China Corruption Drive To Hit Short-Term Growth, But Help Long Term

China Corruption Drive To Hit Short-Term Growth, But Help Long Term
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China’s economic growth has moderated over the past five years thanks in part to the China corruption drive according to Barclays analysts David Fernandez and Dr. Jian Chang.

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According to the duo, economic activity in China clearly moderated during Secretary General Xi Jinping’s first term. According to official NBS data, China's GDP growth rate declined by 1.4 percentage points between the periods 2014-16 and 2011-13. Even though full-year 2017 growth beat market expectations, at 6.9% year-on-year, Fernandez and Chang note that this performance was still below the average growth rate registered in the preceding three years.

China corruption drive good long term

Barclays' own measure of economic activity, the Barclays China alternative activity indicator, showed an even greater decline with a slowdown in growth of 2ppt reported. The region's growth slowed because of the China corruption drive the team speculates. Specifically, Barclays' researchers note that aggregate reported provincial GDP growth dropped by 2.7ppt by the latter part of Xi’s first term mostly due to the "broader environment of caution" created by the "explicit curbing of spending by officials." Not only did the corruption drive cause policymakers all over the country to reel in growth plans, but it also resulted in a degree of uncertainty thanks to "extensive changes in China's provincial leadership." Indeed, the report notes of the 62 provincial party secretaries plus provincial governors or mayors, "56 were replaced over the period January 2016 to January 2018."

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China Corruption

According to Dr. Li Cheng, who as well as being a Barclays researcher is also a Senior Fellow and Director of the John L. Thornton China Center at the Brookings Institution, most of the new provincial leaders are direct protégés of Xi Jinping. It's estimated that these new leaders control around 40% of China's GDP, which, the report speculates, could mean that in the years ahead, China's growth accelerates as "Chinese Communist Party politics" influence the country’s economic outcomes. Potentially, this could mean that regional growth in the years ahead is higher than analysts are currently predicting:

"If GDP in those provinces were to rise to recover, say, 50% of their drop in the GDP growth rate during Xi’s first term, we estimate that nationwide GDP growth could be boosted by 0.4ppt. We recently raised our 2018 GDP growth forecast to 6.7% from 6.4%, but we think the political cycle creates a potential scenario in which actual growth could be even higher."

Of course, this is all assuming that China does not experience serious unrest and/or war before that happens.

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