There are signs that Chinese private consumption is on the rise – retail sales have been accelerated in real terms despite 8% inflation in the first half. Stripping out CPI, retail sales averaged about 14% in the first half and rose 15.9% in July.
This plus the continued strength of exports are leading some people to question the worries about Chinese growth. While China can’t escape a global slowing which would affect many of its customers, its domestic economy is showing signs of strength – which is a good sign. Perhaps China is finally rebalancing somewhat amidst global economic weakness. If so, it might be ideal given that the worst of pressures on exporters may still be ahead.
Real Retail Sales (Retail sales growth – CPI growth y/y)
Data: Chinese National Bureau of Statistics
What’s leading to this increase – and how sustainable is it? Rural and urban incomes are on the rise, contributing to consumption. Rural income growth is now outstripping urban income. In the rural areas, increases in spending on health and education might start to chip away at the savings rate as well as the divide between rural and urban households. Yet, there may still be a long way to go. As incomes rise in rural areas, there might be even more incentives to save – better education, renewed economic uncertainty etc. Furthermore, rural incomes are rising from a very low base, limiting their buying power. Yet it is an encouraging sign.
But what are they buying?
AP reports that “Discretionary consumption was strong, too, with spending on cosmetics and jewellery up 32 percent and 44 percent respectively from a year earlier.”
Yet spending on oil was even higher – rising 55% from a year ago.
But at the same time, spending on air travel is at multi-year low, auto sales are down and there are reports of rising inventories in other sectors. Not only might rural Chinese be less able to buy big ticket items, such purchases might be more vulnerable to credit tightening as they rely more heavily on loans. Higher fuel prices may have contributed to lower airline flights and the backlog of autos and auto parts might reflect slackening external, not just domestic demand. Whatever the reason, a backlog of cars isn’t a good sign and there may be more signs of overcapacity to come – despite still robust exports seen this month.
Michael Pettis suggests that consumer goods might also have benefited from a pre-Olympics boom with some rushing out to buy new TVs and electronics in order to watch the games. If so, retail sales could cool somewhat in the second half of this year.
Exports are still a significant part of China’s growth and one that may come under more strain in the near term as the global economy continues to slow. Exports to Europe which outpaced those to the U.S. in the past year rising almost 30% – in part because the yuan continued to fall against the Euro despite its appreciation against the dollar – have started to slow. Now exports to Western Europe have slowed and Eastern Europe could follow. Intra-Asia trade seems unable to offset a G7 slowdown inching towards recession. Furthermore, should the price of oil continue to fall the demand from countries like Russia and oil exporters in the Middle East, might also fall.
Furthermore, producers are finding it hard to pass on their elevated costs to consumers in China and abroad, leading to lower profit margins ahead. Something corporate earnings estimates are just starting to price in.
Yet the deceleration in CPI, is allowing some more policy space, particularly as the credit growth has remained under control. Government policies are now seeking to selectively boost growth and increase access to credit, and RMB appreciation seems to have leveled off. But its not clear if their tinkering with policies will be enough to boost inflation to offset the costs from global weakness.
Most significantly is the investment outlook – how much will China turn to continued or accelerated infrastructure investment to offset external weakness? And how successful will it be at expenditure shifting? Should Chinese fixed investment remain high, so might its commodity demands, which have been a major factor in the price rises of metal and energy commodities.
So while the Chinese consumer is becoming more important – especially for domestic producers, there may be some definite speedbumps ahead.