China Weighs Cost of Corruption Crackdown

An analysis by Michael Lelyveld
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china-bo-verdict-sept-2013.jpg Staff of the Jinan Intermediate People's Court in Shandong province look at an image of disgraced politician Bo Xilai as the verdict is announced at his trial for corruption, Sept. 22, 2013.

Economic costs of China's anti-corruption campaign have raised questions about the government's policies and plans for sustainable growth.

President Xi Jinping's discipline drive has been spreading uncertainty as some businesses slump and party cadres wonder how far it will go.

Restaurant chains have reported slimmer margins after the government clamped down on conspicuous spending, lavish receptions and multi-course banquets, the official Xinhua news agency said.

Growth in the catering industry has dropped to a 20-year low, the official English-language China Daily reported, citing the China Cuisine Association.

The central government has cut its budget for overseas travel, official vehicles and receptions by over 10 percent, according to the Ministry of Finance.

On April 22, the ruling Chinese Communist Party's Central Commission for Discipline Inspection (CCDI) warned officials against backsliding ahead of the May Day holidays, when gifts in "red envelopes" have traditionally changed hands.

"Misbehavior is more secretive now," Xinhua quoted CCDI deputy chief Li Yufu as saying. Bureaucrats are now more likely to hide bad behavior in private clubs instead of public hotels, said Li.

Over 42,000 people have reportedly been punished since December 2012, mostly under Xi's vague "mass-line" campaign against "undesirable work styles such as formalism, bureaucracy, hedonism and extravagance."

State media regularly rail against officials charged with "moral corruption" as the crackdown reaches senior ranks, targeting figures such as Liu Tienan, former vice-director of the National Development and Reform Commission (NDRC), and former Nanjing mayor Ji Jianye.

Tensions in the upper echelons have mounted since the South China Morning Post reported last August on an investigation of Zhou Yongkang, the powerful former chief of domestic security and retired member of the Politburo Standing Committee with longtime ties to the oil industry.

In March, Reuters said authorities had seized at least 90 billion yuan (U.S. $14.5 billion) in assets from Zhou's relatives and associates. More than 300 individuals were reportedly questioned or detained.

Negative impact

While corruption is usually seen as a drain on the legitimate economy, a recent analysis suggests the uncertainty of the anti-graft push has also been having a negative impact.

Last month, economist Ting Lu at Bank of America Merrill Lynch in Hong Kong estimated that the campaign could be costing China from 0.6 to 1.5 percentage points of growth in gross domestic product (GDP), the broadest measure of the economy.

Fears about the uncertain extent of the crackdown have had a chilling effect on officials who would otherwise launch infrastructure projects, Lu argued.

"Even honest officials with clean hands might be discouraged from initiating new projects as they may be perceived or even charged as being corrupt during the campaign," the analyst said in a research paper.

"Inaction might be viewed as the safest way for self-protection amid a political movement," Lu said.

One sign of holding back was a 28.3-percent rise in government deposits at the end of February, suggesting that allocated funds which might otherwise spur the economy are not being spent.

"The result is a paucity of government investment at a time when exports remain weak and private demand is sluggish," The Wall Street Journal said in a blog posting.

Last month, a senior official of the National Bureau of Statistics (NBS) acknowledged the Bank of America estimate, China Daily reported.

Zhang Zhongliang, director of the NBS finance department, called the impact on GDP "an unavoidable price to pay for better governance," the paper said.

The possibility of economic damage from the anti-graft drive may present a host of questions.

Has the government cast its net so broadly that it is weakening the economy and disrupting legitimate business?

Has the high-growth era of China's economy been built on corrupt practices?

What does the government mean by sustainable development and how does it plan to achieve it?

And does the estimate of lost growth mean that GDP could resume its 8-percent annual pace if the crackdown stops, instead of the 7.4-percent rate in the first quarter of the year?

More cautious approach

Thomas Bellows, a political science professor at the University of Texas at San Antonio and editor of the American Journal of Chinese Studies, said the issue may be a matter of degree.

"The argument is that, up to a point, corruption gets things done. Projects move, permissions are given, things like that," said Bellows. "I wouldn't be surprised if that sort of thing is slowing down."

Bellows also links the uncertainty to the apparent slowdown in the housing market, where many projects built for investment have been left unoccupied, perhaps contributing to hollow GDP.

"Gambling on the future probably has also been affected," said Bellows. "People are behaving more cautiously."

Bellows said the continuation of 8-percent growth might have been possible otherwise, but not for long, because China's speculative over-building has already run its course.

Nicholas Borst, research associate and China program manager at the Peterson Institute for International Economics in Washington, said he doubts the extent of the anti-corruption impact on growth, although some economic activity like luxury spending may be suffering.

"It's more about displacing certain types of consumption in favor of others," said Borst, noting that China's fixed asset investment (FAI)—a measure of capital spending often associated with construction activity—rose 17.6 percent from a year earlier in the first quarter, according to the NBS.

The FAI growth is substantial, although considerably below the 20.9-percent increase recorded in the first quarter of 2013.

"It goes too far to say there's no effect of this corruption drive, but I also think a lot of it is exaggerated," Borst said.

He sees a much greater effect coming from economic trends such as restructuring, more limited credit growth and efforts to cut industrial overcapacity.

"I think most Chinese officials are more nervous than they were a year ago," Borst said. "Maybe that subtracts a little off economic growth, but I don't think it can explain the totality of the slowdown we've seen over the past year."

But uncertainty over the extent of the crackdown may remain as a drag on growth and a stability risk, said Bellows.

"The only way you can stop corruption is to stop it at the top," he said.

"It's dangerous," Bellows said, but he added that "it has to be a wide swath if it's going to be effective."


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