Take hopes for mainland shoppers with pinch of salt
with Tom Holland
Among the reasons investors have recently turned so bullish towards China is their growing conviction in the ability of the mainland consumer to lead the Chinese economy into an early recovery.
In support of their view, the bulls typically point to the mainland's relatively robust growth in retail sales, the recent sharp uptick in car sales, and a host of government measures intended to boost domestic demand such as introducing health-care reforms and allowing farmers more leeway to borrow against their land.
At first sight the case for optimism looks convincing. At a time when other sectors of the economy, like exports, have collapsed, retail sales are indeed continuing to grow at a fair clip. In March sales were up 14.7 per cent year on year. That's an apparent rebound from February's 11.6 per cent rate (see the first chart below), encouraging hopes that the government's stimulus package is feeding through into the economy at large, where it is spurring consumer demand.
Certainly, demand for new cars has risen sharply, with sales hitting a record 1.1 million vehicles in March.
As a result, hopes are running high that Beijing's plan to re-orient the economy away from exports and towards domestic consumer demand are working, and that Chinese growth can remain strong.
On closer examination, however, the evidence doesn't look quite so compelling.
Firstly, it is hard to argue retail sales are rebounding. The steep decline in February's growth rate was partly the result of Lunar New Year distortions. Treating January and February as a single period in order to smooth out the effect gives a rate of 16 per cent, which indicates that growth was still slowing in March, with no obvious signs of a recovery on the horizon.
Secondly, it is doubtful how accurately retail sales reflect consumer demand in China. That's because retail sales numbers actually include a large amount of wholesale trade, business to business transactions, and even some government procurement. As a result, it is highly likely the data gives a false impression of mainland consumers' resilience.
Similarly, it would be wise to interpret recent car sales figures with caution. Sales have certainly shot up in response to government incentives for buyers including recently introduced tax rebates. But to some extent the increase represents the release of pent-up demand, together with government purchases brought forward to support manufacturers, neither of which will prove sustainable.
Meanwhile, there are worrying signs that underlying consumer demand is softening despite the government's stimulus efforts. As the second chart shows, mainland consumer confidence has dropped precipitously in recent months, with the index now down to levels seen at the worst of the Asian crisis in 1998 and almost back to the lows visited during the Sars outbreak of 2003.
What's more, with unemployment rising and incomes under pressure because of the decline in corporate profits, consumers are likely to remain cautious for the foreseeable future.
Nor are government's tentative moves towards health-care reform likely to make much difference. Precautionary savings rates on the mainland may appear high, but they are comparable to those in other regional economies. The real reason that consumer demand plays such a small role in the Chinese economy is that household incomes make up a relatively low proportion of gross domestic product.
Changing that imbalance is possible, but it will take a far more ambitious programme of reform than anything currently planned by Beijing.
As a result, it would be unwise for investors to pin their hopes on a big rise in consumer spending, at least in the medium term.