Lowest retail sales growth for 15 years dash China’s hopes that consumption will offset trade war

Beijing had high hopes that tax cuts for individuals would lift consumer spending and boost an economy which is showing the effects of the trade war, but overall retail sales in November proved disappointing.

Even record spend on Singles' Day’ on November 11 could not prevent retail sales from posting their weakest growth rate in 15 years.

November’s retail sales, which covers both corporate and consumer spending, stood at 3.52 trillion yuan, down from 3.55 trillion yuan in October, according to data released by the National Bureau of Statistics on Friday.

The growth rate fell to 8.1 per cent compared to November 2017, below the 8.6 per cent rate in October. The figure was also below the 8.8 per cent growth forecast by a Bloomberg poll of economists. Adjusted for inflation, the growth was even lower, at 5.8 per cent.

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As the US-China trade war continues to weigh on exports, Beijing is counting on households and companies to spend more to stabilise growth.

However, weak consumption underscores the difficulties the Chinese leadership is having in its efforts to keep the economy stable.

The government expected that its October move to raising the threshold for taxable personal income to 5,000 yuan per month would unlock spending power equivalent to hundreds of billions of yuan.

It appears likely that some consumers saved their extra income for the November 11 shopping festival, when they can benefit from large discounts.

Shen Li, a physical therapist from Beijing, said his monthly after-tax income increased by 1,000 yuan due to the tax cut, which he used to purchase items such as household appliances on Singles’ Day.

Singles’ Day, China’s version of the US’ Black Friday, is often seen as a gauge of Chinese consumers’ spending power, but in the past it has not been able to drive up total retail sales figures.

This year’s Singles’ Day sales across Alibaba’s e-commerce platforms totalled US$30.8 billion, dwarfing the online sale numbers for Black Friday and Cyber Monday combined. But the growth rate of total transactions fell to 27 per cent, from last year’s 39 per cent.

The late October launch of Apple’s new iPhone XR, which is cheaper than the earlier iPhone XS series, did not boost telecom sales in China, which dropped 5.9 per cent in November year on year, to 48.5 billion yuan.

However, a plunge in car sales was the main culprit for weak consumption. Auto sales were down 10 per cent on a year earlier, to 345.9 billion yuan, according to the statistics bureau figures, as auto dealers struggled to clear their inventories.

This matched industry surveys from the China Passenger Car Association (CPCA), which reported this week that retail sales of sedans, multi-purpose vehicles and sport utility vehicles plunged 18 per cent to 2.05 million units last month, which makes a full-year decline very likely in the world’s largest auto markets.

Ding Shuang, chief China economist from Standard Chartered Bank, said weak auto sales were caused by the expiration of tax rebates for smaller cars, a slowdown in consumer loans partly due to the crackdown in online peer-to-peer lending platforms, and subdued property investment, since new homes are often sold together with garages.

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The growth of real estate investment from January to November remained stable at the 9.7 per cent rate seen in the January to October period.

“The decline of consumers’ abilities and willingness to spend is going to first cut down on big ticket items like cars,” said Jiang Chao, chief economist from Haitong Securities. “Auto accounts for two-thirds of China’s consumption of consumer durables.”

Rising household debt has given Chinese policymakers few options to boost spending other than cutting taxes. China’s household debt-to-GDP rose to 49.3 per cent in the first quarter, which was lower than in advanced economies but higher than the average 40 per cent among emerging economies, according to the Bank for International Settlements.

“Household debt will continue to rise and so debt service costs will remain a drag on consumption. But the debt service burden on households should not get much worse unless there is a big acceleration in credit growth (which we do not expect),” Ernan Cui, an analyst from research firm Gavekal Dragonomics, wrote in a report.

“Local commentators worried about ‘downgrading’ of consumption in 2018 as spending on premium goods slowed,” Cui said. “The biggest boom in products favoured by affluent households is probably over, but consumption upgrading will continue as long as income growth does.”

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NBS spokesman Mao Shengyong said at a press conference on Friday that China still had the potential to maintain a stable and fast rate of consumption growth next year, given the rise in the number of middle class citizens.

Economists are eyeing new individual tax deductions that will go into effect next year and more tax relief for private companies to prevent the economy from slowing further.

A more complex tax deduction policy which takes in six types of expenses – from elderly care to medical costs- could inject an additional 80 billion yuan in consumers spend, according to Cui’s estimate.

Beijing has also indicated that it will tighten the collection of social insurance contributions that employers are required to pay, but analysts fear that this could negate the benefits of the tax deductions for employees.

Additional reporting by Amanda Lee