July 3, 2014 12:00 am JST

Xi's anti-graft drive threatens to stifle China's growth

MASAHIRO OKOSHI, Nikkei staff writer

BEIJING -- China's economic growth has cooled to a 7-8% in recent years, a pace President Xi Jinping recently called "the new normal."

    The slowdown can be partially explained by a policy move to trim excess capacity in sectors such as steel and shipbuilding. But that is not the whole story: The prolonged crackdown on graft spearheaded by Xi himself is also taking a toll. His relentless nationwide campaign is creating a climate of fear, forcing local government officials and executives at state-run enterprises to think twice about their investment decisions.

     Wei Jianghong, the 52-year-old chairman of state-owned Tongling Nonferrous Metals Group, China's second-largest copper smelter, jumped out of a building to his death June 24, following corruption allegations, highlighting the far-reaching effects of Xi's campaign.

    Wei's death is the latest in a string of suicides committed by top managers at China's state-owned companies. In January, the president of China Railway Group also leaped to his death, as did the chairman of Harbin Pharmaceutical Group Sanjing Pharmaceutical in May while under investigation by prosecutors.

   Xi has pledged to go after both "tigers" and "flies" -- those guilty of both serious and petty graft. This is producing risks for an economy that has long relied on public works projects and capital investment to grow.

Less grease for the wheels

"Bureaucrats at municipal governments are getting cold feet about authorizing new investments," said an official at an earth-moving equipment maker. "They are increasingly cautious for fear of becoming the next targets (of the anti-corruption campaign)," the official said.

     Their fears are well founded. Authorities seized more than 100 million yuan ($16 million) in cash from the home of a deputy head of the National Energy Administration. The official, who was responsible for overseeing the coal industry, was charged with taking bribes.

     Launched soon after he took power last spring, Xi's campaign has gone on much longer than expected. As a result, sales of expensive liquors and cigarettes, long considered a must-have for officials and company executives looking to do each other favors, have fallen sharply in the past year. Pricey restaurants have few customers. Now the anti-corruption campaign is inhibiting investment, the main driver of China's economic growth.

     Spring typically kicks off new public works construction in China. The ground thaws and money is available after the annual National People's Congress sets the budget. But this year, new construction remained slumberous. In the four months through April, year-on-year growth in fixed-asset investment, or construction plus equipment spending, declined by 0.3 percentage point from that of the January-March period.

Cowering

Xi is trying to shore up his grip on power by clamping down on high-ranking government officials and executives at state-run enterprises. But with corruption so widespread, "You cannot see exactly what yardstick (Xi is using) to separate those who are arrested from those who are let go," according to one Communist Party official. "This uncertainty is causing practically every bureaucrat who feels more or less guilty to keep his head down."

    As the crackdown bleeds into the wider economy, Premier Li Keqiang has grown frustrated. The premier is traditionally responsible for economic policy. At a May 30 session of the Standing Committee of the State Council -- China's top executive body -- Li expressed alarm at the slow pace with which local officials are carrying out directives from the leadership.

    Measures to prop up the economy, such as accelerated infrastructure spending, will not produce results unless bureaucrats implement them. Just before the session, the Ministry of Finance issued an unusual instruction to local governments, urging them to spend their budgets as soon as possible.

    Then, on June 13, China announced President Xi had taken charge of the country's top economic decision-making body, sidelining Li.

     At the root of both the rampant corruption and fear of periodic crackdowns is the Communist Party's monopoly on power. China's governance system is so rigid that even senior executives at state-owned companies must get permission from two deputy vice premiers to visit Japan. This rigidity risks paralyzing the economy.

Toru Sugawara, Nikkei staff writer in Shanghai, contributed to this article.