Soaring Retail Sales in China Demonstrate Economic Shift

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by: Jeff Nielson

Continuing robust demand in China's domestic economy provides clear evidence that China is making a smooth and successful transition between an export-dependent economy, and one which is much more balanced between trade and domestic consumption.

The Chinese government reported retail sales figures for May at the end of last week (through its “National Bureau of Statistics”). While the year-over-year increase of 15.2% actually represents a slowing of domestic growth (compared to prior months), what continually eludes the thinking of so-called “experts” is that these massive gains in the domestic economy are cumulative and compounding.

To illustrate the arithmetic, China's domestic economy has been averaging annual growth in excess of 20%, for several years. At that rate of growth, it takes less than four years for China's domestic economy to double. Even with China's retail sales 'only' increasing by just over 15% per year, this would result in a doubling of retail sales in less than five years.

As I pointed out in a recent commentary (“A Tale of Two Economies: U.S. vs. China”), what makes this stunning growth even more impressive is that Chinese consumers have boosted their spending while still maintaining a savings rate in excess of 30%. In contrast, the U.S.'s consumer-dependent economy could not approach that rate of growth even at the peak of the housing “bubble”, and with a negative savings rate.

In fact, Americans recklessly fueled their consumption through trillions of dollars of additional debt (which must now be repaid during the worst economic crash in the U.S. since at least the “Great Depression”). Thus, while U.S. consumers must dramatically reduce their spending to rebuild shattered, household “balance sheets”, Chinese consumers can steadily increase their own spending every year – and without taking on any debt.

A glance at the details of the recent report on Chinese retail sales provides still more evidence of the trend toward much greater domestic consumption. Purchases of clothing were up by more than 20%. Furniture sales increased by 33%. Sales of cosmetics increased by 21.7%. Purchases of automobiles soared by 23.8%. Meanwhile, sales of gold, silver and jewelry soared higher by 28.7%.

The only facets of domestic “consumption” which were not exhibiting such strong levels of growth were in business and industry. A category of sales described as “cultural and office appliances” increased by a relatively weak 2.6%, while consumption of “petroleum and related products only rose by 5%. Meanwhile, sales of telecommunications equipment actually shrank by 7.8%.

This totally contradicts the propaganda (primarily out of North America) that China has a serious “over-capacity” problem in its economy. In fact, with business and industrial spending severely lagging household consumption, there must be rapid investments in increasing industrial capacity to meet this soaring demand.

As a result, it should be no surprise to anyone that the Chinese government has been on a frantic buying-spree of virtually all “hard” commodities – the “building blocks” of an economy. While China's industrial and business sectors retool, in order to shift their focus to Chinese consumers, China's government is capitalizing on weak commodity prices to build up enormous low-cost inventories of these precious materials.

Consequently, when Chinese industry begins its next phase of spectacular growth, China will be able to produce these goods with huge profit-margins – thanks to extremely low input costs.

In short, China has been extremely successful in positioning itself for its next phase of spectacular growth, while most Western governments have been engaging in reckless and simplistic policies – based entirely on short-term considerations. The consequences of this economic myopia is that growth in most G-7 economies, will be severely reduced through much higher debt levels, alone. This will be greatly amplified by consumers reeling from a combination of crippling inflation, and very high individual levels of debt.

There is nothing magical about sound, economic management. You invest in businesses and sectors with strong growth potential, rather than propping-up uncompetitive businesses/industries teetering on bankruptcy. You adopt a level of spending which is sustainable over the long term – not permanent deficits which can only end in national default.

Sadly, corrupt and incompetent Western governments have demonstrated that they are much too arrogant to learn from China. Instead, they foolishly repeat past mistakes, while serving the needs of no one other than their bankster-overlords.