Highlights

The Chinese government is ramping up its fight against corruption. Medium/long term, the anti-corruption campaign will help improve the efficiency and structure of the economy. Specifically, the structure of fiscal expenditure will be improved, there will be more public services of better quality, and a level playing field will make investment more efficient. The fight against corruption will also help reduce income inequality, raising the consumption rate and lowering savings and investment rates, thereby making the economy more balanced.

Short term, anti-corruption will have some negative impact on aggregate demand, including less government spending, reduced high-end consumption in the private sector, and a slowdown in government investment and some private investment that relies on government approvals to obtain rent-seeking space. Anti-corruption will also have some benefits for private consumption (e.g. more car purchases by civil servants’ families), but its impact on investment will be felt this year and hold back aggregate demand. Meanwhile, the share of high-end consumption will fall and that of mass consumption will rise.

The negative impact of anti-corruption on aggregate demand is short-termso is better dealt with using expansionary fiscal policy. The main way to implement fiscal expansion should be to increase spending on public services and social security and reduce turnover taxes, making the structure of expenditure and tax revenue more reasonable.