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China Talks of Trimming the Fat

March 28th, 2013

by Winnie Chwang

of Matthews Asia

China’s new leaders are talking tough about fighting government corruption and imposing a culture of frugality among Communist Party cadres. Sensitive to growing criticism about government excess, incoming President Xi Jinping has promised to crack down on officials who abuse their power and engage in illicit behavior, regardless of their rank.

These measures, which also call for a scaling back of extravagance, may be partly to blame for China’s slower retail sales in recent months. In several Chinese cities, florists have reported slumping sales as state-run affairs have called for fewer floral arrangements. Upscale restaurants in China’s top cities have seen overall lower revenues with such high-end eateries in Shanghai and Beijing experiencing a decline in sales of more than 20%. Even moutai, a high-end alcoholic drink commonly served for toasts at banquets, has seen a drop in average prices.

It seems the government’s stricter enforcement of anti-corruption policies have also been a drag on retailers of pre-paid department store gift cards, which have accounted for a significant part of store sales. China’s State Council issued regulations two years ago to deter the use of such gift cards in hopes of curbing acts of money laundering, tax evasion and bribery. The regulations require that card issuers register the identities of card buyers who make large purchases or order several thousand cards.

In the short run, the government’s tighter stance on corruption and extravagance may push retail figures lower. But in the long run, this belt tightening should not derail the economy from achieving a higher level of consumption relative to output. If anything, these anti-waste efforts may help resolve longer-term government issues.

China’s latest policies and guidelines place less emphasis on headline growth numbers and more emphasis on “higher quality” and “more sustainable” growth, with a particular focus on developing China’s services sector. Retail growth may be supported by new e-commerce platforms or increased penetration of department stores and shopping malls.

As long-term investors, we pay attention to sustainable growth indicators, such as increased levels of disposable income, a more robust social safety net to enable consumers to save less and consume more and the healthy evolution of China’s consumer space.

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