What is happening in China?

Its been a depressing month or so and it was not just the weather. There has been a pre-occupation with COVID outbreaks in New South Wales and Victoria, and the shambolic withdrawal of the US military in Afghanistan which caught their allies by surprise

So while we were watching all that, plenty of developments occurred in China, many of them with far-reaching consequences.

For a start, President Xi Jinping set in motion his philosophy for what is essentially a policy of wealth distribution. Partly because of income differences between rural and urban populations China has one of the highest levels of income inequality in the world. Income inequality is generally measured by the Gini coefficient (named after the Italian statistician who developed it) which is a comprehensive index and demonstrates a country’s level of inequality of income distribution. A level of 1 (100%) indicates maximum inequality while, naturally, 0 represents perfect equality.

That China should have seen a rise in inequality when it did is, in some ways, unsurprising. In the late 1970s, Chinese leader Deng Xiaoping instituted economic reforms that led inequality and real income to rise in unison. The level of income inequality in China today is very high. According to the official data (which do not provide micro information that can be independently verified), China’s Gini coefficient is around 0.47. By comparison, that of the United States is around 0.41. Chinese leaders have insisted a number of times that inequality above 0.40 is potentially destabilizing.

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Graph1

Other estimates show that 1% of the population have over 30% of the wealth. There are plenty of billionaires in communist China.

President Xi is calling time on this and has started a campaign of “common prosperity” to address this wealth divide. The billionaires have taken the hint and have started announcing programmes of community investment. Ecommerce giant Alibaba has committed to investing US$15.5 billion over the next five years in initiatives which include improving digital infrastructure in undeveloped regions and reducing costs for small businesses. But the message is clear; the Chinese government will no longer tolerate the profitability of large companies unless there is a community redistribution of some of the wealth.

This interference in the market is a warning signal to investors. Technology companies are already under close scrutiny for, among other things, its data collection practices. The private schooling sector has been told it must not make profits. Chinese shares have suffered across world stock markets.

As if that were not enough, the massive gaming industry has suffered a further blow. Alarmed by the growth of gaming among young people, and the ease with which they can gain access, the Chinese government have cracked down. Citing a government report that found that 62.5% of Chinese minors often play games online, and 13.2% of children play for more than two hours a day, the government have limited the amount of time children can play video games to three hours a week. Regulations have been introduced to make companies monitor activity.

This reduction will impact on video companies’ user activity and income. Shares in Chinese gaming stocks fell sharply on Wall Street.

Marketwatch has always been fascinated by how a communist society managed to create so much wealth among so few people. Now we have the answer. Either the government now feels confident enough to be able to take on the wealthy or it is really worried that if wealth creation goes on much longer, inequality will cause social unrest.

Whichever it is, the face of investing in China has probably changed permanently. It will not be for faint-hearted or the amateur. This may well be one to leave to the professionals.

Marketwatch’s tipple of the month is another local resident. The Byron & Harold Estate set up shop in Wandering in 2011 and produces a range of wines from the Great Southern and Margaret River. I recently enjoyed a bottle of their Circle of Life Cabernet Merlot. Well worth checking out.

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