by Senmiao Qiu
One of the most striking activities, since Xi Jinping took office as China’s President, has been the anti-corruption campaign, starting in 2012. President Xi has vowed to take down both ‘tigers’ and ‘flies’ – senior leaders and lower ranking bureaucrats. The anti-corruption campaign has become one of President Xi’s priorities now and received both domestic and overseas attentions.
The campaign started as investigating government official’s extravagant gift-giving and conspicuous spending. However, over the past two years, it has expended to a wider range, involving big companies and even foreign companies in terms of corruption and bribery. Mark Reilly, the senior vice president of the leading British pharmaceutical company GlaxoSmithKline China, is accused of bribing Chinese government officials. 4 senior leaders of the company’s Chinese branch are also involved in the case. The company ended up with paying 3 billion yuan ($486 million) fine, recording the largest penalty for a drug company in China. For Chinese senior leaders, Zhou Yong Kang, the former domestic security chief, topped the list of falling ‘tigers’, whose ongoing investigation involves more than 100 people. 2013 also saw the highest number of officials investigated and around 182,000 officials were disciplined. The total number of censured officials during President Xi’s tenure has been more the previous five years combined.
Although some say that President Xi’s campaign is a pure political measure, in order to of strengthening his power and maintaining social stability, it has inevitably impacted China’s economy. Therefore it is worth discussing the economic cost of the campaign.
The most straightforward impact is definitely the decrease of luxury sales. China’s luxury market growth experienced a plummet in 2011, from 30% to 7%, which is the first time in six years. According to a report by Bain & Co, the luxury sales in China only rose by 2% in 2013. Although the slowdown macro-economy may also contribute to the cool-down of luxury sales partially, the crackdown on public officials spending played a critical role. To be specific, 30% of luxury watches sales in China are for gift purpose, according to Bain & Co. Accounting for one-fifth of Mainland China’s luxury sales, sales of watches experienced an 11% decline in 2013. Another popular category for gift purchase – men’s wear, also witnessed sharp drop last year.
Another stricken area is the catering business, including the consumption on high-end hotels and liquors. In China, it is quite common to discuss business over lunch or dinner, which trigger the business of high-ends restaurant and exclusive clubs. And a large part of these consumptions are eventually billed to government. As Chinese central government is so insistent on tackling corruption, especially for local government and state-owned enterprises (SOE), the catering business inevitably experienced a drastic dip.
In addition, another channel of the impact of China’s anti-graft campaign might be the slowdown of investment. Although the Chinese government claimed that the campaign was not targeting multinational companies specifically, with large companies such as GlaxoSmithKline and Microsoft are under investigation for anti-corruption purposes, concerns have been raised. According to a survey by the American Chamber of Commerce in Shanghai of 400 US companies that also operate in China, 40% of those surveyed claimed the plan to increase the spending on compliance, due to the ongoing anti-corruption campaign. Consequently, the compliance pressure will result in the slowdown of FDI in China. The recent economic data shows that the slowdown in FDI correlates with the anti-corruption campaign, as this August, FDI fell to its lowest point in four years. For domestic investment there are also concerns about the possible negative effects. With tightening control of central government and lower opportunity for future corruption, officials are less incentivized to approve projects. In addition, some of the officials also worry that their activity might be related to corruption, which make them cautious in approving investment projects.
When look at the macro effect of the campaign, a report from Bank of America Merrill Lynch argued that the campaign could cost roughly 1.5% of China’s GDP. Is it a price worth to pay? While in the short run the crackdown may drag the growth of China’s economy, in the long run it should be positive to economy. Corruption is a long-lasting problem in China, which increases bureaucracy and transaction cost, and misallocates public resource. The past leaders all tried more or less to combat corruption, and the present one is the deepest and most sustaining one. The sustained anti-graft campaign can be viewed within the context of economic reform in China. As the China is trying hard to push for structural economic reform to achieve sustainable growth, the anti-corruption battle is crucial for a more transparent government and, more importantly, a healthy market. Meanwhile, challenges still remain. As China is trying to shift away from investment-led growth model and rely more on, consumption, some measures have to be taken to compensate for the drop in consumption due to the anti-corruption campaign. More political and social reforms are also needed to solve more fundamental problems in China.