Anti Corruption Changes For China To Negatively Affect Stocks

The Chinese government has begun a clampdown on official corruption and since Xi Jinping’s initiation as party leader in November 2012, the central leadership has made a drive to appear transparent and anti-bribery. This tougher stance on corruption has already been demonstrated with the investigation of Li Chuncheng, who was a deputy Communist Party secretary in the Sichaun province. Chuncheng is the most senior level official to come under corruption scrutiny since Jinping took the party lead, although no charges have been detailed. It has been speculated that the anti-corruption stance will tighten up the rules for all Chinese officials, however. This could result in a clamp down on expensive restaurant dinners, clarify the rules for receiving gifts and restrict visits to foreign countries. Moreover, experts reveal that the Chinese leadership may force officials to publicly disclose their personal income and any extra wealth. It is believed that the driving force behind these transparency policies is to remove the image that the government is wasteful and untrustworthy.

However, strategists from Deustche Bank have noted that whilst corruption measures are good for government, they can have a negative impact on stock markets. They argued that the markets most likely to suffer are luxury goods companies, such as watchmakers or department stores, like the Intime Department Store and Lianhua. In addition, liquor and cigarette firms are also likely to suffer from the stricter anti-corruption measures. On a broader scale, Chinese government officials and family members may pull money from real estate and stock markets for the fear of a public disclosure measure. In short, it is likely that the stance on transparency will hinder stocks initially.

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Nevertheless, although the Chinese stocks are likely to experience some pain to begin with from the government measures, in the long term the stock market is predicted to improve. This is particularly because a cleaner and more stable government will increase investors’ confidence as the country’s economic health and political solidity improves. This model of behaviour has already been proven in countries such as Indonesia who have successfully implemented a similar anti-corruption strategy. Market analysts noted that as scandals of corruption and bribery were revealed in Indonesia, there was an initial negative shock to the stock market. However, these scandals played a relatively small role on the overall economic climate of the country and investors gained confidence as stability continued.

It remains to be seen as to how exactly Xi Jinping’s tough stance against corruption will ultimately affect stocks, however the volatile period ahead makes for a prime environment for spread betting. Nonetheless, if the Indonesian case study is to be seriously considered as a model for the Chinese anti-corruption policy, it is likely that this volatile period will stabilize as the government becomes cleaner.

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