Collateral Damage From China's Antigraft Drive
As China prepares to welcome the Year of the Sheep on Feb. 19, Beijing’s citizens are doing their best to celebrate as usual. Red paper lanterns with festive tassels are visible in stores and homes. Trains are jammed with Chinese headed to the countryside to visit relatives.
Yet Beijingers like Yao Ting, a 29-year-old accountant at a large state-owned bank, expect this Lunar New Year to be less rewarding. In years past, companies, usually state-affiliated ones, often handed out prepaid gift cards to help pay for shopping sprees by employees at department stores and hypermarkets. But with the government of President Xi Jinping campaigning against corruption, many employers are now less generous. “This year, I think we will only have candies and nuts from the office,” Yao says.
In his high-profile fight against graft, Xi is taking aim at the culture of bribery and kickbacks among the country’s political and corporate elite, with more than 70,000 officials punished last year for violating anticorruption rules. The campaign is also taking a toll on a less obvious target: Chinese retailers dependent on the sales of prepaid cards. Denominated at 100 ($16) to 1,000 yuan each, the cards were easy for companies to buy in bulk and give out to employees at festival time.
The cards also offered privacy, because company employees didn’t need to provide any personal details when buying them or making purchases with them. Xi’s graft busters have gone after these untraceable bits of plastic. In December the state-controlled media reported on an official in the southern city of Nanning who improperly handed out 100,000 yuan of prepaid cards.
People must now disclose their real names at the time of purchase, leading to second thoughts among many would-be buyers concerned about the ability of police to trace the movement of the cards. “If I am a corporate [official] and I purchase a large amount of cards, they can ask, ‘Why are you buying so many and who are you giving them to?’ ” explains Anita Chu, an analyst in Hong Kong with Bocom International Securities, a subsidiary of the state Bank of Communications. “That,” she adds, “might create a problem.”
The drop in demand for the cards is causing a chill at Sun Art Retail, a Shanghai-based operator of hypermarkets that’s a joint venture between France’s Auchan and Taiwan’s Ruentex (a hypermarket combines a supermarket with a midlevel department store). With more than 370 stores nationwide, and estimated revenue of 93.7 billion yuan, Sun Art is one of China’s most powerful retailers. As prepaid-card sales dropped, the company’s Hong Kong-listed shares lost 29 percent of their value in the past year. The benchmark Hang Seng gained 9 percent.
Before the anticorruption campaign, about 17 percent of Sun Art’s sales were from cards that shoppers used in its stores. During last year’s mid-autumn festival, a traditional holiday and popular time for shopping, sales of Sun Art’s cards dropped almost 20 percent. The decline is especially worrisome because consumers would often spend more freely when using cards, says Bruno Robert Mercier, Sun Art’s chief executive officer. “When people were getting these prepaid cards for free, they were maybe a little less cautious than when paying in cash,” he says.
Other retailers are seeing big drops in prepaid card-funded sales. Department-store chains Parkson Retail, Golden Eagle Retail, and Intime Retail had same-store sales declines of 4 percent to 7 percent last year, Chu says. Retailers are suffering in part from the slowing Chinese economy, which last year grew 7.4 percent, the weakest annual expansion since 1990. Stores are also feeling the heat from e-commerce competitors such as JD.com and Alibaba-owned Taobao. Yet Chu argues the slumping demand for prepaid cards is a “major driver” of the slide. Golden Eagle’s Hong Kong-listed shares have dropped 17 percent over the past 12 months, Parkson’s stock is down 30 percent, and Intime’s is off 40 percent.
The anticorruption campaign is more than a year old and shows no sign of easing. The annual New Year’s gala on television this year will feature a comic routine about corruption, the Global Times newspaper, an affiliate of the party-published People’s Daily, reported on Feb. 8. Given the intensity of the campaign, many employers are skimping on New Year’s gifts of all kinds. “It’s a little bit difficult to tell what’s corruption and what’s not,” says Yougang Chen, a partner in Shanghai with McKinsey. So ordinary government officials and managers at state enterprises “are trying to play it safe.”
—With Christina Larson
The bottom line: The Chinese government’s antigraft campaign is hurting demand for prepaid cards sold by retailers.
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