By Joep Huntjens
“It does not matter if a cat is black or white as long as it catches mice,” declared Deng Xiaoping in 1978. Since then, Deng and his successors have ushered in market-oriented reforms that helped propel China to become the largest economy in the world by purchasing power parity. This single-minded pursuit of economic prosperity has lifted millions out of poverty but has also created immense income inequality and rampant corruption.
Three decades later, the country’s overly-centralised bureaucracy means that party officials and civil servants are in prime position to accept bribes in exchange for facilitation of business. Gift giving, hosting expensive banquets to secure minor deals and exchanging favours have been de rigueur. Even homes have been torn down for minimal compensation when property developers bought them via local officials.
With the Chinese economy entering a new stage of growth – one that is easing to a more sustainable pace after rising at a breakneck speed in the past decades – the government has turned its focus to fighting corruption. Led by president Xi Jinping since late 2012, the campaign has become China’s most intense and sustained anti-corruption drive.
The crackdown has taken two main forms. First, the government has punished officials, military officers and senior executives of state-owned enterprises accused of graft. According to the Central Commission for Discipline Inspection (CCDI), hundreds of thousands of party officials have been indicted. Even Politburo Standing Committee members, who consist of China’s top leaders, have not been spared.
Second, China’s new leadership has introduced measures to curb ostentatious spending. Officially-funded galas have been outlawed completely and advertisements that promoted luxury gift-giving have been banned. Government officials are also no longer allowed to stay in five-star hotels or fly first class.
In the immediate term, the effects have had a dampening effect on economic momentum. Nowhere has this been felt more acutely than the consumer goods sector (see Fig. 1). As officials become reluctant to approve investment projects, investments growth have also cooled; in June this year, urban fixed asset investments growth slowed to 11.4% year-on-year, down from 20.6% at the end of 2012. The Bank of America Merrill Lynch estimated that the direct impact from the anti-corruption campaign trimmed up to 150 bps of GDP in 2014.
But for all the short-term dislocations, these reforms are surely good for China’s economy in the long run. Stamping out graft and abuses of power supports the government’s broader goal of economic reform, which aims to allocate capital more efficiently. Cutting the ties of patronage between local officials and business interests removes obstacles to economic reforms, which are targeted at moving China to a more market-based economy. As the reputational and financial risks of operating in China are reduced, the country should attract investments from foreign companies that previously shunned the market to avoid engaging in illegal practices.
Also crucial is the opportunity for Chinese leaders to enhance the party’s legitimacy and strengthen political stability. The anti-corruption drive appears to be popular with ordinary Chinese people, who have long been cynical and angry about the excesses of those in power. A new smart phone app launched by the CCDI allows members of the public to act as whistleblowers by uploading photos of officials in compromising situations.
The campaign is nowhere near abating. But with the punishment and shaming of high-profile officials nearly complete, the government now has to turn its attention to building effective institutions to prevent corruption from occurring at all. The process will be lengthy and fraught with missteps. But there is much cause for optimism for China’s future – a cleaner and more transparent government should usher in sustainable long-term economic growth.
Joep Huntjens is head of Asian fixed income at NN Investment Partners
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