China's anti-graft campaign could end up boosting the economy

China's President Xi made the anti-graft campaign an important part of his address to the Communist Party congress in October.
China's President Xi made the anti-graft campaign an important part of his address to the Communist Party congress in October.PHOTO: AFP

BEIJING (BLOOMBERG) - China's drive to clamp down on corruption might be bad for profits at upscale restaurants and casinos, but ultimately it is going to help the nation's economy, a recent study claims.

President Xi Jinping's signature campaign since taking office in 2012 stands to improve allocation of resources and help small companies - the backbone of the entrepreneurial economy - obtain easier access to finance, according to the research led by Mariassunta Giannetti, finance professor at Stockholm School of Economics.

Xi made the topic an important part of his address to the Communist Party congress in October, at which he consolidated his position as the most powerful Chinese leader in decades. The crackdown, launched only days after he came into power in late 2012, has snared more than 1.5 million officials including former Chongqing party chief Sun Zhengcai, who was once seen as a possible successor to Xi.

The research found that the amount large companies spent on meals and gifts to attract the favour of government officials - commonly detailed in an accounting line known as "entertainment expenses" in China - plummeted as a ratio of their sales in the two years after the campaign began.

In turn, that has helped smaller companies without deep slush funds compete on a more even basis, according to the research.

"Small firms are more profitable and productive when their large peers spend less on entertainment expenses in proportion to their sales, because they are able to increase their sales, invest more, and have cheaper funding," the researchers wrote in the paper.

"This anti-corruption drive has been considered the most far-reaching and lasting than any previous attempts."

The evidence doesn't give Xi's campaign a 100 per cent report card in tackling corruption though.

As smaller firms were more able to compete with their bigger counterparts , they may have taken up some of their old habits. While large enterprises curbed their entertainment spending after 2012, small companies did the opposite.