The Chinese government announced a slew of regulatory measures in recent months, covering tech, tutoring, antitrust and real estate, among other areas. These actions were not only significant in scale but caught markets by surprise, and led to questions about policymakers’ intentions. In this regard, we see clues in President Xi’s recent pledge of pursuing “common prosperity” through development that rebalances equality and efficiency.
In our view, the measures are best seen as continuing reforms toward a sustainable growth model and China’s transformation into a high-income economy. Following the success of supply side and financial reforms in Xi’s previous terms, “common prosperity” is likely to be a key theme moving forward. This marks a turning point in China’s economic model from prioritizing absolute growth toward striking a balance between efficiency and equality—an especially important concern given the growth of inequality over the past two decades.
While the initiative is unlikely to aim for an egalitarian society, it could seek to achieve fairer access for individuals to basic benefits like education, housing, medical care and privacy. For corporations, it could seek fairer competition through legislation, including antitrust laws on tech monopolies. It could also mean narrowing regional differences in standard of living, by enhancing the social safety net and redistributing wealth via taxation. Highly profitable companies may be expected to share their profits via donations, while certain sectors may face salary caps.
For industries and corporations, new restrictions could pressure growth and profits in the near term. However, broader economic policies may remain relatively expansionary: Monetary policy should stay loose and liquidity ample to prevent systemic fallout, leading to lower interest rates in the short term. Fiscal policy could become less tight, while local government spending on urban development could increase. A more inclusive but lower growth model should be sustainable, supporting the renminbi outlook in the medium term, but with little immediate impact.
Although China’s goal of addressing social and economic issues is admirable, there’s risk that, if its actions are too aggressive, they may exacerbate the current growth slowdown. We believe the government will need to roll out a more structured roadmap to guide investors and companies, including on supply side and financial reforms. Three upcoming events could provide more understanding of how policies will be rolled out: The China Communist Party plenum in November, the Central Economic Work Conference in December, and the National People's Congress in March.
For more on this topic, read our latest Fixed Income Quarterly Outlook.