China's 'aggressive frugality program' clams down on government expenses

Splurges fell an impressive 23%.

DBS reported that according to the National Audit Office (NAO), governments’ expenses on vehicles, overseas trips and general reception fell 23% in 2013 as a result of the aggressive frugality program. Last year, a total of 38 central government departments and related agencies still spent a total of USD24.76bn (about 9.5% of the country’s trade surplus in 2013) on the aforementioned items. 

Here's more from DBS:

The ongoing frugality program will likely hammer such spending even more this year. The cause behind frugality and the broader anti-corruption drive is indisputably good. But the immediate impacts on sales are negative, especially pertaining to luxurious items.

But this is not a zero sum game. It is because behavior of Chinese tourists is merely shifting to middle-to-low end consumption from high end in the past. The net impact for the time being is slower growth as seen on headline retail sales number.

Retail sales growth has fallen steadily from 18.4% in 2010 to 13.1% in 2013. The target growth of 14.5% for 2014 is not easy to
achieve as average growth in the first 5 months amounted to 12%. But that is a must pathway of “normalization”.

Under a transiting economy, behavior of real economic variables tends to be volatile. Optimism over a better reading of whatever index from previous month should not be amplified too much. Likewise, excessive pessimism over certain issues are unwarranted should one do not comprehend the full picture with a balance viewpoint.

One example is the scarcity of analysis on the asset side of the balance sheet at the local government level. The estimations of debt level, however, are thoroughly researched. Doomsday predictions are thus often prejudiced.

The growing momentum of the real economy is still there. It is just slower for a longer time period this round. Short term optimism would unlikely come from headline economic figures in the absence of broad based monetary stimulus.

But that does not mean the economy has stopped re-engineering by her-self. Growth potential will be unleashed consequentially by ongoing reform at the firm level which is often slow and painful in the short term. Some will make it through and become stronger but some will extinct during transition. Isn’t this is a natural economic evolution course?