Recently, we’ve been bombarded by headlines about Xi Jinping’s latest “common prosperity” campaign:
For the uninitiated, here’s a quick definition of “common prosperity” and why investors are being spooked by its potential impact.
What is “common prosperity” or 共同富裕 (gong tong fu yu)?
According to UBS, China’s President Xi Jinping’s aim with the “common prosperity” campaign is to have affluence “shared by everyone, both in material and cultural terms”.
In a nutshell, the move for “common prosperity” would entail the following key directions:
- Narrowing wealth inequality
- Closing the income gap between the rich and the poor, and raising household incomes
- Improving China’s social welfare system
What does “common prosperity” mean for Chinese equities?
Based on the comments I’ve observed on various social media, it seems that most are worried about the negative impact of the “common prosperity” movement.
And there’s little wonder why.
I think these latest announcements by prominent listed Chinese companies are raising fear in China investors, especially since the pain of the recent crackdown is still fresh.
However, this has been China’s direction for some time now:
Is “common prosperity” a new directive?
It’s nothing new.
In fact, the idea of “common prosperity” was actually introduced way back by Mao Zedong. Deng Xiaoping decided that to develop China fast, they had to “allow some to get rich first”, hence it was put in the backburner for decades.
However, President Xi has been vocal about it since 2017 and there have been corporate actions taken by Chinese businesses in the past to work towards common prosperity.
For example, in 2017 Alibaba launch US$1.5billion to help fight poverty and subsequently “turn hundreds of poor villages into Taobao Villages”. Back then Alibaba’s financial status/cash on hand is of much lower standing than currently.
Subsequently, Alibaba had continued its involvement in the community. Investors would note that Alibaba’s cash hoard has grown over the years despite its “common prosperity” efforts.
Astute investors would also note that Alibaba Group’s mission is to make it easy to do business anywhere. And their method of contribution to the government’s directive is usually, if not always in line with their business goals.
Likewise, Tencent who owns the super app Wechat would also be able to find synergistic contributions to “common prosperity”, allowing the business to benefit on both fronts – helping the Chinese people and expanding their market share.
Although there are fears that businesses would be forced to make donations or pay higher taxes, ultimately it doesn’t make sense for China to kill the businesses of their local entrepreneurs. After all, this group of people could help China gain higher ground on the global stage.
Is “common prosperity” unique to China, and therefore a market risk?
The truth is the concept of “common prosperity” isn’t unique to China.
In fact, as recent as April 2021, there was a press release on Apple’s official website: “Apple commits $430 billion in US investments over five years.”
Something to note is that Apple being the largest taxpayer in US has paid almost $45 billion in domestic corporate income taxes in the recent 5years alone. Though not an “apple-to-apple” comparison with Alibaba’s contribution.
Recently, we’ve also seen the news header of Alibaba’s effective tax rate for fiscal 2022 could rise to 23 to 25%.
Something to note is that the worldwide effective tax rate of Apple is 24.6 percent.
Regardless, seeing such large sums of investments being set aside for “common prosperity” and social responsibility might raise the following question in your mind.
Does “common prosperity” suggest that big companies like Alibaba will lose out due to “common prosperity donations”?
Does it still even make sense to invest in China companies given that the government can make them give away chunks of their cash and assets on a whim?
Well, there are two sides to everything.
And I think the long-term gains would outweigh the current negativity. Here’s why:
The long-term impact of “common prosperity”
Despite all the negativity, my opinion is that “common prosperity” will be beneficial for both China and its businesses.
Just imagine what would happen to consumption rates once China’s middle class expands! They could be seeing higher disposal income and a significant increase in internet users as the rural population goes digital.
1) China’s fast-growing middle class, now on hypergrowth mode
According to World Bank standards, before the latest “common prosperity” focus, over 70% of China’s population is expected to be middle class by 2030 (source: The emerging middle class in developing countries)
The latest rounds of “common prosperity” initiatives are likely to speed up this growth.
2) Potential of China’s market size and economy
At the point of writing, the US has a population of ~ 300+ million while China has a population of ~ 1.4 billion.
