China Consumer

Hard liquor for hard grafters

Is the price of Moutai the best proxy for measuring the rise in corruption?

Hard liquor for hard grafters

Moutai: an increasingly controversial brew

In China, most deals are made not in boardrooms but at the dining table. Few might remember that the mother of all agreements – who would rule modern China – was also swayed by decisions taken at a dinner more than seven decades ago.

In June 1941, Tan Kah Kee, dubbed the Henry Ford of Malaysia, led a delegation of overseas Chinese to Chongqing. The influential group of billionaires wanted to know what they could contribute for a motherland in the grip of Japanese invasion and, understandably, were also keen to figure out who would run post-war China. Hoping for financial support in return, officials from the ruling party, the KMT, greeted Tan with a lavish feast. But he rebuffed the reception as unbefitting extravagance during wartime.

Disillusioned, Tan then went to the Communist Party’s much more primitive base in Yan’an, where he was treated by Mao Zedong to a meal of beans and persimmons. Staring at the frugal offering, Tan proclaimed to Mao that the Communists would eventually rule China. Thereafter he helped rally overseas support and publicity for Mao’s forces – a major factor in deciding the subsequent civil war.

The story comes from Tan’s own memoir and notably appears on the website of China’s National Bureau of Corruption Prevention.

The Chinese Communist Party has certainly come a long way from the humble dining tables of Yan’an. But has it travelled too far? Plenty of discussion groups in China’s cyberspace now decry the dining excess of its gluttonous officials. The mainstream media has identified it too. Last year the People’s Daily wrote that “correcting Party indiscipline is about correcting dining and boozing extravagance”.

This is where Kweichow Moutai can find itself cast in an unenviable position as the liquor of choice for unprincipled government officials.

China’s most famous baijiu (a term for clear grain-based liquors) has repeatedly found itself mentioned in bribery scandals (see WiC53 and WiC107). The problem for the national brand, as Xinhua’s China Business Journal puts it, is its association with corrupt cadres. So much so that a political advisor proposed earlier this year banning Moutai from receptions paid for with public money. Not that the firm agrees with being singled out. “Won’t it be Lafite instead if Moutai is banned?” Liu Zili, a senior executive at the distiller, asked wryly when confronted with the proposal.

For those looking for a proxy for the hidden costs of graft in China, the price of premium baijiu is a favoured choice. According to CCTV, a standard bottle of Moutai sold for about Rmb300 ($48) in 2007. But the selling price has surged nearly eightfold to Rmb2,600 this year, with the liquor becoming the preferred tipple for all manner of business occasions, legitimate or otherwise.

Of course, just like property stocks in Hong Kong, companies that provoke public ire can still be the darlings of those that own their stock. As we reported in WiC134, Southern Weekly ranked Moutai top for profit growth last year, reporting that net income surged 80%. Bloomberg also said this month that shares of Kweichow Moutai have beaten every other stock in Shanghai during Hu Jintao’s 10-year term as president, with a 3,500% rally. Earlier this year the company paid out the largest dividend in China’s A-share history.

Can Moutai sustain its extraordinary growth? It could be unlikely – especially if Hu Jintao’s blueprint for the Communist Party is to be believed. Addressing the Party Congress this month, Hu made the starkest comments yet about the need to fight corruption. Should the effort fail, Hu warned, China risked “the collapse of the Party and the fall of the state” (see page 18).

Hu also vowed there would be a more transparent approach to disclosure on money coming from the public purse and that taxpayer money would not be doled out on expensive perks.

Let’s pause and raise our glasses quickly to that.

Neither would be especially good news for Kweichow Moutai, which is also starting to come in for more scrutiny from the domestic media. The Securities Times, a financial daily run by the People’s Daily, noted this month that Kweichow Moutai and its rival Wuliangye made more profit last year than 43 state-owned electricity producers combined. The same newspaper went on to call for “controlled regulations” over the profitability of baijiu makers too, warning that China cannot afford to restructure its economy in a “drunken state”.

Running into these political headwinds, some of Moutai’s numbers are also under challenge, especially when consumption of Moutai seems to exceed its annual production (don’t blame the company here, just like Lafite it has a counterfeit problem). Critics have even questioned why so many 50 year-old bottles are still available for sale, when millions of Chinese were starving to death for lack of grain during the Great Leap Forward a half century ago. The inference? Much of it can’t be real.

But if one brand in the Kweichow Moutai portfolio faces tougher times, fortunately it owns another which may soon take up some of the slack. This week the Financial Times has reported that the less expensive baijiu Xi Jiu is suddenly enjoying a surge in sales. The reason: the first character in its name is exactly the same as that of incoming Chinese leader Xi Jinping.

The 60 year-old brand hails from Guizhou province but until recently was not one of the more prominent Chinese liquors. However, thanks to the name association it has been warming throats around the country. Sales have surged to Rmb2.3 billion ($369 million) so far this year and the brand has launched a Rmb300 million TV marketing blitz targeting sales of around Rmb10 billion by 2015. Analyst Bill Bishop told the FT: “The rationale for the big marketing push is the assumption that, once Xi Jinping takes power, lots of people will want to give Xi Jiu as gifts.”

So if Moutai was the drink of choice for the Hu Jintao decade, will Xi Jiu be its replacement for the Xi Jinping era?

For a profile on the man who built Kweichow Moutai (he claims to have drank two tonnes of the liquor over the past 50 years), see WiC65.

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