Thursday, 19 June 2014

The real cost to China's businesses with government anti-corruption crackdown

Many news reports have been published about China's ongoing crackdown on corruption (tigers and flies), but now one of the world's biggest banks has put a price on the corruption.

The report published by the Bank of America Merrill Lynch this week, the Chinese government's anti-graft campaign could have cost China's economy more than $100bn this year alone. 

Many of the small effects of the anti-corruption drive have already been well documented; a slowdown in the restaurant trade and sales in luxury goods has seen Chinese business go out of business.

The gift giving culture is part of the Chinese business culture and required if doing business in China.

The past year has seen Shanghai's posh malls and boutique designer shops business slow to snails pace but the BofAML report suggests that the campaign is also having a significant and troubling macroeconomic effect.

Early last year, government bank deposits have been soaring, by almost 30% year on year and even honest officials are now terrified of starting new projects, for fear of being seen as corrupt that they're simply keeping public funds in the bank.

The cost to the economy of the prohibition on government consumption and the chill on admin spending is an estimated reduction in growth of at least 0.6% this year but it could, the report argues, be as high as 1.5% which gives us the figure of about $135bn of lost economic activity.

The report's authors admit their calculations are a back of the envelope estimate of fiscal contraction, but even if they are only half right it is an extraordinary amount of money and it highlights some of the challenges facing China's anti-corruption crusader in chief, President Xi Jinping.

Since taking office over a year ago Xi has made the cause his goal, warning that official graft and extravagance threaten the very survival of the ruling Communist Party.

Published by Go Frontiers (UK & China)

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