China: Is Retail Growth a Proxy for Consumption Growth? 18 comments
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A lot of people, via emails, letters and phone calls, have been asking me how I can be so pessimistic about consumption growth in China given the spectacular consumption growth figures coming out of China – 15.4% year to date. An editor who asked me for a piece, after reading it also wondered if my view – that China’s GDP growth would be constrained by its consumption growth – was such a worrying thing given China’s 15% growth rate of consumption.
The problem is that these are not consumption growth figures. They are retail sales figures. Fair enough, you might think, but the retail sales growth rate should still be a reasonable proxy for consumption growth. It isn’t. Among lots of other noise retail sales figures include government purchases and shipments to retailers even before these shipments are sold to consumers. That makes it a very bad proxy for consumption.
Take a look why. I took the following chart from the September 14 issue of Jim Walker’s excellent Asianomics report. This shows retail sales for the past decade. As you can see, first of all for all the excitement there has not been much of a surge in retail sales. Secondly, retail sales have been supposedly growing between 13% and 24% for the past six years, which even on an inflation-adjusted basis (I assume it is inflation that explains the late 2007 and early 2008 surge) significantly exceeds GDP growth. But if retail sales were really a decent proxy for consumption growth, it would be hard to tell from this graph that consumption has plunged as a share of GDP.
But it has. Consumption has been growing over the past several years by about 8-9% a year, while GDP has been hurtling forward by 10-12% a year and, not surprisingly, this implies arithmetically that consumption is declining as a share of GDP.
This is supposed to be a short entry, but before closing I should discuss the recent 35% tariffs on Chinese tires imposed by the Obama administration, especially since that seems to have been one of the hottest topics of conversation today. For nearly two years I have been arguing that the global crisis is a two-step crisis in which, as the first step, the low-saving trade-deficit countries would see an interruption in their ability to finance their consumption. The second step would see the impact of the crisis spread to the high-savings trade-surplus countries, which were ultimately more vulnerable to a contraction in global consumption.
This spreading out would almost automatically involve, as it always has in the past, a sharp contraction in international trade and a rise in trade tensions, as the trade surplus countries responded to the contraction in external net demand by self-defensively trying to improve their ability to export excess capacity (as in Smoot-Hawley in 1930). But this effort is doomed to failure. Collapsing trade deficits require collapsing trade surpluses.
For me the tire dispute is par for the course and not a surprise. US labor unions are angry that China’s cheap exchange rate and its interest rate and other subsidies to manufacturers effectively act as tariffs on imports and subsidies on exports, especially since the stimulus package seems to have added capacity unnecessarily. China is angry that the US is imposing tariffs on its products, and wants to retaliate.
This is a dialogue of the deaf. Many in China seem completely incapable of understanding why what it considers as purely “domestic” issues (even the currency is considered a domestic issue) should have anything to do with trade. Many in the US see China cheating in fact but not in form, and cannot understand how slow and how difficult it will be for China to retool its economy and remove its implicit subsidies and taxes.
Most of the press focus is on US-China disputes, and the truth is that these matter a lot because this is the most important trade relationship, but trade-surplus countries are in disputes almost everywhere. This, in my opinion, is only likely to continue. I suspect that we will make a concerted effort to coordinate the adjustment process only after things have gotten much worse for everybody.
P.S. The proxy battle rages on. I can only get through the great firewall occasionally to read or post on my blog. My favorite proxy will be suddenly disabled, and then somehow a few hours later it begins working again. Even when it is in theory working, it takes me an hour each time to post entries. Other friends here complain of the same thing. Sigh. The good news, however, is just as I suspected and discussed last week, the reason my blog has been acting weird is not because of a hacker out to disable it. All Wordpress blogs have been hacked, but fortunately there is an easy (apparently, but I don’t understand it) process to fix the problem, and soon one of my computer-literate friends will do so.
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This article has 18 comments:
Things haven't changed for the Premier, or for China, since he expressed these concerns. If your information is correct, Michael, they are counting INVENTORY BUILD-UP as retail sales, whether a single consumer bought anything or not.
Add to that the usual obfuscation that comes from any centrally-managed economy, and the fear the towns, districts and provinces have of reporting anything less than robust growth (there's that knock on the door at midnight) and you have a combustible combination.
With the Chinese markets right back at their 50-day M.A. even bulls in the China shop might find it prudent to take a deep breath and stand aside with at least some of their assets...
