Bloomberg

(Bloomberg) -- Being hard hit by Chinese President Xi Jinping’s corruption crackdown hasn’t hurt Hainan’s economy. The tropical island province sometimes called China’s Hawaii lagged its peers before the anti-graft efforts started. Now, it’s beating them.

Hainan weathered significant scrutiny over the first three years of Xi’s campaign given its tiny output of $56 billion, with three dozen Communist Party officials probed, according to a Bloomberg Intelligence analysis. Its growth slowed 1.3 percentage points amid the shake-up, less than half the average decrease nationwide of 3 percent, the research by Bloomberg Intelligence economists Tom Orlik and Fielding Chen found.

Similar trends played out across much of China since Xi launched his unprecedented war on corruption in late 2012, the analysis found. Some regions with a high number of senior officials investigated, such as Guangdong and Jiangsu, saw more resilient growth between 2013 and 2015. Others with many cases -- Heilongjiang and Yunnan, for instance -- posted sub-par growth in the years before the party’s disciplinary inspectors arrived.

"Corruption wasn’t the grease in the wheels; it was the spanner in the works," Orlik said. "Corruption was a tax on the productive sector of the economy, increasing the cost of doing business. It channeled resources away from efficient uses, toward whatever purposes generated the largest rents for venal officials."

Growth Links

The findings may help answer lingering questions about the crackdown: Did graft assist China’s decades-long economic boom, and have Xi’s efforts exacerbated the current slowdown? The campaign has snarled more than half a million party officials and continues to reverberate a year after retired security chief Zhou Yongkang was sentenced to life in prison, the highest-ranking party figure prosecuted for financial crimes.

Bloomberg Intelligence compared provincial prosecutors’ reports and corruption data compiled by the Asia Society’s ChinaFile with various regional economic indicators over Xi’s first three years in power. Results were adjusted to reflect the relative size of each economy, in order to assess the regional intensity of the anti-graft campaign.

Catching Tigers

In Hainan, a Chinese tourist mecca that hosts the annual Boao economic forum, the effort unfolded much as it did elsewhere, netting powerful "tigers" tied to Zhou’s vast patronage network. Former vice governor Ji Wenlin, a one-time aide to the ex-security boss, was sentenced to 12 years in prison in March for taking bribes worth 20 million yuan ($3 million).

There were also less-powerful "flies" such as former deputy county party chief Lu Yong, accused of using their outsized sway over local affairs to procure riches. In September, Lu received a 15-year prison term for taking 10 million yuan in bribes, including two cases of XO cognac and 300,000 yuan stashed in oolong tea boxes, for helping a state-owned construction firm secure a hospital project, according to a copy of the verdict.

"I was afraid when I took a bribe for the first time, but I later got hooked and became a slave to the money," Lu told the court.

The southwestern metropolis of Chongqing posted China’s fastest growth last year despite the downfall of its former party chief, Bo Xilai, in 2012. Guangdong, the manufacturing powerhouse bordering Hong Kong, saw the party boss of its capital Guangzhou and eight other high-level officials investigated, but only suffered a 0.2 percentage point slowdown in growth, compared to 3 percent nationally.  

‘Give Gifts’

"The anti-corruption effort is very good for small businesses," said Hu Yuting, 41, whose Guangzhou Xieli Lighting Co. employs more than 90 people. "In the past, we had to give gifts or money to the government officials, or to dine them. Now, I don’t have to do that. They won’t dare take anything."

Some provinces have fared worse since the anti-graft watchdogs arrived. While China’s coal heartland Shanxi saw 12 tigers probed -- the most outside Beijing -- amid a 7 percentage-point plunge in growth, it’s difficult to separate the impact of the campaign from the woes of the coal industry.

Restaurateurs, hoteliers and luxury retailers have blamed falling sales on the corruption crackdown. But the Bloomberg Intelligence analysis suggests corruption acted as an overall drag on growth. In southwestern Yunnan, where nine tigers were caged, the economy grew 11.9 percent from 2005 to 2012, compared with 12.5 percent nationally.

Party Risk

Xi has warned corruption could jeopardize the party’s rule if left unchecked. The research indicated some potential factors feeding graft in China. Provinces with the highest levels of state ownership and greatest debt burdens were among those where severe corruption problems were exposed.

In the impoverished northwestern province of Gansu, where the crackdown has been three times more intense than the national average, the share of industrial assets under state ownership is among the highest in China. Hainan’s debt-to-gross-domestic-product ratio was 40 percent, compared with the national average of 27 percent.

"A more sustainable solution requires reform of the state sector and greater controls on local government borrowing," Orlik said.

To contact Bloomberg News staff for this story: Keith Zhai in Beijing at qzhai4@bloomberg.net, Jasmine Zhao in Washington at jzhao86@bloomberg.net. To contact the editors responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net, Brendan Scott

©2016 Bloomberg L.P.

bloomberg

 Bloomberg