In 2020, it was reported that China’s middle class is made up by about 400 million people.
Putting the numbers side by side, we can see how much more potential China has to grow its economy. In fact, even Elon Musk has stated that:
It would only require getting to a GDP per capita half the size the United States for their economy to be twice the size of ours.
Elon Musk, CNBC
To give you a better idea, let’s also take a look at China’s GDP per capita:
3) Potential growth of internet users in China
Moreover, China’s internet users are projected to increase further.
At the point of writing, the US has ~ 80% internet users while China has ~ 65% internet users. And this percentage will likely increase if “common prosperity” is successful with major players investing to increase the literacy rate of rural areas such as the one we saw previously in 2019 where Alibaba turns poor villages into Taobao Villages, just that now it’s at a bigger scale spearheaded by various big companies. Not just the poor will be transited into the middle class, the middle class will transit to having more spending power and overall growth in GDP per capita.
In fact, 2020 has given us a preview of China’s potential growth when they were forced into lockdown.
China’s online sales on Singles Day 2020
Although China has had crack down on its tech companies lately, it doesn’t mean that they are against technology or digitalisation. Note that the above data only consists of Alibaba and JD online sales which exclude many up and rising e-commerce players numbers such as Ping Duo Duo or smaller caps like DADA Nexus etc.
If “common prosperity’ is successful, the Chinese will enjoy higher disposal income, a larger proportion of middle class, a higher percentage of internet users for a population of 1.4billion. How will be the above chart looks like then? Are we just at the beginning stage of it?
In fact, President Xi and his advisors had come out to lent their voice in support of the digital economy on 6th September 2021.
Having data as the new oil, together with 5G and various evolving tech growth it is bound to come with new regulations or guidelines. That said, this is an area that is currently dominated by the private sector and will likely come under increasing scrutiny.
Can China meet its “common prosperity” goals?
Although past performance doesn’t guarantee future success but based on track record, China has achieved success in poverty alleviation in the past.
Given their speed of policy implementation and the compliance of their businesses, there are few reasons for them to fail.
Even Berkshire’s Charlie Munger was impressed with the feat:
Wrapping it up
- Well managed businesses will continue to grow by pledging to synergistic “common prosperity” initiatives
I don’t think businesses would make a pure donation just to fulfil their duties for “common prosperity”. Instead, their management would look for synergistic directions aligning with their business mission such as the case for Alibaba. In the long run, we would see Chinese businesses rise up together, alongside their country…and fellow countrymen.
There’re two sides to everything. As opportunistic investors, we need to remain clear-headed, rational and don’t be affected by share price or news headlines. Instead, keep an open mind and be flexible of potential changes.
In my view, the company that will emerge as the winner (regardless of various kinds of regulatory crackdown) will be the one that is the fastest to adapt, track record of rising above challenges (in the past), the one with the most experienced in the sector, and one that comes with the most resources. Does having a huge cash pile equates to “high resources”?
That being said, the Chinese stock market is relatively young and is likely to remain volatile. However, that doesn’t mean that opportunities don’t exist. On the contrary, the current uncertainty could unearth new opportunities for us.
- Long-term returns outweigh the short-term negativity
Secondly, let’s focus on the long-term rewards. The potential growth in consumption is definitely something we shouldn’t overlook. This is also the reason why many businesses worldwide are interested in doing business in China.
In fact, China is growing so big it is difficult to ignore. Even Google which had turned its nose up at China previously, withdrawing its operations from China on claims of censorship and lack of freedom, is reportedly trying to get back in.
If you’re vested in the Chinese markets and want to learn more, Alvin will be discussing about the how investors should approach the China markets using the 3Cs framework, how to find the next multibagger China stocks and more at his live webinar. You can register for his Growth Dragons China investing masterclass here.
Disclaimer: The article is purely my opinion based on my research/study. It does not constitute any form of financial, investment or advice. Just sharing my own experience as I have put my own money into the stock market for over 17 years. I am not a Chartered Financial Analyst (CFA) Charterholder and I do not have any finance-related qualifications