The Chinese consumer fails to live up to the world's hopes

The world is pinning its hopes on the great Chinese consumer. In Beijing, senior officials hope that growing consumer demand will take over as the main engine of China's development, allowing them to wean the economy off its unsustainable addiction to sky-high levels of investment. In Washington, politicians believe that if Chinese consumers spend more of their incomes and save less, China's glut of excess savings will diminish and the dangerous bilateral economic imbalance between China and the United States will disappear. And in Europe, the continent's business leaders look to China in the hope that the emergence of a newly wealthy middle class hundreds of millions strong will provide a lucrative new market for their luxury products and generate fat profits for their companies even as their home markets stagnate. There's just one problem with these visions of a glorious new dawn for China's consumers: China's consumers aren't playing along. Analysts were shocked earlier this month when official data showed a deep slump in China's retail sales growth over January and February. From a robust 19.1 per cent clip in December, year-on-year growth in retail sales fell to just 11.6 per cent over the first two months of this year (see the first chart below). That's as slow as in the very depths of the economic crunch in early 2009, when stories abounded of 20 million Chinese workers losing their jobs. Even worse, with consumer inflation running at close to 5 per cent, much of February's pallid growth rate can be attributed to rising prices. In real terms, it looks as if retail sales growth ground almost to a halt. Granted, there are some problems with these data. The Lunar New Year holiday distorts the picture. In an attempt to iron out the wrinkles, China's statisticians release the figures for January and February together and growth is calculated on a year-to-date basis. Even so, retail sales growth usually shows a steep fall over the first two months of the year, rebounding in March. And the way the numbers are compiled can also be misleading. In China, retail sales figures include many purchases at wholesale level, as well as a portion of government and corporate procurement. As a result, retail sales numbers can be a poor reflection of consumer demand. In 2009, stepped-up government spending and stimulus measures including subsidies for car and home appliance purchases may have artificially inflated retail sales. Now the winding down of Beijing's stimulus programme and the ending of subsidies could be artificially depressing the data. But even so, the extent of the slowdown in the first two months of the year still took analysts by surprise. And reinforcing the picture of weak demand, China's latest consumer confidence survey - often regarded as a better measure of demand than the retail sales figures - also shows a worrying deterioration in sentiment. In January, the country's consumer confidence index slumped to just 99.9. To put that fall into perspective, it is the lowest reading since records began, lower than during the economic crunch of 2009, lower than during the Sars outbreak of 2003, and lower than in the Asian crisis slowdown of 1998 (see the second chart). Other measures also indicate an alarming fall in consumers' willingness to go out and spend. For example, according to one recent survey, almost 90 per cent of urban bank customers say they prefer either to save or invest their spare cash - even though the interest rates on bank deposits are negative in inflation-adjusted terms, the stock market has fallen by 15 per cent over the past 18 months, and the government is determined to stop property prices rising further. Only just over 10 per cent say they are inclined to go out and spend, the lowest proportion on record. Quite what has caused this slump in confidence is debatable. Inflation often acts as a spur to consumer demand. Spending today is seen as better than spending tomorrow, when prices will be higher. But in China, it may be that rising food prices have unnerved consumers, persuading them that times may be about to get tougher. On the other hand, the knowledge that their savings deposits are generating no returns in real terms could have prompted people to save more each month to make up for the lost interest. Or the unaffordable price of housing could have persuaded people that they must save even more of their incomes if they are ever to stand a chance of getting their feet on China's property ladder. Whatever the explanation, instead of going shopping as they were supposed to, Chinese consumers are saving more than 40 per cent of their disposable income. That's going to make it awfully hard for a lot of other people around the world to realise their economic dreams.