Bloomberg News

China Rebound at Risk as Xi Curbs Officials’ Spending

April 12, 2013

China Rebound at Risk as Xi Curbs Officials’ Lavish Spending

Workers install Chinese flags on a lamp post on a street in Tianjin, China. Photographer: Tomohiro Ohsumi/Bloomberg

Chinese President Xi Jinping’s campaign to rein in lavish spending by officials and state-owned companies is proving so effective that it risks helping end the nation’s economic rebound after one quarter.

Bank of America Corp. is among 12 of 41 respondents in a Bloomberg News survey who estimate first-quarter expansion was at or below the previous period’s 7.9 percent pace. The world’s second-largest economy probably grew 8 percent in the January-March period from a year earlier, according to the median forecast ahead of data due April 15 in Beijing, down from an 8.2 percent projection in February.

Xi’s efforts are restraining consumer spending and making it tougher for the new government to boost domestic demand as factory output slows. Large-restaurant and catering sales fell for the first time in more than three decades in the first two months of the year, while demand and prices for luxury items such as Moutai liquor and Longjing tea have slumped.

“The anti-corruption action by Xi is creating unprecedented phenomena, including an absolute fall in high-end restaurant sales,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, who previously worked for the European Central Bank. “It’s certainly a big factor dragging down short-term growth.”

October-December growth in gross domestic product represented the first acceleration in two years, up from the third quarter’s 7.4 percent rate. For the full year, expansion was 7.8 percent, the slowest since 1999.

March Figures

The National Bureau of Statistics will release GDP data at 10 a.m. local time along with March figures for industrial production and retail sales and first-quarter fixed-asset investment.

China’s benchmark Shanghai Composite Index (SHCOMP) of stocks has fallen about 9 percent since Feb. 6 on concern government steps to cool property prices will drag on economic growth. The gauge dropped 0.6 percent today, capping a third week of losses.

Economists estimate March data will show an improvement. Industrial production probably rose 10.1 percent from a year earlier, according to the median estimate in a Bloomberg survey. That compares with 9.9 percent in January-February combined, which was the slowest for the period since 2009.

Retail sales may have gained 12.6 percent, up from a 12.3 percent pace that was the weakest for the first two months of the year since 2004. Investment excluding rural households may have expanded 21.3 percent in the first quarter after 21.2 percent in January and February.

‘Shaky Ground’

Shen has cut his first-quarter forecast for GDP expansion to 8 percent from 8.3 percent in January. The drop in extravagant dinners and luxury spending came at a time when the Chinese economy has “no shining spots” apart from infrastructure spending, he said. “The recovery is still on shaky ground.”

At least nine other analysts have reduced their first-quarter GDP projections since January, according to survey data compiled by Bloomberg. Lu Ting, head of Greater China economics at Bank of America in Hong Kong, on March 19 lowered his forecast to 7.9 percent from 8.3 percent, citing in part the “new leaders’ serious crackdown” on luxury consumption by the government.

In the first two months of 2013, sales at restaurants and catering businesses with annual revenue above 2 million yuan ($320,000) fell 3.3 percent from a year earlier, China’s statistics agency said in March. The China Cuisine Association said it was the first fall in figures dating to when the nation began opening up its economy in the late 1970s, according to a report in the Economic Information Daily, published by the official Xinhua News Agency.

Frugality Drive

Catering-industry sales rose 13.6 percent last year to 2.3 trillion yuan, according to the statistics bureau. That’s about 4.5 percent of GDP.

The frugality drive probably contributed to the retail sales deceleration in January and February, Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, said in an interview yesterday. At the same time, government spending on banquets and “unproductive” items may shift to much-needed areas like health care and education, which would help economic growth, he said.

Xi started the campaign after becoming Communist Party chief in November as part of efforts to combat corruption that poses risks to the party’s more than six decades in power.

