China’s Austerity Measures: Three Years Later

In November of 2012, China’s President, Xi Jinping, announced a crackdown on corruption among government officials. In the months that followed, multiple regulations have been passed at the central and local levels to reduce the use of luxury cars, lavish gifts for government officials, and limit the scope of government sponsored extravagant parties and dinners that have traditionally been seen as a way of doing business in China. These austerity measures have led to firing of and punishment of a number of highly visible government officials and there are hundreds of corruption cases under investigation. When the new restrictions were announced, many thought this would be a temporary and ineffective attempt by a new leader; however the reforms have lasted longer than they predicted.

The reforms imposed by the Xi Jinping regime, appear to be impacting a number of sectors of the Chinese economy, in particular the luxury market. One survey of consumers indicates that 25% fewer plan to give expensive gifts at Chinese New Year. Additionally, China’s high-end hotels have experienced a considerable drop in their occupancy rates. Before the campaign, government bookings were attributed to more than 40 percent of sales for business hotels; these have declined by more than 50 percent.

Many economists believe that the austerity measures are one reason China’s annual growth rate is has missed its target. Economists have estimated that Jinping’s campaign is cutting between 0.6 and 1.5 percentage points from China’s GDP. The impact is not only felt in luxury retail and service sectors, but in more broad expansion as government officials are less likely to approve new projects that might get them in trouble for taking bribes, a practice that used to be commonplace. This reduction in deals is affecting the number of overseas and domestic acquisitions and development initiated by China and is amplifying the slowdown in economic growth.

The new austerity climate has also trickled down to the employees of government-owned organizations, not just the officials in power. In the past, employees often received incentives in the way of gifts of cash bonuses, but now some organizations have removed these perks. The impact is also being felt on the companies that depend on the state run organizations. Less investment by government flows to upstream stakeholders.

Companies making luxury products may be feeling the greatest impact of Jinping’s reforms. As gift giving has declined, makers of high-end spirits, designer watches and handbags have seen a substantial reduction in revenue. It has been estimated that 40 to 60 percent of purchases of these items are for gifts.

Some pundits argue that China’s rapidly growing middle/upper class will eventually replace the lost sales from frivolous government spending. They are probably right about this as this population will continue to expand; however, this may take some time. Jinping’s austerity measures came at a difficult time for China given the global economic slowdown, and given the combination of both factors, China is likely to feel the effects of the reforms for years to come.

Tom Augustson

MBA Candidate 2016