Explainer | China’s economic buzzwords explained, from ‘common prosperity’ to ‘dual circulation’

China’s top leaders have introduced a number of new economic terms like ‘cross-cyclical adjustment’ and ‘chief of industrial chains’ in recent years
The buzzwords describe strategies to tackle everything from inequality to industrial chain inefficiency, and point to a new phase in China’s development

China economy

Frank Tangin Beijing

Published: 8:15pm, 12 Sep 2021

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China is writing a new chapter in its development strategy, and its using a host of terms that do not appear in mainstream macroeconomic textbooks. Here are some of the buzzwords on the lips of the nation’s leaders.

1. Cross-cyclical adjustment

The term refers to policy actions across business cycles and first appeared in a July statement from the Politburo, the 25-member decision-making body headed by President Xi Jinping. It marks a shift from countercyclical policies, which are direct fiscal and monetary interventions like stimulus to offset coronavirus shocks and tightening when the economy begins expanding. The switch signals a more long-term approach to economic policy, marked by smaller macroeconomic adjustments.

Cross-cyclical policy entails better coordination of macro policies between this year and next to ensure smooth economic performance, according to the Politburo meeting. Policymakers have been asked specifically to improve the efficiency and effectiveness of fiscal policy and guide the pace of budgeted investment and local bond issuance.

Authorities must consider a variety of factors when setting policy, such as the increasingly uncertain external environment and whether their strategies will promote a stable, moderate platform for long-term growth, Jia Kang, the former head of the finance ministry’s research institute, explained in a meeting last month.

Already, various Chinese provinces have saved a portion of their bond issuance quota to ensure adequate investment next year. The People’s Bank of China, meanwhile, has pledged to ensure steady credit support during the period.

2. Common prosperity

Tackling inequality and ensuring so-called common prosperity have been elevated to priority status in China’s work agenda this year, after Xi declared victory in eliminating absolute poverty and successfully building a comprehensive well-off society.

Common prosperity marks a shift from the decades-old pursuit of rapid economic growth, which lifted hundreds of millions of Chinese out of poverty but greatly expanded the income gap – a potential threat to the legitimacy of the ruling Communist Party.

The Central Commission for Financial and Economic Affairs in mid-August did not go so far as to suggest a Robin Hood-style “rob from the rich to give to the poor” plan, but called for better governance and more balance in the economy. In a reference to the recent crackdown on Big Tech, it vowed to prevent the practice of “getting rich through illegal means of capital markets”.

China will address income disparity through taxes, social security and direct government transfers, with the goal of creating an olive-shaped distribution structure in which middle-income groups account for most wealth.

Authorities will eliminate “unreasonable incomes” and illegal revenue, and encourage wealthy individuals and companies to give back more to society.

Morgan Stanley has estimated China could gradually introduce wealth taxes on capital gains, inheritance and property, and centralise local land revenue to allow for fiscal transfers to less-developed regions.

The pursuit of common prosperity implies more government spending on public services, including elderly care, medical care, housing and social security. The government will also provide more policy support for small and medium-sized enterprises, which employ most Chinese.

The wealthy eastern coastal province of Zhejiang has been chosen to start a pilot programme under the new policy.

3. Dual circulation

The economic strategy, introduced by Xi in May 2020, is a shift from China’s decades-old export-oriented development model, and is central to a series of new goals laid out in the 14th five-year plan for 2021-25 and the country’s 2035 vision.

“Dual circulation” includes both internal circulation, with a focus on the domestic market, and external circulation, or interaction with the global economy. But it is China’s vast domestic market that will play the dominant role, as the world’s second largest economy is facing an increasingly unstable and hostile outside world.

Beijing has tried to dismiss market concern about the more inward-looking economic strategy, saying it allows China to shift to a new growth model, ensure economic security and prevent the country from being strangled by foreign curbs on technology.

Amid resurgent coronavirus outbreaks, the government has had to pay greater attention to “smoothening internal circulation” this year, as domestic consumption remains weak.

Authorities have stepped up efforts to boost consumption and harmonise national resources to tackle technological bottlenecks, such as a shortage of computer chips.

4. Chief of industrial chains

Under the “chief of industrial chains” scheme, provincial governors, vice-governors and mayors shoulder political responsibility for streamlining industrial supply chains, especially in industries affected by the US trade war and the pandemic.

The system was first adopted in September 2019 by the eastern province of Zhejiang, the country’s fourth largest provincial economy and a major exporter. After the Central Economic Work Conference set a goal of strengthening control over industrial chains, it was quickly extended to more than a dozen provinces including Guangdong, Shandong and Hebei.

The “chief of industrial chains” must harness government resources, such as finance and credit support, to help companies in designated industries and consolidate China’s position as the “factory of the world” amid new external uncertainties. It is part of Beijing’s broader push to climb up the global industrial value chain and ensure economic security.

5. Houses are for living in, not speculation

Although the policy was introduced in December 2017, it is often reiterated in major economic pronouncements from the government and has profoundly changed the country’s real estate market. Beijing has outlined a series of macro-control measures in recent years, from blanket purchase and pricing restrictions, to tightening mortgage requirements and clamping down on illegal financing.

The property market has been one of the main pillars of economic growth since home ownership was privatised in 1998, resulting in massive real estate investment and boosting upstream and downstream sectors related to the housing sector. Its output accounted for 7.3 per cent of gross domestic product last year.

But high home prices – Shenzhen, Shanghai and Beijing are among the world’s most expensive cities – have generated a series of social problems. The exorbitant cost of home ownership has hurt young people the most, affecting their work, marriages and willingness to have children. It has also provoked complaints about growing inequality in China.

Soaring house prices over the past two decades have also fuelled concern the country is facing a property bubble, which would pose a major threat to the financial system. Speaking at a conference in June, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, warned the property market was the biggest Grey Rhino risk to China’s financial system and speculators would pay a big price.

The property sector remains one of the main targets of Beijing’s campaign to reduce debt and excessive leverage.

Late last year, financial regulators set three financing restrictions – the “three red lines” – including capping major developers’ debt ratio to 70 per cent. This has exerted pressure on developers, such as the troubled Evergrande, who have sounded the alarm over cash flow and been forced to sell assets to repay high levels of debt.

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