The Economic Impact of Cleaning Up Corruption

Just before handing the baton of party power to Xi Jinping, former CCP general secretary Hu Jintao warned that corruption “could prove fatal to the party.” Since taking the reins, newly appointed general secretary Xi has made his commitment to cleaning up corruption at all levels of the party clear. One campaign to crackdown on official misconduct and gather public trust has been a party vow to limit extravagance, often seen in the lavish banquets enjoyed by officials. The Wall Street Journal reports on how this is affecting the bottom lines of upscale dining establishments:

China’s upscale restaurants and hotels are feeling the pain as the government pulls back on public funding for fine dining amid efforts to project an image of increasing official austerity.

Upwards of 60% of restaurants have faced cancellations since the austerity push began, according a report released on Thursday by the China Cuisine Association (in Chinese), which surveyed 100 restaurants and hotels across the country to determine the economic impact of the government’s belt tightening.

One five-star hotel in Beijing saw roughly 10 million yuan ($1.6 million) in reservations cancelled, according to the report. Catering businesses in the northeast city of Tianjin have seen business drop by 30% this year compared to the same period last year, the report added, though it didn’t specify a time frame for the period.

In another article about the ongoing crackdown on corruption, The Wall Street Journal cites a Xinhua report on an official who was suspended for failing to observe the ban on official banquets:

Officials have suspended Zhou Shaoqiang, the manager of state-owned Zhuhai Financial Investment Holdings Co., for holding a luxury banquet last month despite a government ban on lavish government-sponsored events, according to a report Tuesday from the official Xinhua News Agency.

Luxury brands have also long raked profits from the pockets of corrupt officials, and have also been a cause for public outrage – last September, Yang Dacai, aka “Watch Brother,” was removed from his official post after netizens lambasted him for wearing designer watches whose price tags far outweighed his salary. On his blog at The New Yorker, Evan Osnos reports on the gains that luxury brands have seen in China, and the declining returns that watchmakers have seen since the anti-corruption campaign began:

Global luxury sales and epic Chinese political corruption have become so inextricably intertwined over the last decade that the recent kerfuffles in Chinese politics—the investigations and convictions and pledges of propriety—have been nothing but trouble for the privileged few. That became clear last fall, when political disorder in Beijing made it difficult to know which faction would end up on top, and one luxury-brand representative told the Journal that sales were down because “no one knows who to bribe.”

Some of the heaviest hearts are in the luxury-watch business. No industry has enjoyed such a warm embrace in China as the one that packs such enormous monetary value into a small, easily exchanged physical object. And, sure enough, the luxury watch business enjoyed a banner year in 2011, growing forty per cent. But then China’s anti-corruption campaign began, and by September, Bo Xilai was in handcuffs, and watch exports to China suffered a devastating blow—down 27.5 per cent compared to a year earlier, according to the Federation of the Swiss Watch Industry. China Daily quoted an industry consultant saying the anti-corruption drive “hurts the luxury watch business a lot.”

It’s not just watches. In 2009, the industry experts estimated that gifts to government officials made up nearly fifty per cent of all of China’s luxury sales.[…]

China’s state media regulator has recently taken means to discourage the gifting of luxury goods. From Global Times:

China’s TV watchdog on Tuesday ordered local radio and television channels to stop playing commercials that blatantly encourage giving gifts to officials.

The State Administration of Radio, Film and Television (SARFT) said in a statement that some commercials broadcast on some channels support a culture of gift giving to superiors that  include luxury watches, rare stamps and gold coins. This has spread incorrect values and helped create a bad social ethos, SARFT was quoted as saying in a report from the Xinhua News Agency.

The broadcasters have asked ad agencies to make changes if their advertisements contravene the rule, said a staffer working for the advertising department of Zhejiang Satellite Television.

“Unqualified advertisements will be stopped from being broadcast until they are modified,” he told the Global Times Wednesday, adding that it would not take long to modify them as advertising agencies usually produce several versions of a commercial for the same product.

The move is in response to the central government’s repeated calls for people to practice thrift and avoid extravagance and waste, a SARFT spokesman was quoted by Xinhua as saying.

The Telegraph has more on the SARFT directive, providing context as we countdown to the Year of the Snake:

Exchanging often-costly gifts is a key feature of China’s Lunar New Year celebrations that will be held on February 10.

In the lead up to the annual festivities, “gift giving” is a common tactic among company directors seeking to curry favour with powerful government officials and bureaucrats hoping for a promotion.

Children are also expected to shower their elders with presents as the Year the Dragon mutates into the Year of the Snake.

While this may not fare well for luxury retailers operating in China, Jing Daily reports on measures being taken at Heathrow Airport to make the most of this holiday season:

Despite making up less than one percent of the total travelers who pass through Heathrow, mainland Chinese currently account for around 25 percent of overall luxury spending at the airport, a statistic that has given retailers there even greater impetus to target this big-spending demographic in the run-up to Chinese New Year. In addition to printing Chinese-language maps of the airport’s retailers, Heathrow is also following the lead of Dubai duty-free retailers in beefing up its Mandarin-speaking service staff.

Additionally, with Chinese New Year just around the corner, this week Heathrow is hosting a number of activities aimed at Chinese tourists, among them traditional Chinese music performances, dragon dancing, food samplings, and paper-cutting classes.[…]

[…]With many mainland Chinese duty-free shoppers at Heathrow passing in transit, rather than spending time in London (owing, often, to visa difficulties), British heritage brands like Burberry and Mulberry are among the most popular purchases at the airport, along with luxury watches, and multi-brand retailers prominently display the fact that they accept UnionPay.