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China Retail Sales Growth Hits Three-Year High in May

Rising prices, fast-growing incomes and wealth created by a record stock market rally propelled Chinese retail sales growth to a three-year high in May.

The National Bureau of Statistics said on Wednesday that the value of retail sales in May was 715.8 billion yuan (US$93.87 billion), 15.9% more than a year earlier and handily beating forecasts of a 15.3% gain.

Sales were flattered by a rise in inflation last month to a 27-month peak because of a surge in meat prices.

But economists said the report confirmed a well-entrenched trend of rising spending and showed the government was having some success in tilting the economy away from its dependence on exports and investment.

"Consumer spending has been improving, which is very encouraging," said Yiping Huang, chief China economist for Citigroup in Hong Kong. "The government has been working very hard to stimulate consumption so this is a positive development, but at the same time I suspect that there has been a bit of contribution from the wealth effect from the stock market," he said.

Rising incomes, along with rapid urbanization, are the main factor underpinning consumption. Disposable incomes in towns rose 16.6% from a year earlier in real terms in the first quarter, while rural cash incomes were up a real 12.1%.

But the government has been steadily increasing spending on health and education, and working to expand pensions coverage, so people have more money in their pocket and feel less of a need to save for a rainy day.

In the breakdown of the data, spending in all but one category -- telecommunications equipment -- rose by much more than the headline figure. Sales of building materials jumped by 62.8% from a year earlier, office supplies by 26.3%, jewelry by 37.3% and automobiles by 34.2%.

Underlying Strength

Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong, called the quality of the data poor, but he said the rising trend was clear.

The increase was the biggest since May 2004 and sales for the first five months combined were up 15.2% from a year earlier, well above the 13.7% gain for calendar year 2006. "You only have to walk up the street to see that retail sales are strengthening," Simpfendorfer said.

After stripping out inflation, sales growth in May came in at 12.9%, little changed from 13% in April, according to economists at Goldman Sachs, who said rising prices would continue to prop up the nominal value of sales in coming months.

The impact of inflation was clearest in sales of meat, eggs and poultry, which rose 39% by value from a year earlier.

But Goldman said in a note to clients that the underlying picture was also bright thanks to higher incomes and the wealth effect from a fast-rising stock market.

The Shanghai Composite Index climbed 2.1% on Wednesday morning, bringing it to within 4.3% of a record high scaled on May 29 before a tripling of the stamp duty sparked a sharp selloff.

"We view the robust growth of retail sales in real terms as a sign of strong fundamentals in domestic demand," Goldman said.

Consumer credit is in its infancy in China, and most people in any case pay off their card bills every month.

Even so, economists at Paribas said policy makers would take comfort from the fact that retail sales had powered ahead despite recent rises in interest rates.

"The acceleration in consumer consumption is encouraging as it demonstrates that the series of tightening measures have limited impact on the general consumer sentiment," they said in a
note to clients.

The government also reported that China attracted $25.3 billion in foreign direct investment in the first five months of the year, 9.87% more than in the same period last year.

Foreign manufacturers have invested in China at the rate of more than $1 billion a week since Beijing joined the World Trade Organization in late 2001, lured by its cheap labor, first-rate
infrastructure and big domestic market.

Economists have long expected the surge to ebb. After Wednesday's figures, the wait goes on.