VP Bank : China’s battle against inequality

The government's latest actions suggest that it intends to pursue the aim of a fairer distribution of income and wealth with the same rigour as it showed in the battles against corruption and atmospheric pollution. Recent measures are intended to help low and middle income earners by targeting activities that put an excessive strain on their finances. Thus, the private education sector, notably after-school cramming, has been massively downsized in order to relieve the financial burden on parents. This also increases the incentive to have a second or third child, a trend that would help counter the problem of China's aging population. In another move, the government has decreed that young Chinese are no longer allowed to devote more than three hours a week to online gaming. This measure has obvious implications for the tech giant Tencent as well as foreign gaming providers. Tougher regulations are likewise to be imposed on traditional gambling. The government is also targeting tech companies and online platform providers that exploit their huge databases and algorithms to fix user-specific prices and steer customers' buy decisions.

The market power that tech companies have amassed thanks to their mammoth stores of user data is also viewed critically by governments in the US and Europe. But the Chinese authorities, unlike their western counterparts, have no qualms about intervening in market competition. The top priority is the public good rather than private wealth or the health of individual companies.

Alongside these measures, China could also use tax changes to achieve a fairer spread of incomes. The effective average rate of income tax, at 7%, is much lower than in most other countries, and taxes on capital gains or inheritance are unknown. New and/or higher taxes would therefore make sense. The introduction of a real estate tax, for example, has repeatedly been postponed, but could well be put on the agenda again.

Implications for the financial markets

China is still committed to economic expansion, but the emphasis of economic policy is shifting. For the first time ever, the current five-year plan (until 2025) contains no numerical growth targets. This is a strong indication that qualitative growth will now take centre stage.

The new 'common prosperity' push is intended to achieve a fairer distribution of affluence, enabling more citizens to share in the proceeds of economic progress. But China's leadership does not intend to resort to Robin Hood methods. The rich are not going to be robbed to help the poor.

These policies are basically positive for China's long-term growth outlook. Yields on Chinese government bonds have hardly changed at all in recent months. But the impact on individual firms varies. Heavier government intervention, increased regulation and potentially higher taxes are intrinsically negative for corporate earnings. This applies primarily to tech companies, platform providers, real estate companies and the energy sector. Businesses in the consumer sector, by contrast, stand to benefit from improved purchasing power in the population at large. Providers of sustainability solutions should also be among the winners. The Chinese equity markets' negative reaction to the recent measures is partly due to the fact that the market is now dominated by tech companies, as in the US. Moreover, many international investors have reacted by pulling out of China for the time being and switching to the US market. Chinese equities' underperformance vis-à-vis the US has reached historic proportions.