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Palm-greasing end means Xi graft crackdown may aid growth
By Bloomberg -

Xi Jinping, President of China, is trying to unwind a culture of bribery and graft that has hurt the government’s legitimacy and jeopardized economic growth. Xi Jinping, President of China, is trying to unwind a culture of bribery and graft that has hurt the government’s legitimacy and jeopardized economic growth.

The champagne has stopped flowing in Beijing, and Joerg Wuttke couldn’t be happier about it.
President Xi Jinping’s crackdown on everything from gift giving to excessive wining and dining is leveling the business playing field, said Beijing-based Wuttke, president of the European Chamber of Commerce in China. Even as antitrust probes zero in on foreign companies from Microsoft Corp. (MSFT) to Qualcomm Inc. (QCOM), the government’s anti-corruption campaign is making business easier in the world’s second-biggest economy.
“It takes the stress away,” said Wuttke, head of a chamber whose members include Airbus Group NV (AIR) and Bayerische Motoren Werke AG. “You’re not afraid that somebody gets an order because he found a better champagne or something like that. It’s not Singapore yet, but it’s a very positive development.”
Economists forecast Xi’s crackdown will boost gross domestic product growth by 0.1 to 0.5 percentage point in 2020, according to the median estimate in a survey of 17 economists by Bloomberg News. That could equate to a dividend of as much as about $70 billion in today’s dollar terms, the size of Sri Lanka’s economy, as the drag on business from greased palms eases.
“Anti-corruption helps the economy in the long run, as it reduces business costs,” said Chang Jian, chief China economist with Barclays Plc in Hong Kong. “Just like a corporate restructuring, it brings short-term effects but has benefits in the future.”
So far, Xi’s campaign to net both “tigers and flies,” parlance for cadres from the top to bottom ranks, has ensnared more than 480 officials, spanning all of China’s provinces and largest cities.
Politburo member
Among those embroiled in the campaign is Zhou Yongkang, a tiger who was a onetime member of the Communist Party’s elite Politburo Standing Committee that rules China. About 30 senior officials at the vice minister level or higher have been put under investigation, charged with violations or expelled from the party since December 2012, according to a June 30 report by the state’s Xinhua News Agency.

The investigation of Zhou Yongkang, former Politburo Standing Committee member, is China's highest-level graft probe in 60 years.
Today, a former deputy head of the National Development and Reform Commission, Liu Tienan, is scheduled to go on trial in Langfang, near Beijing, on charges he illegally received money and goods in bribes.
Xi, who became president last year, is trying to unwind a culture of bribery and graft that has hurt the government’s legitimacy and jeopardized economic growth. China ranked 80th in Transparency International’s Corruption Perceptions Index for 2013, below nations including Senegal and Tunisia. Singapore was rated the cleanest in Asia.
Regional precedents
Hong Kong and Singapore’s anti-corruption campaigns in the first half of the 1970s are precedents that show they can be the springboard for accelerating output, according to a report by the Organization for Economic Cooperation and Development. The campaigns helped raise the countries’ per capita income well above the OECD average by 2011, the report said.
“Hong Kong’s golden age was the 1980s when all the manufacturing was in Hong Kong and corruption had lessened,” said Tony Kwok, the former deputy commissioner of Hong Kong’s Independent Commission Against Corruption. “A level playing field plays a part in the booming economy.”
The immediate impact of Xi’s crackdown is hitting revenue at Macao’s blackjack tables, Hong Kong’s luxury boutiques and high-end hotels and restaurants across China’s biggest cities. Growth will be 0.1 to 0.4 percentage point lower than otherwise due to the campaign this year and next, according to the median estimate of economists surveyed by phone and e-mail from Sept. 11 to Sept. 22.
Luxuries curbed
China’s luxury spending grew about 2 percent last year, the slowest pace since at least 2000, as more shoppers traveled abroad and the anti-corruption campaign bit, according to advisory firm Bain & Co. Companies from Treasury Wine Estates Ltd., the Australian maker of A$785-a-bottle ($700) Penfolds Grange, to Hong Kong listed Chow Tai Fook Jewellery Group Ltd. (1929) have cited the crackdown on gift giving and corruption as a brake on sales.
This year, the drag has shifted to fixed-asset investment, Bank of America Corp. economists led by Hong Kong-based Lu Ting wrote in a June note. That’s because of increasing evidence that the campaign is creating a kind of “political paralysis” where both corrupt and honest officials are discouraged from taking investment decisions, the economists said.
The impact on annual GDP growth is at least 60 basis points and could be as high as 150 basis points, they estimated.
That’s contributing to risks that Premier Li Keqiang will miss his 2014 expansion target of about 7.5 percent after softer-than-projected industrial-production, credit, import and investment data for August.
Broad impact
“The anti-corruption campaign is wide and deep and it’s impacting all kinds of business practices,” said David Loevinger, former U.S. Treasury Department senior coordinator for China affairs and now an analyst at TCW Group Inc. in Los Angeles. “One reason economists are ratcheting down growth forecasts is because they thought by now the anti-corruption campaign would lighten up. It has not.”
Even as the anti-corruption campaign simplifies aspects of doing business in China, the broader climate is deteriorating, say the EU and American chambers of commerce. Sixty percent of respondents to an August survey by the American Chamber of Commerce in China said they feel foreign business is less welcome in the country than before, up from 41 percent in a late-2013 survey.
For economic gains from the anti-corruption campaign to materialize, Xi must follow through with additional changes that include greater accountability, more rule of law, less space for discretionary decisions, and financial-industry liberalization, said Louis Kuijs, Royal Bank of Scotland Group Plc’s chief Greater China economist in Hong Kong.
“The anti-corruption and extravagance campaigns are meant to be coming alongside more systemic changes,” said Kuijs, who formerly worked at the World Bank. “These systemic changes should eventually lead to somewhat better productivity growth and somewhat better allocation of financial resources.”