WASHINGTON, September 18, 2014 — Chinese Premier Xi Jinping’s anti-corruption campaign is not only attacking graft in the country. It’s also stunting the massive spending spree by China’s middle class. The anti-graft drive is already hurting luxury brands that had recently made headway in the once off-limits Chinese market.
Xi’s effort to aggressively enforce long-standing anti-corruption laws have landed several high-profile politicians in jail and reprimanded many others. According to Chinese state media, the government is investigating more than 50 officials a month, at all levels of government. Even a former member of the Communist Politburo Standing Committee, the highest authority in the country, has been charged.
Executives and employees of GlaxoSmithKline [NYSE: GLAXF] and food company Danone [NYSE: DANOY] have also been charged under anti-corruption laws, as have employees of state-owned PetroChina [NYSE: PCCYF].
The government has instructed all officials to curb spending and to end the appearance of wealth. For example, luxurious banquets, lavish funerals and expensive gifts have been banned for government officials. Likewise, officials can no longer display flower arrangements or serve dishes with exotic, expensive ingredients like shark fin.
While critics say the slash-and-burn effort is aimed at undermining Xi’s enemies, it is also hurting the effort by Western companies to take advantage of increased spending by China’s growing middle class, which has extra cash burning a hole in its pockets.
“It’s no fun anymore,” says “Suzy,” an account executive in Beijing who asked that her real name not be used, “We can’t do anything, we can’t buy anything. I can only wear my jewelry when I’m home alone.”
The move could significantly alter expansion plans by luxury brands such as Tiffany [NYSE: TIF], Coach [NYSE: COH] and Kate Spade [NYSE: KATE]. Earlier this year, Tiffany had hoped to take advantage of China’s new-found love of diamonds. Chinese couples were increasingly purchasing diamond engagement rings, fueling the market. That trend has come to an abrupt halt.
“No one wants to be seen with a massive diamond on their finger,” says Suzy.
High-end restaurants and hotels are also under pressure. Instead of heading to a well-known high-end restaurants and hotels, Chinese consumers are downplaying their spending, favoring fast-food or discount chains. Chinese economy hotel chain China Lodging Group Ltd [NYSE: HTHT] has seen massive increases at the expense of luxury locations like Starwood [NYSE: HOT].
Karaoke parlors, gentlemen’s clubs and bars have also faltered since February.
Even estimates of condom demand have dropped dramatically this year. U.S. company Church & Dwight [NYSE: CHD], whose Trojan brand of condoms are the market leaders in China, are set to suffer drops under the new policy.
There is no sign that the campaign is easing. Instead, the government is turning its attention to investigations of Chinese media, raising concerns that advertisers and other media affiliated industries will be the next victims of government inquiry.