[Opinion] The Impact of China's 'Gongdong Buyu' on the Global Economy

Seojun Sik, Professor at Soongsil University

China's "common prosperity" has become a new topic of discussion. Numerous interpretations abound depending on each political and economic standpoint. As an economist and investor, my primary interest naturally lies in how common prosperity will affect South Korea's wealth and my own investment assets.

The outward appearance of the ongoing common prosperity policy is quite radical. Large-scale regulations on monopolistic companies and wealth redistribution are progressing rapidly, and hundreds of real estate companies are going bankrupt due to stringent real estate regulations. Policies such as converting private education companies into non-profit organizations are also shocking from the perspective of democratic countries. This is why many economic analysts are more concerned than optimistic. However, I find my worries somewhat eased despite previously being deeply concerned about the accumulated problems of Chinese capitalism that emerged alongside rapid economic growth since the introduction of capitalism.

In fact, China had been showing signs of an economic crisis for some time. These include a sharp increase in private debt, real estate price issues, and severe economic polarization. There was also significant concern about the insolvency of financial institutions due to private debt problems. When private debt reached saturation, the government, unable to tolerate it any longer, implemented monetary tightening such as interest rate hikes, leading to asset bubbles bursting, financial institution insolvencies, and panic. The Great Depression, Japan's bubble collapse, and the global financial crisis are examples of such sequences.

However, this time China's common prosperity adopts a different approach, drawing attention to its outcome. While South Korea and the United States reconsider their monetary policies, China has chosen to eliminate the real estate bubble through strong government policies. It is also attempting to mitigate the resulting economic shock by using funds raised from large monopolistic companies and the wealthy for economic stimulus. Unlike the past pattern of bubble collapse → panic → Keynesian stimulus policy, China aims to simultaneously execute artificial bubble removal and Keynesian-style stimulus to catch two rabbits at once. At least, I believe the risk of the worst economic crisis has significantly decreased compared to before.

The essence of common prosperity is similar to Keynesian policies. It is a policy to redistribute the nation's wealth concentrated in a few to economically vulnerable groups to promote overall economic growth. When this policy is actively implemented, effective demand leading to product consumption will increase. If 1 million won is given to one ultra-wealthy individual, that money is unlikely to be spent on bread but rather flow into real estate purchases. Conversely, if the same amount is distributed as 10,000 won each to 100 vulnerable people, it is more likely to lead to the consumption of 100 loaves of bread. The logic is that dividing 1 million won from one top individual among 100 vulnerable people can revive bakeries and increase employment.

China's common prosperity will impact South Korea's and other countries' economies in two major ways. First, if the income of the vulnerable group, estimated to be over 1 billion people with a monthly income below 1 million won, increases through government support, a tremendous increase in effective demand can be expected. Second, funds originating from China that have flowed into real estate markets worldwide until recently are likely to stagnate or even flow out again. It is necessary to carefully consider how South Korea's economy and various asset markets will be affected if China's common prosperity continues long-term, and which companies will benefit or be disadvantaged.