Chinese Austerity Drive Spreads Beyond Ferraris

Zhang Hongbao, who’s run a funeral home in Shanghai for more than a decade, says he can’t recall the last time business was so dead.

“Government officials don’t dare to spend too much on funerals,” Zhang, owner of Shanghai Funeral Service (China) Co., said in an interview. “It’s the peak of the anti-corruption drive. They choose simple ceremonies, such as inviting fewer people and have quieter events rather than the noisy rituals of the past.”

Zhang, who says profits have fallen 20 percent in the past year, illustrates how President Xi Jinping’s drive to root out corruption is morphing into a broader austerity campaign that’s spreading to small businesses in the world’s second-largest economy. What began as a fight against extravagance, which put a halt to surging sales of Ferraris and Gucci bags, is now sapping demand for items such as firecrackers and greeting cards.

“There’s always collateral damage,” said Dariusz Kowalczyk, Hong Kong-based strategist at Credit Agricole SA. “These are negative side effects that nobody wanted but it’s a big economy and making one rule for a market that size means that you cannot take care of every nuance and it’s unavoidable.”

Slowing China

Credit Suisse Group AG in January cited the anti-corruption drive for cutting its projections for gross domestic product and real consumption growth. As analysts estimate China’s GDP to grow at its slowest pace in more than two decades, investors will be on the lookout for economic policy updates when the National People’s Congress kicks off its annual two-week meeting this week.

A government report showed on March 1 that a gauge of Chinese manufacturing fell in February to the lowest in eight months, while a private index today from HSBC Holdings Plc and Markit Economics indicated a contraction worsened last month. Separately, a services index rebounded in February from a five-year low, according to official data today.

Xi has made graft-busting among his biggest priorities since he began replacing Hu Jintao as China’s leader late in 2012. Two days after becoming head of the Communist Party, the People’s Daily reported that Xi warned fellow leaders graft could lead to the state’s demise and likened corruption to a rotting body that attracts worms. He’s since stepped up the campaign, vowing to go after both “tigers and flies” -- cadres big and small -- by targeting the military, provincial officials and state-owned enterprises.

Luxury Market

While the government didn’t explicitly single out companies, luxury items were soon hit. In 2013, China sales of high-end Swiss watches fell, as did deliveries at Fiat SpA’s Ferrari and Volkswagen AG’s Lamborghini. Overall, 2013 saw China’s 116 billion yuan ($19 billion) luxury market grow at the slowest pace this millennium, according to Bain & Co.

Not everyone’s been hurt as Coach Inc., whose bags are cheaper than those at Gucci stores, saw China sales rise at least 25 percent in the last three months of 2013. Hong Kong-based Halewinner Group, which sells watches ranging from 8,000 yuan Tissots to 150,000 yuan Audemars Piguets, is coping by shifting focus to mid-priced timepieces.

Xi’s campaign “changed the industry completely,” Halewinner Chairman Karson Choi said in an interview.

Lavish Funerals

For Zhang, the undertaker, the crackdown stretches beyond big-ticket items. The government circulated a notice last year ordering party members to set an example with simple and frugal funerals, banning officials from profiteering on condolence money, according to the official Xinhua News Agency.

Chinese funerals can be lavish. The state broadcaster -- China Central Television -- reported in October that a Party official in Zhejiang hired a 130-man band and had a 2-mile procession of vehicles. On the Hunan government website, it cites the practice of handing out 3,000-yuan electric bikes to pallbearers among wasteful practices at such ceremonies,

The State Council’s information office didn’t reply to faxed questions seeking comments on its anti-corruption drive.

China’s government, which had a procurement budget of 1.4 trillion yuan in 2012, has also banned government agencies from purchasing or giving out greeting cards, and cadres are scaling back spending on items ranging from firecrackers to hotel rooms.

‘Work Harder’

That’s hurt Wu Zaichi, who owns 12-year-old Worldmark Printing and Publishing Co. in the city of Xiamen. He said total business is down 10 percent after orders from government-related organizations dried up.

“I’ve had to work harder in focusing on exports to make up for lost business,” he said. “I’m also trying to recruit more private companies as clients.”

For Zhang Qijun, austerity spoiled the ushering in of the Lunar new year, which is bigger in China than the Dec. 31 celebrations. Zhang, the legal representative at Shanghai Qizhe Shiye Ltd., said sales of fireworks this holiday season tumbled almost 40 percent from a year earlier. Sales to corporate customers, mostly to government and state-affiliated companies, plunged about 60 percent, he said.

“I might have to change business and stop selling fireworks,” he said. “This is definitely a factor affecting my business.”

Inspecting Cashiers

China is so serious about its campaign that several provinces asked officials to return gift cards, which can be exchanged for cash, and the government dispatched inspectors to cashiers at shopping malls to check on gift-card usage during the Mooncake festival last year, according to Bain.

Count Diageo Plc, the world’s biggest distiller, among those coping with a less festive China. Its Sichuan Swellfun Co. unit, which makes the baijiu white spirit that’s long been a staple of Chinese banquets, will focus more on selling to walk-in customers and online buyers, said James Rice, Swellfun’s managing director.

“Before Xi Jinping, anybody could sell baijiu,” Rice said in a February interview. “Now, you have to be at the right price, you have to sell the right way and you have to go find your consumer.”

While the government crackdown is reverberating throughout the country, the push is a right step for the health of the economy as it will help root out the inefficiencies of corruption, said Yao Wei, China economist at Societe Generale SA.

For businessmen such as Zhang, the undertaker in Shanghai, such an upturn won’t come soon enough.

“There’s not much I can do except try to get more smaller ceremonies to make up for the lost income,” he said. “This has affected not just my business. Others in the industry have also said they are earning less than before.”

— With assistance by Alexandra Ho, and Liza Lin

(Corrects sixth paragraph to say services gauge rebounded from five-year low, not record low.)
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