China’s slowing retail growth environment has signaled the peak of the consumer story, according to Francis Lun, Managing Director of Lyncean Holdings.
Lun says the Chinese economy is too dependent on fixed asset investment, and consumers can’t carry the burden when this drops off.
“When the government doesn’t invest heavily in fixed asset investment, the economy flounders and then you don’t have the consumer spending to back it up,” Lun told CNBC Asia's "Cash Flow" on Wednesday.
Sluggish consumer demand has led to a slide in China’s retail sales this year. July retail sales fell to 13.1 percent year on year, down from 13.7 percent in June. This is well off the 17.1 percent in 2011 and 18.4 percent rise in retail sales in 2010.
“The China growth story and consumer spending has lost its luster, and it is not a high growth market anymore, and I think we have to get used to the reality now," Lun said.
Lun's comments come despite a strong first half profit from Sun Art Retail Group this week. The hypermarket chain’s net profit jumped 75 percent, but it is not immune from the slowdown, with first half sales growth falling to 4.3 percent from 11 percent in the same period last year.
According to Lun, Sun Art Retail’s profit numbers were “exceptional”, but outside of a few strong performing companies, the sector is set for more weakness.
“What you have is a cut-throat retail environment — there are too many people and too much competition in a market that’s really not growing much more. Everybody is suffering and I don’t think many people are making much money in retail right now,” he noted.
Asked whether he would invest in any retail stocks right now, Lun said he liked the foreign companies over local retailers, and that Prada is one company that has strong sales across China and Asia.
Disclosure: Lun does not have any holdings in Prada or Sun Art Retail Group.