Chinese Consumers Are Still Not Spending Enough

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Retailers and policymakers have high hopes for consumer spending in China driving profits and economic growth. And while on the rise, consumption is not getting there as fast as many had hoped, industry watchers say.

China is trying to rebalance its economy away from investment and exports towards consumption, which Beijing hopes will deliver more stable long-term growth for the world's second-largest economy.

The problem, say strategists, is that China's consumers remain elusive.

"China is still sitting there with the lowest consumption to GDP [gross domestic product] ratio in the region. Consumption is 35 percent of GDP and is a good 25 percentage points from where it should be," said Paul Gruenwald, chief economist, Asia Pacific at Standard and Poor's Ratings Services.

"The Chinese authorities know this, they know they have to get all the social safety nets in place so they can reduce precautionary savings and get SMEs [small to medium enterprises ] to pay dividends [that could encourage spending], it's just proving to be very difficult," he told CNBC Asia's "Squawk Box."

China's rapid economic development and wage rises have helped boost consumer spending. Consumption was the largest overall contributor to economic growth in 2012, accounting for 51.8 percent, while investment contributed 50.4 percent.

However, consumption as a proportion of GDP is much lower than other major economies such as the U.S. where it accounts for about 70 percent of GDP or regional neighbor India where it makes up roughly 60 percent of GDP.

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A slowdown in the economy meanwhile has raised concerns about sluggish spending going forward, creating headwinds for those retailers that have rushed into the Chinese market betting on huge gains.

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"Internal consumption has not been able to pick up and offset weakness in exports," said CV Ramachandran, managing director and Asia head of Alix Partners, a consulting firm.

China's retail sales grew 12.8 percent in April from a year earlier, up from a 12.6 rise in March, but down from a 15.2 percent increase in December and the 13-14 percent growth rates seen for much of last year.

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"One of the biggest fears in a lot of consumers' minds is what will happen with the overall economy, the price for real estate. To the extent that people start to feel more comfortable about their jobs, their investments in real estate and the general state of the economy, we will see more consumption," Ramachandran said.

China's economy slowed unexpectedly in the first quarter of the year and concerns about the outlook have grown recently amid signs of weakness.

The International Monetary Fund and the Organization for Economic Cooperation and Development cut their growth forecasts for China on Wednesday. The IMF lowered its 2013 GDP forecast to 7.75 percent from a previous estimate of 8 percent, while the OECD cut its forecasts to 7.8 percent from 8.5 percent.

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Industry watchers say uncertainty about the economic outlook means China's consumers may continue to veer towards less-expensive foreign brands.

"While they [Chinese consumers] may be less conspicuous, we do see more of the conservative brands doing well there," said Corinna Freedman, footwear and apparel analyst at Wedbush Securities in New York.

"That's why we see Michal Kors doing well because it's not as expensive as some of the other brands operating in China," she said referring to the U.S. retailer, which is reported to have about a dozen outlets in mainland China.

By CNBC.Com's Dhara Ranasinghe. Follow her on Twitter: @DharaCNBC.