As China embarks on what President Xi Jinping calls the “third distribution” along the path to reaching “common prosperity” and “socialist modernisation by 2035”, it might want to consider the idea of pre-distribution of wealth through universal basic capital. This would modernise the socialist market economy by spreading wealth more fairly.

Pre-distribution addresses the fundamental dynamic of inequality in all market-driven economies, where an ever-increasing share of national income goes to those who own capital assets – as opposed to those who only labour for their livelihood.

French economist Thomas Piketty famously put this in the equation r > g – that is, return on capital (r) grows faster than the growth (g) of income and output. As he puts it, “the past devours the future” because those without capital income who must live from pay cheque to pay cheque can never catch up with those who compound their wealth through the appreciating value of their investment returns.

The aim of Xi’s “third distribution”, it would seem, is not just to limit concentration of wealth at the top but build it from below. One per cent of China’s population owns 31 per cent of the nation’s wealth. Closing such a wealth gap that sooner or later portends instability in any society can best be done by fostering an ownership stake by all in China’s future prosperity.

China’s economy is an enormously productive and dynamic wealth-generating colossus with world-class enterprises. Instead of the benefits of that success flowing only to the shareholders of Alibaba or Tencent, for example, why not spread the equity around to everyone through a common prosperity fund that would provide dividends from capital gains on its investments to every family?

China could use its huge surpluses to initiate the fund. Rather than follow the standard Western model of the welfare state, which taxes the income of the most successful entrepreneurs to redistribute it to the less well-off after wealth has been created, China could enable all families to share in that wealth creation from the start by requiring all start-ups to assign 30 per cent of their equity to the fund.

Once established, the fund could allocate, say, 7,000 yuan (US$1,100) to an account for every family held in their name. Though owned as family accounts, the fund would be collectively managed and invested across all listed companies in the Chinese economy and globally, boosted by the rising market value of start-ups that successfully scale up.

The growth in value of those family accounts over time would accrue to each family, not the state. After a certain vesting period, the family could draw on their accumulated wealth for their own needs, from housing to medical care and education, or even to start a business.

Though its sources of funding are different, Singapore’s Central Provident Fund operates essentially in this way.

In California, where we are based, the idea of universal basic capital is being actively discussed as one approach to stemming inequality there. Governor Gavin Newsom this year proposed using unexpected state surpluses to fund a US$500 college savings account for every low-income student in public schools.

Once seeded, this fund will be collectively invested by professional managers with the value appreciation over the years accruing to the individual to pay for their higher education when they reach college age.

The majority leader of the California State Senate, Robert Hertzberg, has joined former Google CEO Eric Schmidt and Snap co-founder Evan Spiegel to propose using the state surplus – as well as philanthropic equity contributions from Silicon Valley’s richest companies and individuals – to take the next step and create a commonwealth fund that would provide every citizen over 18 with US$1,000 to start their universal basic capital account.

They point out that a US$1,000 investment in 2011 in Tesla would now be worth $85,101; in Facebook, US$14,147; in Apple, US$12,957. If invested in this way, all Californians would benefit from holding a stake in the publicly traded companies residing in the state that are worth US$13 trillion.

Where the idea of universal basic capital has been discussed in the United States, it has garnered support across the political spectrum. Both hedge fund giant Ray Dalio and Nobel Prize-winning economist Joseph Stiglitz agree that “this idea of pre-distribution through universal basic capital is absolutely critical going forward”.

It would reduce the burden that would be put on taxation, and on redistribution, while augmenting people’s assets. As Dalio puts it, “by allowing everyone to be a capitalist, it would generate more buy-in within a system that today is being torn apart by inequality”. He also notes that “it’s an odd duck that is neither capitalist nor socialist”.

From the Chinese perspective that sees unity in opposites, the reconciliation of this duality is precisely what the socialist market idea is all about. In many ways, China’s socialist market economy has far more policy leeway to test out this new path than the capitalist nations of the West. This could be one innovative path to “common prosperity” that the policy of the “third distribution” is meant to achieve.

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This article was originally published in the South China Morning Pos