China’s stratospheric retail sales growth is drawing in consumer firms like flies to name-brand honey. Retail sales grew 15.4% year-on-year in August, up from 15.2% in July – figures particularly alluring to foreign brands at a time when US retail sales are flat in most areas.
As many retail businesses in China are aware, however, business is good, but not that good. Particularly in coastal provinces, where consumers in more developed markets have been relatively exposed to the global economic downturn, the national retail sales numbers conjure an unrealistically positive image of the country’s consumption levels.
"Elsewhere in the world, we’d be looking at the split between food and non-food," said Paul French, chief China representative for market research firm Access Asia, and a frequent contributor to CHINA ECONOMIC REVIEW. "But here, autos takes up nearly half of retail sales because it includes gas and lube sales as well, which is ridiculous."
In fact, rising fuel prices are one of the main factors Merrill Lynch economists Lu Ting and T.J. Bond cite as leading to a rise in retail sales numbers.
The automotive component is particularly notable this year due to rapid growth in car sales, fueled by government subsidies for small vehicles. Total automobile sales rose 81% year-on-year in August; sales of passenger vehicles grew even more quickly, up 90.2% over August 2008.
Retail sales figures are also skewed by their inclusion of government and institutional purchasing.
Fortunately, retail sales data is not the only source of information on spending habits. The National Bureau of Statistics’ (NBS) quarterly survey of urban household expenditure, which is based on direct consumer surveys, excludes government and institutional purchasing, but includes spending on services.
As might be expected, growth in urban household expenditure is lower than retail sales growth. China’s urban households spent 8.9% more in the second quarter of this year than in the same period last year, up from an 8.5% year-on-year increase in the first quarter.
In a recent report, Andy Rothman, chief China macro strategist at CLSA, noted that not only were retail sales and urban household expenditure data different, but that the differences were becoming larger. "During the past four quarters, retail sales growth was, on average, 65% faster than household expenditure growth. During the same four quarters one year ago, the difference was 41%," he wrote.
Even 8.9% growth may be enough to entice many brands to enter low-tier markets, especially given the rapid pace of urbanization in China. But the data disparities are a helpful reminder that not everything in China’s retail market is exactly as it appears.