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Spirits' decline might be worthy of a toast

THE holiday spirit soon evaporated in China's liquor market this year. Kweichow Moutai and Wuliangye, two premier brands of Chinese liquor, suffered poor sales during the nation's peak festive season - a startling reversal due to Communist Party austerity.

In December, the Party sent out a directive aimed at reining in corruption and reckless spending. It demanded that officials reject "extravagance, formalism and bureaucracy."

A classic area for extravagance has long been lavish gift-giving and elaborate banquets during the holiday season.

The directive has spooked investors' confidence in Moutai and Wuliangye. The two listed companies lost more than 40 billion yuan (US$6.4 billion) in market capitalization in the past month.

And a fine of 447 million yuan imposed by China's top economic regulator on the two liquor producers for price manipulation may further cast a shadow on their financial performance.

Now there are worries that the clampdown may hurt China's domestic consumption, which remains weak even as it is being touted as the new engine of growth in the world's second-largest economy.

Do the concerns make sense?

Yes, if measured over the short term.

Soon after the announcement of the austerity rules, the price of Feitian Moutai fell by 22 percent to 1,120 yuan a bottle.

Also affected were top-flight cigarette brands such as Chunghwa as well as luxury hotels and restaurants.

Banquets and other ceremonies commissioned by Party and government officials were canceled, leaving those venues high and dry in a price realm out of the reach of ordinary people.

Government spending

But viewed over the long term, the Party's edict may benefit the market, making consumption in China healthier and more sustainable.

Common sense tells us that something is amiss in an economy where government spending accounts for such a big chunk of the catering market.

According to the People's Daily newspaper, nearly 80 percent of waste in the food and beverage industry was paid for by government, with weddings and other festive occasions accounting for the remainder.

It isn't healthy for extravagant feasts, gifts or office embellishments purchased by government officials at taxpayers' expense to support China's growth. A year ago, Lu Zhengwei, chief economist at Industrial Bank, issued a warning about the trend.

It is wiser for the country to continue to rely on exports or investments for growth than on expanded government spending, he said.

"There seem few effective elements in China's recipe to increase consumption," Lu said.

"Consumption includes both people's spending and government spending. In China, the growth of government spending turns out to be much more powerful than that of people."

Last year, consumption contributed 51.8 percent to China's economic growth.

That was down from 77 percent in 2011, the strongest year since 1985 and not very far off the ratio of developed countries such as the United States.

On the other hand, Chinese government spending was increasing at an average annual rate of 26 percent in the years between 2000 and 2010. In 2011, the pace reached a record 28 percent.

In contrast, when China initiated its opening-up policy in 1978, government spending accounted for 21.4 percent of total consumption.

The expansion of government expenditures between 1978 and 2011 was, on average, 1.4 percentage points faster than growth in spending by the general public, according to the National Bureau of Statistics.

"It is not hard to see that China's increasing consumption is closely connected with increasing government spending," Lu said.

"We had expected 'structural optimization' in consumption, but the result is just the opposite."

Government spending - not to mention waste on lavish self-indulgence and the costs of wooing new cadres - may create more bureaucracy that discourages free market operations, Lu said.

"Officials, no matter old or new, have to have something to manage, but a free market just does not need so much administration," Lu said.

Some argue that the money would be better in people's pockets.

Lu suggested the government should reduce taxes more vigorously and increase the disposable income of ordinary people if the country really hopes to spur consumption properly.

Retail sales in January and February, a broad measure of consumption, may appear rather weak because of the new Party rules.

Official frugality

Spending during the week-long Spring Festival in Shanghai has been estimated at 793 million yuan a day, down from the 812 million yuan recorded in the equivalent period a year earlier, according to the Shanghai Commission of Commerce.

Zhao Hongjun, an economics professor at Shanghai International Business and Economics University, said the new push for official frugality could benefit the economy if handled well.

"They chop only excessive government spending that should have never happened in the first place," Zhao said. "Idealistically, the savings should be used to help people who are in need, boosting their consumption and helping growth accelerate."

Jeff Gong, director of Beijing Vogue Glamour Brand Marketing Inc, said makers of luxury products should take heed from the experience of companies such as Moutai, Wuliangye and Chunghwa.

"The ethos within China's society is gradually improving and that has brought enormous changes in middle-class buying behavior of luxury items," Gong said. "Luxury brands in China still in blind pursuit of maximum profits may be putting their future development in danger if they lose their charm among the middle class, who should be their core target group."

Kweichow Moutai, China's biggest liquor producer by market value, cautioned last month that its net profit growth may have slowed in 2012 to 50 percent from 71 percent a year earlier. It reported a 59 percent jump in profit in the first three quarters of last year.

That slower trend may continue if the spirits maker doesn't change its strategy and become more price-friendly to ordinary people. But the reduction in profits for such companies may be a good sign for China's consumption.


 

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