George Magnus considers how mounting geopolitical risk will affect China's Xi Jinping's efforts to bring the private sector to heel

Earlier this month, as Russian forces shelled Ukrainian cities and COVID-19 infections soared, Communist Party of China (CPC) leaders gathered for their most important annual political meetings: the National People’s Congress and Chinese People’s Political Consultative Conference. While the weighty documents and lengthy speeches that defined both meetings hardly mentioned the pandemic, and did not mention Russia’s war at all, China – and its already troubled economy – is undoubtedly being rocked by both.

For much of the last year, the CPC’s “common prosperity” campaign has dominated Chinese government rhetoric. President Xi Jinping has frequently described common prosperity as “an essential requirement of socialism.” But important questions about the campaign’s contours remain, and many observers expected them to be answered, at least partly, at this month’s twin sessions.

That did not happen. Instead, China’s leaders made only brief and patchy references to “prosperity” and “prosperity for all.” In the face of internal and external instability, China’s leaders seem to be recalibrating their priorities.

To be sure, economic headwinds are nothing new. While the annual Central Economic Work Conference last December presented an upbeat forecast for China’s economy in 2022, it also highlighted risks stemming from contracting demand, supply shocks, and weakening market expectations. The main goal for the year, policymakers concluded, should be “stability.” Specifically, stability would require policymakers to limit contagion from the weakening property sector and resist the temptation to over-stimulate the economy.

In the past three months, however, the challenge has become far more formidable. Rising COVID-19 infections have led to a spate of lockdowns, threatening to exact a heavy toll on already-sluggish consumption and service industries. Meanwhile, Russia’s war on Ukraine has driven up energy, commodity, and food prices, which will cause inflation to accelerate and hit Chinese exports as global demand weakens.

In this context, meeting the Chinese government’s 5.5% target for GDP growth this year will probably be impossible, though the country’s leaders may massage the numbers to claim success. Even 2.5-3% growth will be difficult to achieve. To boost growth and avert a significant rise in unemployment, China’s leaders already plan to reduce taxes and fees levied on small firms, and to increase transfers to local governments. But more action to stimulate the economy should be expected.

So, the common prosperity campaign has been sidelined for now. Nonetheless, it is likely to remain a totem for Xi, as he pursues his goal of making China a “great modern socialist country” with an advanced economy by the time the People’s Republic celebrates its centennial in 2049. Success, in the CPC’s view, requires addressing the adverse consequences of 40 years of single-minded emphasis on economic growth, which have left large economic and sectoral imbalances, as well as yawning income inequality and deep regional disparities.

If ignored, the CPC fears, these problems could endanger social and political stability. But rather than addressing them as a Western democracy might – with social-welfare policies – China’s government is mounting a political campaign to mobilize people behind policies intended to expand the economic pie and produce a fairer distribution of income.

A remarkable feature of the common prosperity campaign has been the tightening of state control over private firms, and the stipulation of a more orderly “expansion of capital.” Since 2020, when the CPC Central Committee issued its “Opinion on Strengthening the United Front Work of the Private Economy in the New Era,” private firms and entrepreneurs have faced greater political interference and increasingly intrusive regulations.

For example, at firms with three or more Party members, Party committees in or near operational management are being encouraged to become more involved in recruitment, staffing, supervision, and compliance. More broadly, private firms have faced a blizzard of new regulations and investigations, involving, for example, antitrust, data privacy, and security.

Technology, data, and finance platforms have been the primary targets. But the education, health-care, and housing sectors, as well as any company operating in the gig economy, are also in the government’s crosshairs. In housing, state enterprises are now re-entering the market for the first time in 40 years, in order to purchase the assets of overextended property developers.

In an effort to align the private sector’s interests with those of the CPC, and under the threat of regulatory interference, leading firms like Alibaba and Tencent are making donations to Party programs, in what can be described only as coerced corporate philanthropy. Billions of dollars in donations and pledges have already been offered.

China’s recalibration of industrial policy and corporate governance, designed to bring private firms and entrepreneurs to heel, may well rein in some private-sector excesses. But by asserting the political control it craves, the CPC risks destroying the incentives for the innovation and productivity that China needs.

Despite the advantages enjoyed by state-owned enterprises in China, private firms have been the more powerful engine of economic growth and development. As Vice Premier Liu He noted last year, the private sector accounts for more than 50% of taxes, 60% of GDP, 70% of innovation, 80% of urban employment, and 90% of new jobs and companies.

Common prosperity denies the market-oriented policies that have enabled China’s rise and marks the formal end of the era of reform and opening up launched by Deng Xiaoping. But at a time when COVID-19 border controls and perceived complicity in Russia’s aggression are already threatening to exacerbate China’s isolation, the common prosperity campaign is at risk of being undermined at home and overtaken by events abroad.

George Magnus, a research associate at the University of Oxford’s China Centre and SOAS University of London, is the author of Red Flags: Why Xi’s China Is in Jeopardy (Yale University Press, 2018). Copyright: Project Syndicate, 2022, published here with permission.