The Chinese Consumer Could Define Year of Snake

Dhara Ranasinghe and Eunice Yoon
Melissa Tse | Flickr | Getty Images

Pineapple tarts, red paper lanterns and delicacies such as abalone – just some examples of the traditional goods that China's shoppers snap up ahead of the Chinese New Year.

In fact, the run-up to Chinese New Year, which starts on February 10 and will mark the Year of the Snake is a key shopping period. And this year more than ever, the spending patterns of China's 1.3 billion people are expected to be scrutinized as a measure of how the economy is fairing - not only as it recovers from last year's slowdown, but also as it switches from a reliance on exports to consumption.

"We think consumption will be one of the key drivers of the Chinese economy this year. And the consumer should be stronger because of more confidence, faster economic growth and fast gains in incomes," Dariusz Kowalczyk, a senior economist at Credit Agricole in Hong Kong said.

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"So retail sales should be good and that should be reflected in the data we get for the Lunar New Year sales that will come out later in the month," he added.

So far the signs bode well for a pick-up in consumer spending: China's economy expanded 7.9 percent in the final quarter of 2012, rebounding after seven consecutive quarters of slowing. Confidence is also recovering with a consumer sentiment index, compiled by market information provider Nielsen rising two points to 108 in the fourth quarter.

The Chinese New Year, also known as the Lunar New Year or Spring Festival, is celebrated throughout China and Hong Kong as well as several parts of Asia. Chinese markets will be closed for the whole of next week.

Economists say that while the long holiday and departure of China's migrant workers back home means that industrial activity and economic growth often slows in February, a pick-up in spending over the holiday season should be supportive.

"I will buy food and clothes for Spring Festival," says Pan Li, who lives in Beijing with her husband and three-year old daughter. "After spending time with my in-laws in Beijing, we will travel to Shanxi to see my parents. We will spend approximately 50,000 yuan to 100,000 yuan ($8,018 to $16,035) on this festival."

Because China will release its January retail sales numbers alongside the February data, a delay from the usual monthly release schedule, the next set of numbers are expected to provide the most up-to-date snapshot of consumer spending.

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"We expect 250,000 migrant workers go home over the Chinese New Year holidays and that will slow industrial activity just ahead and after the New Year but boost retail sales and inflation," Barclays, China economist, Jian Chang told CNBC. "The official holiday will be around 8-9 days, but the travel period starts about 15 days ahead of the holiday and lasts up to 20 days after."

China's retail sales rose 15.2 percent in December from a year earlier, up from 14.9 percent in November.

"I feel that I can get by financially for now as I am not under pressure to buy an apartment. I spend mostly on socializing and electronics," said Owen Guo, a 26-year old who lives in Beijing.

Higher Incomes Equal Higher Spending

Analysts said expectations for further increases in wages would help underpin consumption in the months ahead.

Per capita income among urban households rose 12.4 percent in 2012 compared with a rise of just about 14 percent in 2011, according to official data. Beijing meanwhile delivered an early New Year's gift this week with a pledge to increase the minimum wage to 40 percent of average urban salaries by 2015, according to media reports.

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"We are hopeful our income will rise next year. We always spend around 100,000 yuan to 200,000 yuan on traveling every year," said Li in Beijing.

Another consumer that was upbeat about the outlook was a travel agent, who went by the name of Mr Cao.

"I will spend Spring Festival with my parents at home and we will spend around 2,000 yuan to 3,000 yuan on food ($320 to $481)," he said. "The Chinese economy is still doing great. I won't worry about my income in the coming year."

According to Oliver Rust, Nielsen's Hong Kong managing director: "Our clients, they tell us that they see an up-lift in digital devices, appliance, food products, skin care, especially in the run up to the Chinese New Year. That will fuel the change (in the economy), especially as incomes grow."

Consumption Key

In a bid to put China's economy, the world's second largest, on a more secure long-term footing, the government is trying to shift the economy's drivers to consumption, away from investment and exports.

Managing the shift is seen as one of the key challenges facing the new generation of leaders that officially take charge in March and will govern China for the next 10 years.

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The services sector contributed 44 percent to China's gross domestic product in 2011, up from 35 percent in 2000.

Against this backdrop, data on China's services sector are gaining in importance. China's official purchasing mangers' index (PMI) rose to 56.2 in January from 56.1 in December, holding well above the 50-mark that points to accelerating activity. A similar indicator by HSBC hit a four-month high in January.

"The rebound of 2008 was driven by manufacturing investment and what we're seeing now is new growth in the Chinese economy coming from services," Emmerson Yip, a fund manager for Greater China at JPMorgan Asset Management in Hong Kong told CNBC.

"Consumption sectors should see a turnaround in 2013, consumption at department stores, high- end luxury sales, all of these sectors should see a pick up this year," Yip added.