China Retail Sales Growth Falls as Slowdown Hits

China's sales of retail goods from furniture to cosmetics deteriorated in October, the starkest evidence yet of spending cutbacks by Chinese consumers that could deepen worries about the global economic slowdown.

CNBC.com

China's headline figure for annual retail sales growth held up well, slowing to 22.0 percent in October from 23.2 percent in September, but doubts about the reliability of that number were underscored by big drops in a detailed breakdown.

A retrenchment in Chinese consumption would mark a sudden and, for the global economy, unwelcome reversal of a long-established trend of robust spending that had been supported by higher incomes and government policies to tilt growth away from investment and exports.

"Retail sales have been hit by the slowing economy and especially by falling asset prices," said Li Lihong, senior analyst at CITIC-Kington Securities in Hangzhou. "That situation will last for some time.

The bottom fell out from virtually every category that composes the retail index.

Sales of recreational goods in October were up 2.1 percent  from a year earlier, down from an 18.0 percent annual rise in the first three quarters. Sales of home appliances in October increased just 0.8 percent from a year earlier, down from a 19.6 percent annual rise in the first three quarters.

"Anecdotally, it's clear that consumption growth slowed in September and October," said Stephen Green, an economist with Standard Chartered in Shanghai. "Pretty much all our customers are telling us that."
     
Misleading

The country's headline figure for retail sales actually increased in real terms from record highs earlier in the year thanks to fast-dropping consumer price inflation.

But economists have always viewed the retail index with a large measure of skepticism, in part because it includes corporate and government purchases.

"These data are misleading. Real private consumption has already decelerated," Xing Ziqiang, economist of China International Capital Corp, said in a note. "Household consumption growth will continue to moderate due to slowing income growth and negative wealth effects amid the correction of the stock and property markets."

China's stock market is down about 70 percent from its peak late last year. The country's once-roaring housing market has also faltered this year, with prices in some major cities, such as Shenzhen, dropping steeply.

Retail sales in 2007 rose 16.8 percent, the fastest in 11 years.

Rising incomes, along with rapid urbanization, have been underpinning consumption, but China's flimsy welfare net means households still save about 30 percent of their incomes.

Chinese officials have declared that boosting consumption is a priority and made that pledge a centerpiece of the stimulus plan, with a price tag of 4 trillion yuan ($586 billion) through 2010, that they announced this week.

Analysts, though, are concerned that the stimulus package will focus excessively on capital spending and not enough on boosting incomes and spending.

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Household consumption for the last five years has been below 40 percent of GDP and fell last year to little more than 35.3 percent, a record low for a major economy, although final consumption expenditure contributed more than gross capital formation to last year's GDP growth.

Economists would like to see more spending on education and health, two areas where ordinary Chinese have to spend heavily, reducing their discretionary purchasing power.

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