrying for Chinese leaders with their Marxist background. They worry about urban poverty.

These gaps are problematic. If you want to grow out of the middle-income trap, you need to invest in education, health care and these kinds of inputs to build a strong economy. For a time, the distinction between urban and rural areas meant that you could invest in urban areas and save the rural areas for later. And that is no longer possible. We are now in a different stage of development. So I think we’re going to see Xi Jinping and whatever leadership cohort that comes out invest a lot more in common prosperity.

And then the question is: what does that really look like? It can look very neoliberal, but there can also be a lot of redistribution in it.

That’s the part we’re really not sure about. Until now, his speeches on communal prosperity have talked about redistribution. But does he mean new taxes that we haven’t seen before? Does he mean the kind of voluntary redistribution that Jack Ma does – not punish my businesses and I will redistribute some of my income voluntarily?

If the amount of money the central government has access to decreases because of slower economic growth, will they try to capture other sources of income? And what are those?

Common prosperity is really important. We’ve surveyed China every two years since 2018 and ask people if they think it’s appropriate to protest. We ask them per distribution area. We also know their age, income level and whether they are party members or not.

And what we see is that people usually say you shouldn’t protest. You have to cooperate with the government, donate or do other things. Protest is everyone’s absolute last choice. That’s all about when you get to problems of inequality.

When we ask about children left behind, even party members say it’s appropriate to protest about that issue, because they don’t feel that the local government or the central government is doing a very good job. This also includes solving high unemployment for recent graduates. It really shines a light on this inequality and all these lockdowns that we see in Chengdu and all those other cities where migrant workers suddenly lose all income.

I think people are very sensitive to these areas of inequality in a way that they haven’t been in the past. And they think that the government is not doing it right yet.

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