The Chinese government’s anti-corruption campaign hit luxury shops hard as the gifting expensive items for company executives dwindled — but spare a thought for the country’s corporate caterers.
The sector was almost wiped out in a stroke when the reforms were announced in 2012, as companies put an end to extravagant parties. Analysts from Merrill Lynch show this in one great chart.
Here’s what happened:
China’s leader, Xi Jinping, began a crackdown on corruption in November 2012, after being appointed general secretary of the Communist Party. Prosecutors have already claimed several big scalps, including General Guo Boxiong, a vice chairman of the powerful Central Military Commission.
Living extravagantly and giving luxury gifts was associated with corruption, so the purge weakened the sales of high-end items both in China and abroad, hurting profits at luxury-goods makers. The fashion house Burberry reported a double-digit percentage decline in sales in Hong Kong this year.
Coupled with the slowdown in retail sales, China is targeting 7% annual growth and a rebalancing of the economy away from industrial production to boosting internal demand. Top Chinese policymakers are meeting informally this week to discuss the country’s economic prospects.
Some, such as the Bank of England, think this is too ambitious, while others believe China is massaging the official data, and growth is closer to 5%.
According to the Merrill Lynch note, the Chinese growth decline might be slower than people think. It cites four main reasons, but all of them focus on one thing: Power.
- the anti-corruption campaign already reduced investment and consumption to a low base, flattering future figures.
- with the power consolidation achieved in the past two years, the government has the authority to force and entice government officials to perform.
- many younger officials promoted in the past two years are either cleaner or are more loyal to the current government. These officials tend to be more proactive in boosting growth, Merrill Lynch says.
- the central government is pushing local officials to take prompt actions in fiscal spending.
There are also signs that the corruption crackdown on top officials is slowing from highs seen last year.
Here’s another Merrill Lynch chart: