Spending in free fall - as China swats flies, catches tigers

CHINA’s anti-corruption campaign has slashed spending in sectors of its domestic economy, but it is impacting on global business, too, including travel, casino takings and the luxury goods sector. The cost to China itself could be as high as 1.5 per cent of GDP growth this year . . .

THE ECONOMIC cost to China of enforcing its anti-corruption campaign could be as high as 1.5 per cent of its GDP growth this year, according to some estimates.
But the flow-on impact to the global economy is much harder to measure.
Whether it is the Paris-based purveyor of luxury goods, casino operators in Singapore or companies doing business with State-owned enterprises or Government departments, all are affected in one way or another by Xi Jinping’s anti-corruption drive.
The reason is that the intensity of the campaign has led to paralysis of a sort. Officials are too scared to make decisions, business people no longer wine and dine extravagantly for fear of being caught, while once free-spending
nouveau-riche Chinese officials have stopped spending and travelling.
In business circles in China, foreign firms operating there have suffered unintended consequences of the campaign — in areas ranging from Government access to investment decisions. Indirectly, they, too, feel the heat.
The anti-corruption campaign has affected leaders of China’s State-owned enterprises (SOEs) in fields including oil, power, telecommunications, transportation and steel.
The driving force behind the campaign is the Central Commission for Discipline and Inspection (CCDI), a watchdog agency headed by Wang Qishan. It deals with corruption among Party Members, Secretaries, Vice Governors, and Vice Chairmen.
Now, questions are being raised as to whether China’s economy has become an unintended casualty of the campaign.
Fixed asset investment (FAI) eased to 13.3 per cent in August (year-on-year) from 15.6 per cent in July and 17.8 per cent in June, according to the Copenhagen-based Danske Bank. Its calculations, seasonally-adjusted, show that FAI increased by only 0.3 per cent in August compared with July. The monthly increase in July was 0.9 per cent, in June 0.6 per cent.
Based on its figures, Danske Bank says FAI growth appears to have slowed markedly in recent months.
“Looking into the details, the weakness in investment demand has become more widespread in August, with investment within manufacturing and transportation also starting to weaken,” the bank says. “Previously, weakness in investment demand has mainly been concentrated within property.”
Leading Hong Kong-based economist Lu Ting has said that the main channel of economic impact from the anti-corruption campaign in 2013 was slumping luxury consumption while in 2014 the channel has been slowing FAI growth.
Ting attributes this to the inaction of local government officials and executives of State-owned enterprises, either because they are in fear of corruption charges or because they are not financially motivated.
Ting, Bank of America-Merrill Lynch China economist, told the German broadcaster, Deutsche Welle, that FAI could be affected, firstly, because room for potential corruption might be greatly squeezed as a result of the anti-graft campaign. Some officials could also be dis-incentivised from starting new projects.
Secondly, even honest officials with clean hands might be discouraged from initiating new projects, as they may be afraid of being perceived or even charged as being corrupt during the campaign. Inaction might be viewed as the safest way for self-protection amid a political movement.
High-end retail, catering, hotels and the travel industry are those sectors most affected by the campaigns. This is because an important part of the drive is aimed at extravagance.  In the early days of the campaign, hotel industry executives claim that they downgraded their five star hotels to four stars or less to avoid scrutiny.
Regulations have been introduced to ban the use of luxury cars, eliminate lavish gifts for officials, stop the use of public funds to organise galas, and limit expenses on travel and hotels.
Ting told DW that he estimates the impact of fiscal contraction on China’s GDP growth as a consequence of Beijing’s anti-corruption campaign by looking at the growth of fiscal deposits — bank deposits of all Government and quasi-Government agencies.  
He estimates that the impact could be about 0.6 per cent on annual real GDP growth, but this could go as high as 1.5 per cent. It is difficult, he says, to accurately estimate the cost of the campaign. “We estimate that the direct impact could be around one percentage point of GDP.
Anecdotally, Chinese companies outside China are also affected by the paralysis. Officials in foreign countries are too scared to make decisions – just in case they could be brought into the anti-corruption dragnet. Local executives working for Chinese enterprises complain that no one will make decisions.
While it is far too soon to make any assumptions on the direct impact of the anti-corruption drive on other economies, industries around the world which cater primarily to high-spending Chinese entrepreneurs and officials are feeling some pain.
Charles Yan, Greater China head economist at Standard Chartered Bank, says the impact on luxury retail sales — from fashion garments, to shoes and watches — is “significant”. Yan says the recovery won’t come quickly – at least not this year or next year.
Sales of luxury goods grew by 30 per cent in 2011, slumping to seven per cent in 2012 and to just two per cent in 2013.  The campaign has impacted upon the common Chinese practice of gift-giving, which is a custom of building connections through gifts, banqueting and favours.
Macau has firmly established itself as the gambling capital of the world, outstripping Las Vegas many years ago. Last year, its total casino earnings hit a staggering US$45.2 billion.
But slowing growth in China has compounded the impact of the anti-graft drive to crimp the number of VIP visitors from China. The Chinese mass market is affected by the slowing economy.
The alarm bells sounded in June when Macau’s total monthly gaming revenue dropped 3.7 per cent – the first monthly drop since June 2009 (during the global financial crisis).
The New York-based Telsey Advisory Group estimates that the Chinese mass market slowed to 17.3 per cent year-on-year expansion in July compared to 26.9 per cent in June and 32.5 per cent in the whole of the second quarter.
Union Gaming Research Macau analysts Grant Govertsen and Felicity Chiang cite Xi’s corruption crackdown as the top reason for the VIP slowdown. The effect on the bottom-line is being felt far and wide.
A case in point is Singapore’s two casinos – Marina Bay Sands and Resort World Sentosa – which have enjoyed phenomenal growth since they opened their doors in 2010. Their key customers are Chinese tourists, and, more significantly, high rollers from China.
Gaming analysts say the two integrated resorts – as the casinos are known in Singapore – racked in huge profits.  When they opened their doors for trading, their quarterly revenues rose to more than US$1.2 billion, with margins of about 40 per cent making them the most profitable casinos in the world.
That spectacular growth has slowed – to a mere three per cent from 2012  — with combined takings of about expected US$7.4 billion expected this year.
In a rare interview with ATI, a highly-optimistic  US casino tycoon, Sheldon Adelson (ATI April 2007) said he was preparing to pump US$12 billion into casino and resort development in Macau and the adjacent Hengqin
Island. His bullishness was not surprising because he got back his entire investment in his first Macau casino within one year. Billionaire Adelson is the founder and driving force behind Las Vegas Sands.
In Singapore, Chinese tourist arrivals have also fallen. Singapore is the most popular destination for first-time travellers out of China. Their ranks have shrunk by 30 per cent on-year in the first six months of this year. Australia and New Zealand have also suffered a drop in the number of Chinese arrivals.
China accounts for nearly one in 10 tourists globally, and they are already the biggest spenders globally, outstripping the Americans and Germans with their spend per trip. In 2013, Chinese tourists spent more than US$100 billion — and they travel to shop.
So far, global real estate is the only sector to benefit from the anti-corruption drive. Wealthy — and not-so-wealthy Chinese — are hedging their bets on their future in securing visas in foreign countries, whether it is Australia,
Malaysia or Spain.
As far as these Chinese buyers are concerned, the country does not matter so much provided there is a scheme to trade off real estate investment with residency permits.
According to a report published by the National Association of Realtors in July, Chinese spent US$22 billion buying US real estate.
The New York Times reported in September that China’s rich are offshoring their families along with their cash. That has created a real estate boom in an unlikely corner of the US – suburban Seattle. In recent years, Chinese have bought up to one-third of homes sold in certain areas, costing about US$1 billion.
The story is the same in Australia, where the Chinese have been similarly accused of bidding up local prices in suburbs popular with Asians in Sydney and Melbourne.
Australia’s Foreign Investment Review Board says that, conservatively, Chinese buyers have invested more than AUD5 billion a year in Australian real estate. A report in March by Credit Suisse estimated that Chinese buyers spent around AUD24 billion over the past seven years.  In fact, the Swiss bank expects Chinese nationals to sink around AUD44 billion into Australian residential real estate over the next seven years.
The anti-corruption drive is about to enter its third year and there are no signs of the Government slackening off. If anything, there are signs of a renewed focus.
When Chinese leader Xi Jinping took office in 2012, one of his very first actions was to launch the now widely-feared war against corruption campaign to swat “flies” (low-level offenders) and catch “tigers” (high-level corrupt officials).
More than 40 high-profile “tigers” or officials and executives of State-owned enterprises equivalent to Ministerial and provincial-Governor rank have been caught. They include one former Politburo Standing Committee member, Zhou Yongkang, and one senior General, Xu Caihou.
Some 180,000 flies — Communist Party members — were punished last year. In the first half of this year, another 84,000 officials were disciplined. Latest reports coming out of China suggest that the hunt for corrupt officials and their ill-gotten wealth has spread to their mistresses.