China’s Anti-Graft Drive and the Effects on Commerce
Since China’s new Chairman, Xi Jinping, came into power at the beginning of the year, he has made it his mission to eradicate corruption in China. Many guidelines for government officials have been introduced including bans on extravagant banquets, over-expensive gifts and building new government buildings. Whilst this crackdown may be beneficial to the party and its image within China, the effects have also been felt by the Chinese economy.
One of the largest industries affected has been luxury restaurants and hotels. Government officials and their business associates traditionally throw lavish, multiple-course banquets at Mid-Autumn Festival and Chinese New Year however, the industry has seen thousands of cancellations since the new guidelines came in. The government has also banned the use of public money for buying expensive dishes including shark fin soup, hairy crabs, and birds nest soup, also contributing to a loss of business for hotels and restaurants.
However, these businesses are learning to adapt to the new economic environment by reducing the number of courses they have on offer for special occasions and offering less expensive dishes. Sellers of hairy crabs have also been adapting to the new market conditions by travelling further afield to sell their goods, as well as reducing the cost to make the crabs more affordable to more customers.
It’s not just restaurants and hotels that have been affected. Sellers of luxury gift food products have also felt the pinch. It was especially obvious at Mid-Autumn festival; a time when moon cakes are often given to business associates and government officials to cement relationships. Sales of luxury moon cakes were hit hard and some outlets even stopped stocking the most expensive moon cake brands. Not only were moon cake sales reduced greatly; the sale of all food products as gifts dropped in 2013 by 40%.
Another industry that has felt the downturn caused by Xi’s anti-corruption drive has been the makers and sellers of luxury watches. Watches were often given as gifts because they are a small object that carries a lot of value. However, since the new guidelines were introduced, sales of luxury watches have shrunk by 12%. This reduction is directly related to the government’s austerity guidelines as, in 2009, government officials were responsible for nearly 50% of trade in the luxury goods market in China but, since the austerity guidelines were introduced, this share of the market has been decreasing rapidly.
There has also been an impact on the sales of high-end cars. Luxury vehicle manufacturers like Audi, BMW and Mercedes-Benz saw sales in China slow by 4% this year. However, government purchases only account for 2% of all luxury vehicle sales in China and the car industry has already started to adapt and evolve to attract more customers.
The major international car makers have been developing more entry-level, smaller, luxury vehicles in an attempt to boost sales expose their cars to a wider audience. So, although their sales have decreased, the market as a whole is still growing, albeit at a slower pace than in previous years. This increase is being driven by China’s burgeoning middle class which is growing rapidly and getting richer by the year. This new middle class is increasingly willing to spend their disposable income on all kinds of luxury goods from cars to food. So much so that, even with the crackdown on buying luxury vehicles and the slowdown in the luxury car market, China is still expected to surpass the US as the largest luxury vehicle market by 2016.
It remains to be seen how the most recent guidelines will affect industries. Government officials have recently been told not to smoke in public or to buy cigarettes with public money; in an attempt to reduce smoking in China where 1.2 million people die each year from smoking-related illnesses. This could affect cigarette producers as well as restaurants, hotels, KTVs and anywhere where people generally get together and smoke. In all likelihood, the tobacco industry will devise new ways to encourage cigarette consumption and, no doubt, will also be helped by China’s middle class much like the other industries affected in Xi Jinping’s anti-corruption drive.
Although some companies and industries have suffered losses since the austerity guidelines came into force, most businesses have been learning to adapt to the changing circumstances and find new markets for their goods.
Adapting to the new climate in China is the only way that restaurants, hotels and luxury goods sellers will be able to keep making a profit and ensure that their industries grow in the future. China’s increasingly large middle class population will be the new market for these goods as these nouveaux-riches have a taste for luxury goods and access to large disposable incomes they can spend in acquiring them.