When Chinese President Xi Jinping came to power in November 2012, his decision to implement an anticorruption campaign capable of catching both “tigers and flies” came as no surprise amidst the highly publicised downfall of corrupt former Communist Party Chief, Bo Xilai. But in the wake of falling consumer demand for luxury goods, and no end to the China’s fight against corruption in sight, market analysts have been left wondering whether the golden goose of retail has lost its shine for good.
Anti-corruption at a glance
Characterised by large-scale investigations, a willingness to prosecute high-level officials and a renewed focus on the rule of law, China’s current anticorruption campaign has been more wide-ranging and long-lasting than any of those which came before it. According to the ChinaFile web platform of the Asia Society, a New York-based non-profit that aims to promote a greater understanding of Asia, President Xi Jinping’s highly publicised anticorruption campaign has already named over 170 top officials (“tigers”) and 1487 low level officials (“flies”) to date, in corruption cases totalling 6.5 billion yuan.
Upon entering office, President Xi Jinping announced a number of bans for government officials and employees of state-owned enterprises aimed at curbing corrupt and excessive behaviours, including extravagant house purchases, alcohol consumption at military functions, and state-funded banquets for military officials. Concrete actions for investigation and punishment were not taken until late 2013 however, when the Communist Party of China released its 2013-2017 Work Plan for Establishing and Improving the System for Punishing and Preventing Corruption. Also known as the “5 year anti-graft campaign”, the Work Plan signalled China’s staunch intention to wage war against corruption, and foreshadowed a wave of formal investigations against government officials at both the provincial and ministerial level. Following 2014 amendments to China’s existing Anti-Unfair Competition Law and Criminal Law legislation, culpability for corruption now extends to both the payer and payee of a bribe, and convictions can attract a range of penalties including life imprisonment, monetary fines and the confiscation of personal property.
Despite the success of President Xi Jinping’s 5 year anti-graft campaign, China’s renewed fight against corruption and bribery shows no signs of slowing, with the Central Commission for Discipline Inspection (CCDI), vowing to continue its investigations with unabated force and unchanging rhythm in 2016. Led by Vice-Premier Wang Qishan, the CCDI investigates corruption in government agencies and SOEs under a dual leadership structure aimed at minimising the influence of Communist Party committees over inspectors. According to its website, which receives up to 2 million visitors per day, CCDI investigated or concluded cases against 90 top officials in 2015, up from 68 in 2014. At the same time it punished 49,000 officials for violations of rules under an eight-point guideline aimed at curbing gross and extravagant behaviours. Overall, the number of corruption cases investigated in China has increased by 30% since 2012.
The economics of anti-corruption
The exchange of favours, expensive gifts and lavish banquets for government officials has a long history in China, and has infamously been used to obtain access to public services, maintain contractual relationships, and reinforce Communist Party loyalties. In 2012, gifts purchased with state money comprised 25 percent of all luxury spending in China, and banquets for officials constituted 80 percent of domestic food wastage, at an estimated value of US$32 billion. While startling, these figures shine an important light on both the extravagance and prevalence of corruption in China at this time.
While the CCDI has teeth, the market has eyes, and the effect of China’s corruption crackdown on the luxury goods industry has been obvious to anyone watching. Restaurants and expensive nightclubs once populated by government officials now sit unoccupied following restrictions on official banquets, and the demand for high-end liquor such as baijiu has been quashed. In 2015, Chinese consumer spending on luxury goods fell by two percent, following a one percent decline in 2014. Expensive business gifts for men were particularly affected, with watch sales down 10 percent and clothing sales down 12 percent in just one year.
To compensate for the correlation between China’s economic slowdown and President Xi Jinping’s anti-corruption campaign, producers of luxury goods and alcohol have been forced to shift their business and marketing practices to appeal to a new demographic of Chinese consumers. As the practice of social gifting is overtaken by personal shopping, luxury retailers are working hard to attract a new wave of bold and informed middle class consumers with a preference for subtly branded, limited-edition goods of high quality. The Chinese liquor market has also been forced to adapt, by producing more affordable and fashionable products targeted at a younger demographic with a taste for light, fruity flavours and low alcohol content beverages.
The future for luxury goods in China
With a corruption perception index of 37, where 100 signifies a fully clean environment, it is clear that the war against corruption in China is far from over. But as the dust from President Xi Jinping’s anti-corruption campaign begins to settle, luxury brands must adapt to a “new normal” in order to survive, by diversifying their products and services to attract an increasingly discerning middle class consumer, with more brands than ever to choose from.