A year before he could be confirmed by the Communist Party (CP) as the first head of state since Mao's death for a third term, China's president has announced a comprehensive redistribution from rich to poor and an “adjustment of high incomes”.

Hendrik Ankenbrand

Business correspondent for China based in Shanghai.

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At a meeting of the CP's Finance and Economic Commission on Tuesday, the results of which were released on Wednesday by the official Xinhua news agency, Xi said it was necessary to "regulate excessively high incomes." Also, “high income groups and businesses” should be “encouraged” to “give more back to society”.

The party decision will "go down in the annals of history," wrote Niu Wenxin, chief commentator of the "China Economic Weekly," which is published by the Central Propaganda Authority and is considered to be one of the most important leading media in the country.

The call for “common prosperity”, which Xi had highlighted as the leitmotif for the future policy of the Communist Party at the meeting, “suddenly became the strongest voice in China” with the speech of the state leader.

The party made it clear that redistribution was "the fundamental necessity of socialism".

Inequality becomes a burden on the party's legitimacy

This heralds a change of course in China's politics. As recently as 2016, Xi Jinping said in the central leadership group for finances and economics of the CP that “redistribution is preferable to economic development”, does not correspond to the party's line. In response to the devastating collectivization policy and planned economy of the founder of the republic, Mao Tse-tung, Deng Xiaoping opened China to capitalism in the early 1980s by saying that some sections of the people should “get rich first”. The breaking up of the collectives and the permission of private companies, together with the influx of foreign capital, triggered an unprecedented boom that made China the second largest economy. In the party resolution on Tuesday it is now said that the party will "still allow some people to get rich".However, they should “help others get rich”. The goal is now the "common prosperity".

Observers suspect that Xi Jinping hopes that the attempt will strengthen his power in the Communist Party and secure the third term he is obviously aiming for after 2022. After Mao's death, the party had agreed that no president would be allowed to remain in office for more than five years twice. In 2018, however, the National People's Congress removed this restriction from the constitution, which had been interpreted as an indication that Xi would try to remain at the head of the state after the expiry of the previously applicable deadline.

According to the previous unwritten rules of the party, the 68-year-old Secretary General would actually have to resign for reasons of age. In the year of the 100th anniversary of the party, the growing inequality in China has become a burden for the legitimacy of the party and its leader Xi Jinping. With a Gini coefficient of 0.47 (with 0 everyone has the same amount, with 1 everything belongs to one person), this is greater than in the USA (Gini coefficient 0.41). In a household survey conducted by the Chinese economist Gan Li, which observers considered credible, inequality was even significantly higher with a Gini coefficient of 0.6. Bank Credit Suisse recently estimatedthat in addition to the 5 million dollar millionaires already existing in China today, more people could exceed the limit of 1 million dollars in available wealth in the country than in America by 2025.

Is capital gains tax coming?

The party now wants to reduce the growing inequality with higher taxes, among other things.

For years there has been discussion in China about levying a tax on property ownership.

Opponents of this proposal argue that in such a case the real estate market would collapse and the economy would suffer severe damage.

Depending on the type of calculation, the real estate industry contributes between a fifth and a third of the Chinese gross domestic product.

It is conceivable that not first-time homes, but any other apartment that was bought for speculation and exceeded a certain value limit - about 10 million yuan (1.3 million euros) will be taxed.

In addition to an inheritance tax, there could now also be a capital gains tax on profits on the stock market. In view of the weak performance of the mainland stock exchange, which - as measured by the Shanghai Composite index - has increased by just 37 percent in the past ten years (the American S&P 500 rose 315 percent during the period, the Dax rose 187 percent), however, it turns out the question of how much this instrument should contribute to redistribution.

In China's private sector, the party decision is seen more as an attempt by Xi Jinping to subordinate companies in the technology industry in particular to the party's goals. Since September last year, under the banner of competition law and national security, the government has been pursuing tough regulation against powerful corporations such as Alibaba, Tencent, Didi and Meituan on the orders of the head of state. Because the share prices of the companies then fell sharply, their founders have sometimes lost a third of their assets on paper. The KP wants to test its new redistribution instruments first in the province of Zhejiang. The internet companies Alibaba and Ant Financial, founded by multibillionaire Jack Ma, are based there.