China's Retail Sales Growth Holds Firm in May

China's retail sales held up in May despite the devastating Sichuan earthquake, offering Beijing reassurance that domestic demand is bolstering growth as net exports soften.

Annual retail sales growth edged down to 21.6 percent in May from 22.0 percent in April, slightly below a consensus forecast of 21.8 percent.

China, Chinese Flag
China, Chinese Flag

But that was still the second fastest on record, continuing a well-established trend of sturdy spending that has been fuelled by higher incomes and government policies to tilt the economy away from investment and exports.

"It looks healthy, given we had an earthquake in May which would have undermined consumer sentiment, so I would have expected a fall," said Kevin Lai, economist at Daiwa Institute of Research in Hong Kong.

The figures from the National Bureau of Statistics are not adjusted for inflation, which slowed to 7.7 percent in the year to May from 8.5 percent in the 12 months to April.

Goldman Sachs calculated that in real terms growth in retail sales was unchanged in May at 12.9 percent year on year.

On a rolling three-month basis, the bank said sales actually picked up in May to an annualized pace of 23.4 percent from 21.6 percent in April, once seasonal variations are stripped out.

"With CPI softening in May, it is not surprising to see nominal retail sales growth following the trend as well. However, real retail sales growth, which we use as a proxy for real private consumption growth, has been holding up well," Goldman economists Yu Song and Hong Liang said in a note to clients.

Inflation Vs. Olympics

Some economists fear that inflation, which Beijing is just starting to rein in after a year of rapid escalation, could start damaging sales as it erodes people's spending power.

"We are concerned that the inflation-adjusted incomes of urban and rural residents in the first quarter actually fell compared with a year ago, which may have a negative impact on consumption in the coming months," said Zhang Yongjun, an economist with the State Information Center, a government think-tank in Beijing.

The Olympics should provide a fillip to consumption, however, as millions of Chinese splash out on souvenirs, branded sports gear and new televisions to watch the competition.

"I think the Olympics will push up retail sales over the next couple of months: people will be spending a lot on electronics, clothing. Without the earthquake, I would have expected sentiment to really start kicking off in May," said Daiwa's Lai.

In the details, food sales slowed, matching a decline in food price inflation. Spending on recreational goods and home appliances also dropped, but building materials purchases rose -- possibly in preparation for reconstruction in the quake zone.