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Impact of Beijing's anti-sleaze campaign wildly exaggerated

Mainland slowdown is less to do with wary officials cutting lavish spending and more, among other things, with a sluggish homes market

PUBLISHED : Thursday, 23 May, 2013, 12:00am
UPDATED : Thursday, 23 May, 2013, 4:27am

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Over the past couple of months, the media have been full of articles about how Beijing's latest anti-corruption campaign has dented consumer demand and even contributed to the slowdown in the mainland's overall economic growth.

At first glance, the data seem to support these stories. In the first quarter of 2013, retail sales growth slowed to 12.7 per cent from 14.5 per cent in the last quarter of 2012. And sure enough, real GDP growth was a weak 7.7 per cent.

Still, blaming the corruption crackdown looks excessive.

A cynic would argue that there is more show than substance to Beijing's periodic anti-sleaze campaigns, and that they are a normal element of leadership transitions.

They allow the new party bosses both to demonstrate their popular credentials, and to cement their political position by purging unco-operative officials and replacing them with their own supporters.

There may be something in it. A quick search of the Factiva newspaper archive shows the number of stories about anti-corruption efforts doubled in the six months either side of the last reshuffle, in 2008.

Yet even if the current campaign is largely for show, there appear to be real effects. The growth in sales of expensive brands of baijiu, a popular drink and present for those seeking favour with officials, slowed significantly in the first quarter of the year.

Meanwhile, reports were quick to blame slower first quarter sales growth for designer frippery such as Louis Vuitton handbags and pricey European cars on Beijing's corruption clampdown, as officials tried to consume a little less conspicuously.

But from slowing sales growth for handbags and luxury cars to slower economic growth is a big leap. Car sales make up only around 10 per cent of overall retail sales, and luxury motors are just a small segment of that market.

In any case, a look at the data shows the slowdown in retail sales growth pre-dates the latest anti-corruption campaign (see the chart).

Much of the nominal slowdown simply reflects abating inflationary pressures. But government efforts to cool the property market have also played their role.

Fewer property transactions means weaker demand for new household goods. At the same time, subdued home prices act as a powerful drag on sentiment, with consumers feeling less wealthy and so less inclined to spend lavishly.

And government attempts to rebalance the economy have played a part, too. Switching from investment to consumption-driven growth sounds great in theory.

But in the short term, slowing investment hits income growth, which in turns weakens consumers' willingness and ability to spend.

As a result, it appears that weakening retail sales growth may be part of a larger pattern of slowing growth on the mainland, and not simply the short-lived effect of Beijing's latest crackdown on official sleaze.

Areader has rightly chastised me for yesterday's Monitor examining the woeful performance of international equity investments made by the State Administration of Foreign Exchange, the body charged with managing the country's US$3.4 trillion pile of foreign reserves.

It was misleading of me to compare the price performance of SAFE's shares in the oil company BP with the total returns from US Treasury bonds, he complains.

It's a case of apples and pears. Instead I should have looked at the total returns generated by SAFE's BP stake.

It's a fair point, which I neglected yesterday for lack of space. I am happy to remedy the omission.

According to the South China Morning Post's Bloomberg data terminal, total returns from BP shares since April 2008, when SAFE acquired its initial stake, with dividends re-invested in the stock, have amounted to 9.7 per cent.

That's in pounds. But in the meantime the pound has slumped in value. As a result, the total return in US dollars, which is how SAFE prefers to gauge its performance, has been minus 15 per cent. SAFE's other high-profile investments in European oil companies and banks have performed as badly or worse.

Over the same period 10-year US Treasury notes have generated US dollar total returns of 50 per cent.

So even comparing apples with apples, SAFE's track record as an equity investor still looks lamentable.

tom.holland@scmp.com

 

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