Common Prosperity

Common Prosperity (from the Chinese “共同富裕,” gòngtóng fùyù) is a national policy objective of the Chinese government aimed at significantly reducing economic inequality. Think of it as a grand societal rebalancing act. It's not about forced wealth redistribution in a purely socialist sense, but rather a strategic push to moderate “excessive” incomes, expand the size of the middle class, and encourage the wealthy to contribute more to society through philanthropy and investment in social goods. For investors, this isn't just a vague social slogan; it's a powerful force driving a wave of regulatory changes that have fundamentally reshaped the investment landscape in China. It signals a major shift in priorities from “growth at all costs” to a more “high-quality, sustainable, and equitable” model of development. Understanding this concept is no longer optional—it's essential for anyone investing in Chinese companies or sectors with significant exposure to the Chinese market.

At the heart of Common Prosperity is a framework for how wealth is distributed throughout the economy, broken down into three layers. The government's current focus is on strengthening the second and, most notably, the third.

• First Distribution: This is the primary, market-driven distribution of wealth. It includes your salary from a job, the profits an entrepreneur makes, and the returns you get from an investment. This is the free market doing its thing.
• Second Distribution: This is the government's role. Through taxation, social security, and transfer payments, the government redistributes wealth to provide public services and support those in need. The Common Prosperity drive aims to make this system more robust and progressive.
• Third Distribution: This is the new star of the show. It refers to voluntary wealth redistribution through philanthropy, charitable donations, and social volunteering. The government is strongly encouraging—some might say pressuring—high-income individuals and corporations to “give back” to society. This has led to high-profile donations from tech billionaires and a new corporate focus on social responsibility.

For a value investor, who seeks to buy great companies at a fair price, Common Prosperity introduces a crucial new layer of analysis. The “rules of the game” in China have changed, and your investment checklist must change with them. It's no longer enough for a company to be growing fast; it must also be aligned with the government's long-term social and economic goals.

The policy has created clear winners and losers. Navigating this landscape requires a keen eye for both peril and potential.

The most significant risk is regulatory uncertainty. A company's business model can be upended overnight by a new directive.

• Direct Crackdowns: Sectors seen as exacerbating inequality or social problems have faced intense scrutiny. This includes:
  • Big Tech: Giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. were targeted for anti-competitive practices.
  • For-Profit Education: This industry was effectively dismantled by regulations banning for-profit tutoring for school subjects.
  • Property: Policies like the “three red lines” were introduced to curb developer debt and cool the speculative housing market.
• Margin Squeeze: Pressure to improve worker pay (for gig economy workers, for example) and make large “voluntary” donations can directly eat into corporate profits.
• Variable Interest Entity (VIE) Structure: The regulatory storm has raised questions about the long-term viability of the VIE structure, a legal workaround used by many Chinese tech companies to list on foreign stock exchanges.

Conversely, companies operating in sectors that align with the goals of Common Prosperity may receive government support and face a smoother path to growth.

• State-Aligned Industries: Sectors deemed critical for “high-quality” national development are likely to benefit. These include advanced manufacturing, green energy, electric vehicles, and biotechnology.
• Consumer Discretionary and Staples: The policy's central aim is to grow the middle class. A larger, more prosperous middle class will spend more on everything from healthcare to consumer goods and domestic travel.
• Companies with Strong Environmental, Social, and Governance (ESG) DNA: Businesses that already have a reputation for treating their employees well, paying their fair share of taxes, and contributing positively to society are better insulated from regulatory risk. They are a natural fit for the new paradigm.

Common Prosperity is a powerful reminder that in China, political and social priorities are inextricably linked with economic outcomes. For a value investor, this means the concept of a Margin of Safety must be wider than ever. It's not just about finding a company trading below its intrinsic financial value; it's about finding a company whose business model is durable, socially acceptable, and aligned with the nation's long-term vision. The best investments in China today will likely be businesses that don't just create wealth for their shareholders but are also seen as contributing to the prosperity of all.