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Weighing the risks and benefits of China’s ‘common prosperity’ agenda

China is planning to introduce a slew of policies to achieve more distribution of wealth. This will potentially lead to regulatory uncertainty in the near term, while the longer-term results will largely depend on how effective the new policies are implemented.

China's authorities have reemphasised the need for the country to build ’common prosperity’, with the goal of lowering income inequality and improving the social safety net to achieve long-term economic sustainability. Policies to meet this objective will shape the country's growth path and have far-reaching effects for many types of debt issuers.

In the short term, there will likely be increased credit risks resulting from a period of regulatory uncertainty. Longer term, two different scenarios could emerge: in the first one, regulatory uncertainty would be prolonged and discretionary intervention would increase, with negative effects on the private sector, productivity and efficiency. In the second scenario, policy implementation would be more effective in addressing structural imbalances, positive for productivity, the overall economy, and social stability.

The key implications of the agenda are outlined below.

» Policy shifts focus on sustainable growth, reducing income inequality. The goal of the common-prosperity plan is to strengthen regulation, lift incomes, improve wealth distribution and enhance the social safety net.

Near- and long-term credit effects of ‘common prosperity’ policies

* In an “olive-shaped” distribution, national income and wealth would be symmetrical around the mean, with a bigger income share of lower-wage earners rising and a lower share of higher earners. The three layers of distribution refer to (1) distribution via income from contribution to production, (2) distribution via taxation and transfers, and (3) distribution via voluntary donation.
Source: Moody's Investors Service

China’s urban income inequality has surged along with higher income levels

The Gini coefficient for China's urban population is used to represent China's income equality. The Gini coefficient for China's rural population surged to 40.6 in 2010 from 24.7 in 1981. This rural Gini coefficient then declined to 33.2 in 2019. The World Bank has reported these two indexes separately for China, based on income data from two separate household surveys by the National Bureau of Statistics of China.
Sources: World Bank, Our World in Data and Moody's Investors Service

» In the near term, regulatory uncertainty is the key credit risk. Transition risks could arise from lack of predictability and unclear communication around policy implementation, which could deter foreign and private investment, and discourage big-ticket consumption.

» Prolonged uncertainty could produce more negative outcomes. Under this scenario, policy uncertainty would continue for longer, with negative effects on private investment, productivity, capital efficiency and growth relative to Moody’s forecasts.

» In the medium to long term, effective implementation would be positive for sovereign credit quality. Potential long-term benefits include higher consumption, lower excess savings and more sustainable growth. Changes that lead to a broader tax base could help provide the resources to fund a more extensive social safety net.

» Longer term impact on companies depends on regulatory and social risk exposure and ability to adapt. The policies could pose different risks and opportunities depending on the sector and individual company. It poses risks for luxury goods makers, high-end property developers and internet platforms that have benefited in the past from lax regulation. But companies that cater to mass-market consumers will likely benefit as the population of lower- and middle-income earners grows, along with their purchasing power.

To understand more about the ‘common prosperity’ agenda, please download the full report here

Please feel free to reach out to the rating experts below regarding this article.

Lillian Li, VP-Sr Credit Officer/CSR
Moody’s Investors Service
[email protected]
+86.21.2057.4028

Michael Taylor, MD-Credit Strategy
Moody’s Investors Service
[email protected]
+65.6311.2618

Martin Petch, VP-Sr Credit Officer
Moody’s Investors Service
[email protected]
+65.6311.2671
 
Lina Choi, Senior Vice President
Moody’s Investors Service
[email protected]
+852.3758.1369
 

 

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