China condom sales droop 1 million/day on anti-graft campaign

China corrupt Aug14Condom sales have dropped by 1 million/day in China according to The Economist magazine.  It highlights how:

Across China, luxury retailers and fancy restaurants are suffering from an edict against wasteful government spending. A chill has crept into karaoke parlours and brothels; mistresses also face a hard time.

The reason is the new leadership’s anti-corruption campaign.  This is spreading far and wide, and causing officials to be very careful about what appears on their expense accounts, as well as in their private bank accounts.

The background is simple:

  • All financial bubbles lead to massive corruption.  The major Western banks have already been fined $75bn according to the Wall Street Journal (WSJ) for their price-fixing and other activities in the sub-prime bubble era
  • China’s $10tn lending bubble after 2008 was no different.  People were so busy making money, they didn’t bother to ask how it was being made.  But now the bubble is coming to an end, serious questions are being asked

Thus state-owned China Daily now has a special section each day devoted to the anti-graft campaign, as the picture shows.  It records how 6601 officials were punished in June alone.  And it also highlights how the investigation has now reached the very top of the Communist Party.

Former Politburo member Zhou Yongkang was reported last week to be under investigation for “serious disciplinary violation”.  Zhou was not only a Politburo member in charge of internal security, but also the former head of PetroChina.  This confirms President Xi’s promise to catch the ‘tigers’ and the well as the ‘flies’ – the senior figures, as well as the more junior ones.

It is impossible to over-estimate the implications of this probe.  As Bloomberg notes, the investigation into Zhou covers 4 main areas:

The oil industry, where he once led state-owned China National Petroleum Corp (PetroChina); Sichuan province, where he served as party secretary; internal security; and his family

Equally, as the WSJ reports, the investigation is now impacting multi-$bn activities outside China.  In Canada, for example:

The shuffling provides a glimpse into the unexpected impact that Beijing’s graft probe, which has hit China National Petroleum particularly hard, is having on efforts to exploit the world’s third-largest oil reserve. The two Chinese executives who recently left their posts helped to make billions of dollars worth of investment commitments. Both were board members of trade organizations in energy-rich Alberta and had enough clout to summon meetings with senior Canadian lawmakers at short notice”.

And, of course, there is much more to come.  Last Thursday, the Party announced a team of anti-graft inspectors had arrived in Shanghai.  This was the scene of a previous probe in 2006, under which  President Xi Jinping became Party Secretary.  So Xi presumably knows where to target the team’s enquiries.

It will take 2 to 3 years for the full impact of the anti-graft campaign to become clear.  But already we can see some early changes underway:

  • China used to account for half of the world’s luxury market, as people apparently competed to bribe relevant officials with high-end products
  • Early signs of the crackdown came with the profit collapse last April for drinks companies Diageo and Remy Cointreau; write-downs have continued since then
  • Now it is the turn of the car companies, as officials are forced to give up their luxury Western cars, with Audi likely to be badly hurt
  • The latest investigations mean that at least 10  major State Owned Enterprises (SOEs) - including PetroChina, China Resources, Magang Group and China Three Gorges – have reportedly had to postpone or cancel planned Merger & Acquisition (M&A) activity

At the end of the campaign, China will be a better place to do business.  A proper cleansing process is essential, if growth is to move forward in a more sustainable manner.  As the WSJ reports today:

Corruption has reached the point where it is undermining the fighting capabilities of the People’s Liberation Army. It warps decision-making at massive state enterprises.”

But in the meantime, the economy is likely to slow even further than expected, as officials refuse to take any decision that might later appear corrupt.

The blog thus suspects its February forecast that “China’s lending bubble could now lead to zero GDP growth’ may well prove over-optimistic.  No Chinese official – guilty or innocent - will take any initiative over the next year or two, whilst investigations are continuing with such severity.

 

 

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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