China’s Officials Tighten Belts: Going Too Far?

The Impact of Austerity Measures on China’s Economy

China is currently navigating a complex economic landscape, marked by domestic challenges and an ongoing trade war with the United States. As part of a three-part series, this article delves into the government’s efforts to curb wasteful spending and the unintended consequences that have emerged from these measures.

The Civil Servant’s Dilemma

Wang, a civil servant from a small town in northeastern China, has become increasingly cautious about his dining habits. Once an avid foodie who dined with friends multiple times a day, he now avoids restaurants entirely. Even attending his niece’s wedding was a challenge due to the fear of being seen at a banquet. This shift in behavior reflects a broader trend among state-sector workers, who are impacted by a government austerity drive that has sent shockwaves across the country.

The campaign began in May when stricter rules were introduced for civil servants and state-owned enterprise employees attending official receptions. These rules banned the consumption of cigarettes, liquor, and “high-end dishes.” Initially aimed at curbing wasteful celebrations and corruption, the policy has since evolved into something more extreme as local authorities attempt to demonstrate political loyalty to Beijing.

Unintended Consequences

Economists warn that the overbearing nature of these measures could jeopardize Beijing’s efforts to stimulate domestic consumption, a key priority as the country tries to offset the impact of the trade war. One economist, speaking anonymously, noted that officials are so terrified that even casual meetings outside coffee shops are avoided.

The new spending rules align with two broader priorities: combating official corruption and reducing wasteful government expenditure. However, the economic slowdown has made these issues more urgent, as local governments face budget constraints and public resentment towards any signs of misusing public funds.

Recent reports about local officials dying from excessive drinking and the financial burden caused by lavish banquets may have prompted the government to introduce stricter guidelines. Despite these intentions, some local governments have implemented measures that go far beyond the original rules, such as daily breathalyzer tests and rewards for restaurants reporting officials dining out.

Government Response and Challenges

Beijing has attempted to address the issue by clarifying the boundaries of the austerity drive. State-owned media outlets and Communist Party publications have urged local governments to implement the new rules with restraint. However, misunderstandings persist, with some regions banning alcohol 24 hours a day or limiting meal attendance to three people.

State media recently highlighted a district party secretary in Chongqing who treated local pig farmers, workers, and entrepreneurs to a meal costing 1,100 yuan (US$150). Despite this positive coverage, concerns remain among public-sector workers, with many still choosing to avoid social events.

Effects on Industries

The liquor industry is also feeling the effects of the campaign. Kweichow Moutai, the premier baijiu maker, saw its share price fall 14 per cent from a peak in mid-May. Shares in Wuliangye Yibin, another top distiller, also declined 13 per cent.

The private sector is not immune either. A worker at a commercial bank in Beijing mentioned that several planned company gatherings were canceled to comply with the central government directive. Documents circulating online suggest that several Chinese law firms have adopted similar restrictions on dining and drinking.

Economic Implications

Analysts argue that while there is a need to cut government waste and prevent corruption, the way the campaign is being implemented is causing unnecessary damage to the economy. Tao Jingzhou, an arbitrator, noted that many regions have failed to create a clear code of conduct for officials, leading to a “destructive” trend of cutting off all catering expenditure.

Xue Qinghe, CEO of the private think tank Zhibenshe, highlighted the impact of the campaign on consumer spending, especially in smaller cities where public-sector household consumption forms the backbone of local demand. The report by the Economist Intelligence Unit estimates that spending by government bodies, public-sector institutions, and companies drives 51.6 per cent of the catering industry’s revenues.

A 10 per cent drop in spending by these groups would drag down the catering industry’s revenues by 5.2 per cent and cause a 0.6 per cent fall in China’s overall retail sales. Economists from Nomura predict that the new austerity measures will deal a blow to the catering, tobacco, and liquor sectors, with high-end catering services likely to be hit hardest.

Conclusion

While the government’s efforts to curb wasteful spending and corruption are understandable, the unintended consequences of these measures are becoming increasingly evident. The reliance on government hospitality to boost the catering industry may indicate an unhealthy economic model that needs to change. As the situation evolves, it remains to be seen how effectively these challenges can be addressed without further damaging the economy.