China’s ongoing anti-corruption campaign’s downside: reduced government spending

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By Jacob Maslow

tinananmen square beijing
Team of soldier walk by Tiananmen in the morning on April 1, 2013 in Beijing, China. It is a famous monument in Beijing and serves as a national symbol.

One of the main reasons why China was able to survive the 2008 Global financial crash relatively unscathed is its top-down command and control government spending structure. Of course, the downside to increased local spending is corruption. Not all of that money will end up at its intended destination. For a long time, China observers note that this was standard operating procedure. A certain chunk of local infrastructure spending is lost through corruption.

As ironic as it may appear, it seems that China’s ongoing crackdown on corruption at all levels of the government might actually harm China economically because local officials might find their hands tied too tightly. In its zeal to cut down on official corruption, the national government’s drive can give local officials second thoughts when approving local government spending. Reduce government spending can cut down the volume of money flowing through the local provincial level economy. This can be a drag on the overall economic growth of China.
While it is easy to see the upside of a cleaner government, there are also downsides. One key downside is that the corruption drive might be pushing many business people to go overseas to avoid local prosecution. This takes a lot of capital off the table. Also, by constraining local spending decision making, the corruption drive might be choking China’s local economic growth at precisely the point in time China needs more growth. According to Goldman Sachs, certain sections of the Chinese consumer market are seeing the impact of the government’s efforts at cracking down on corrupt officials. The sector that got impacted the most are luxury goods distributors but the impact is expected to widen as lower government spending is factored in
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