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Inflation Boosts Chinese July Retail Sales

China's retail sales growth accelerated in July, the government said on Tuesday, reflecting strong household spending in the world's fourth-largest economy but also a pick-up in inflation that is worrying policy makers.

The nominal value of retail sales grew 16.4% in the year to July, up from 16.0% in June, the National Bureau of Statistics said. It was the highest monthly increase since May 2004 and beat expectations of a 16.2% rise.

Stripping out inflation, which hit a decade-high of 5.6% at the consumer level in July, real growth in retail sales was about 12%, Ren Ruoen, an economics professor with Beijing University of Aeronautics and Astronautics, said.

This was faster than China's overall gross domestic product growth, which was 11.5% in the first half, he said. "Rising incomes and a soaring stock market are factors underlying the retail
sales boom," Ren said. "The government's efforts at providing more social welfare may also be helping to boost consumer confidence."

The government is trying to spur consumption to reduce the economy's reliance on capital spending and exports.

But Ren said rebalancing the economy was a tall order because China, as a developing country, still has massive needs for roads, airports and other infrastructure. "It is unrealistic to expect consumption to replace investment as the major engine of economic growth," he said.

Retail sales is not an indicator that typically grabs the attention of stock market investors, and the main Shanghai Composite Index showed little reaction to the data, ending the morning down 0.13%.

Rising Prices

The breakdown of the retail sales report underscored the surge in food prices that is concerning both the government of Premier Wen Jiabao and the central bank, which has vowed to keep a lid on inflationary expectations.

The value of sales of meat, eggs and poultry jumped 51.4% in July from a year earlier, up from 36.0% growth in June. The value of grain and edible oil sales rose 45.2%.

"In real terms the pick-up hasn't been as strong because if you look at retail sales right now, they're being inflated by the big increase in food prices," said Paul Cavey, an economist with Macquarie in Hong Kong.

Sales growth of home appliances, furniture, cosmetics and oil slowed in July from June, the statistics office said.

But Cavey said rising global commodity prices, which boost Chinese farmers' incomes, coupled with solid wage growth in the factory sector boded well for the spending outlook.

"It's nothing to be too worried about because retail sales growth is still strong," Cavey said. "Everything is pointing towards stronger consumption still."

Xue Hua, an analyst with China Merchants Securities in Shenzhen, agreed that the pace of retail sales would continue to speed up in coming months. "The main reason is increasing corporate earnings, which is translating into rising incomes," Xue said.

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