No Conflict

Shen Danyang, a Ministry of Commerce spokesman, said at a Feb. 20 briefing that since the frugality drive began, demand for luxury items has fallen. He said a ministry survey found that sales of shark fins plunged by 70 percent and sales of abalone dropped about 40 percent in the period before, during and after the Lunar New Year holiday that started Feb. 9.

“Opposing extravagant spending is in line with the purpose of expanding consumption, there’s no conflict,” he said.

Bottles of Kweichow Moutai, China’s “most prestigious liquor,” sold for an average 1,300 yuan in March, down 28 percent from December, when military staff were banned from consuming alcohol during official functions, HSBC Holdings Plc said in an April 10 report.

Shares of parent Kweichow Moutai Co. (600519), based in Renhuai, Guizhou province, have fallen 26 percent since Xi became party secretary Nov. 15 as of yesterday’s close, compared with a 9.3 percent gain in the benchmark Shanghai Composite Index.

Really Big

Top-quality Longjing tea, which sold last year for 8,000 yuan per kilogram (2.2 pounds), now goes for 4,000 yuan, the state-run China Daily reported this month, citing a tea producer in the Hangzhou area. The price of knife fish has also fallen by about half this year after going for 16,000 yuan per kilogram in 2012, according to a separate China Daily article that cited fishery law enforcement in the city of Jingjiang.

“The frugality campaign’s impact is really big” at high-end restaurants and hotels, said Hao Hong, Hong Kong-based head of China research at Bocom International Holdings Co. “It will feed into retail sales and the overall economy.”

--Zhou Xin. With assistance from Ailing Tan in Singapore, Cynthia Li in Hong Kong and Nerys Avery in Beijing. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff for this story: Zhou Xin in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

Workers install Chinese flags on a lamp post on a street in Tianjin, China. Photographer: Tomohiro Ohsumi/Bloomberg Bottles of Kweichow Moutai, China’s “most prestigious liquor,” sold for an average 1,300 yuan in March, down 28 percent from December, when military staff were banned from consuming alcohol during official functions, HSBC Holdings Plc said in an April 10 report. Photographer: Nelson Ching/Bloomberg A pedestrian walks past an Hermes store in Beijing. Retail sales may have gained 12.6 percent, up from a 12.3 percent pace that was the weakest for the first two months of the year since 2004. Photographer: Tomohiro Ohsumi/Bloomberg April 9 (Bloomberg) -- Qu Hongbin, chief China economist for HSBC Holdings Plc, talks about the outlook for the nation's growth. China’s consumer prices rose 2.1 percent in March from a year earlier, the National Bureau of Statistics said today in Beijing. Qu speaks with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg) April 12 (Bloomberg) -- Cui Li, Hong Kong-based economist of Goldman Sachs Group Inc., talks about the outlook for China's economy. She speaks with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg) April 11 (Bloomberg) -- Rodney Ward, chairman of Asia corporate and investment banking at Bank of America Corp., talks about China’s banking industry and economic growth. He spoke April 8 with Bloomberg Television's Stephen Engle at the Boao Forum for Asia in Hainan, China. (Source: Bloomberg) April 10 (Bloomberg) -- Chang Jian, a Hong Kong-based economist at Barclays Plc, talks about the outlook for China's economy and central bank monetary policy. China’s exports rose less than forecast for the first time in four months in March, and inflation eased more than forecast from a 10-month high as food-price gains ebbed. Chang speaks with Rishaad Salamat on Bloomberg Television's "On the Move." (Source: Bloomberg) April 10 (Bloomberg) - Leland Miller, president of China Beige Book International, discusses China's latest trade report showing a smaller-than-forecast increase in exports in March for the first time in four months and a 92.9% jump in exports to Hong Kong which the government said it is investigating as a possible case of falsely inflated figures. Miller spoke with Bloomberg's Kathleen Hays and Vonnie Quinn on Bloomberg Radio's "The Hays Advantage." (Source: Bloomberg)

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