Chinese Shoppers Go on Record Spending Spree

Chinese shoppers turned in a gold-medal performance in July as annual growth in retail sales accelerated to a record 23.3 percent on the back of rising incomes.

Eugene Hoshiko / AP

Financial markets had expected a dip in sales growth to 22.2 percent from June's record pace of 23.0 percent.

The increase was all the more impressive because the figures are reported in value terms, not by volume, and consumer inflation dropped to 6.3 percent in the year to July from 7.1 percent in June.

"In real terms, retail sales are still very strong," said Paul Cavey, an economist with Macquarie in Hong Kong. "This is very consistent with household income and wage growth being strong.

China is striving to stoke consumption in order to reduce the economy's reliance on exports and related investments, and the strength of retail sales shows the policy is working at the margins.

But China's flimsy social security system, job insecurity and high out-of-pocket expenses for health and education mean households still save about 30 percent of their incomes.

And because investment is rising even faster than spending, household consumption for the last five years has been below 40 percent of gross domestic product. Last year it fell to just 35.3 percent, a record low for a major economy.

"The potential for China's domestic consumption is huge, but it will be a long-term process for China to wean its economy off exports and investment," said Zhao Qingming, an economist at China Construction Bank in Beijing.

Others fretted that spending could wilt in coming months because growth in real disposable incomes slowed in the first half of the year due to high inflation.

"The outlook for consumption growth in China is still uncertain," said Li Zhukun with China Jianyin Investment Securities in Beijing.

Spending on oil jumped 55.5 percent in July from a year earlier, reflecting an increase in government-set fuel prices.

Discretionary consumption was strong, too, with spending on cosmetics and jewelry up 32 percent and 44 percent respectively from a year earlier.

Ha Jiming, chief economist at investment bank CICC, also saw the effect of the Olympics in Wednesday's data as sales of home appliances and sports goods accelerated.

Ha said he was sticking with his forecast of 12.4 percent inflation-adjusted sales growth for all of 2008 compared with an estimated 13.3 percent rise in the first seven months.

"With the phasing out of the Olympics influence and the slowing of household incomes, growth in domestic consumption will weaken in the second half, but it will still be the most steady driver of the economy," Ha said in a note to clients.

Copyright 2008 Reuters. Click for restrictions.