This is simply false. Numbers prior to 2005 would take quite a bit efforts to gather given the upward GDP revision done by China's NSB in late 2005. In 2006, nominal GDP growth was 14.9% and retail sales growth was 13.7%; in 2007, nominal GDP growth was 17.8% and retail sales growth was 16.8%. I suspect numbers prior to 2005 will largely show the same pattern, i.e. nominal GDP growth slightly has been larger retail sales growth -- which is why supposedly private consumption as a percentage of the overall GDP gradually has decreased, as far as the numbers gathered and provided by NSB go.
If you are somebody who is actually selling something, you may ask how exactly an economy with the PCE as 1/8 of the America's manages to become the largest auto market in the world. A far more plausible explanation is,
* China's GDP is under-reported, especially in the service economy, which is likely severely under-reported.
* The service component in China's PCE pie, is getting larger and larger. Overall we don't know if the private consumption as a percentage of the overall GDP has increased or decreased.
1. Warehouse storage costs are at an all-time high in Shanghai, I have been told by many people its a great business to be in at the moment. Factories do not house goods in private warehouse storage centres. Retail distributors do.
2. Shanghai has experienced unbelievable discounted sales, 50% has been very common in the sales. These sales have been running for the past 3-4 months. From my calculations, I believe that a lot of these shops are selling below their cost price. I also believe that they would not be doing this unless the low selling price was being subsidised.
The retail sales picture in most sectors is a complete mirage. However consumption does seem to be very strong in decoration industries in Shanghai as a result of the strong property market. From where I am standing the only true policy that seems to be making a real as apposed to control difference is in the strengthening of the asset markets.
Not a bad way to create a wealth effect and improve consumption in the higher middle/higher classes. Shame the middle/higher middle class only represent about 10% of the population.
On the issue of trade protection, you have been on the ball Michael.
Maybe world trade needs to contract for the participants to move past their tunnel vision.
If you wish that Chinese economy will collapse soon, just go on and dream about it.
On Sep 14 12:00 PM James Lewis wrote:
> I have two comments on the retail figures:
>
> 1. Warehouse storage costs are at an all-time high in Shanghai, I
> have been told by many people its a great business to be in at the
> moment. Factories do not house goods in private warehouse storage
> centres. Retail distributors do.
>
> 2. Shanghai has experienced unbelievable discounted sales, 50% has
> been very common in the sales. These sales have been running for
> the past 3-4 months. From my calculations, I believe that a lot of
> these shops are selling below their cost price. I also believe that
> they would not be doing this unless the low selling price was being
> subsidised.
>
> The retail sales picture in most sectors is a complete mirage. However
> consumption does seem to be very strong in decoration industries
> in Shanghai as a result of the strong property market. From where
> I am standing the only true policy that seems to be making a real
> as apposed to control difference is in the strengthening of the asset
> markets.
>
> Not a bad way to create a wealth effect and improve consumption in
> the higher middle/higher classes. Shame the middle/higher middle
> class only represent about 10% of the population.
>
> On the issue of trade protection, you have been on the ball Michael.
>
> Maybe world trade needs to contract for the participants to move
> past their tunnel vision.
It shows no such thing. The chart shows the GROWTH RATE of retail sales for the past decade. It shows that after an unsustainable spurt in the growth rate during recent years and an inescapable slowing of the growth rate since the worldwide financial crisis began, growth is getting back on track at the retail level in China, undoubtedly spurred by that country's programs of monetary and fiscal stimulus. Whatever the true numbers for retail sales, the chart is meaningful and bulllish as long as computations are consistent month to month.
On Sep 14 04:22 PM huangthomas wrote:
> China just announced that for the first 8 month of the year, the
> electric energy usage increased by 0.36%. This is the first time
> it turns positive. It is unbelievable that the recovery and growth
> of the economy at 8% annual rate without electricity. Is China still
> in the stone age?
On Sep 14 04:22 PM huangthomas wrote:
> China just announced that for the first 8 month of the year, the
> electric energy usage increased by 0.36%. This is the first time
> it turns positive. It is unbelievable that the recovery and growth
> of the economy at 8% annual rate without electricity. Is China still
> in the stone age?
On Sep 15 04:45 PM johnqh wrote:
> If you think the electric energy usage is a true reflection of the
> GDP, then China's GDP is severely under-reported, since its electric
> usage is about 75% of US, higher than the whole European Union, and
> 3X of Japan. All of the data is available on CIA World Factbook.
>
>
>
He offers in my opinion the most reasoned, balanced views on USA and China on the internet these days. He provides articulate arguments to caution us about the actions being taken by both. And forewarns that they could lead to some serious negative consequences ahead.
It is simple... call the retailers and interview consumers. Consumers keep on spending and some retailers (the better branded ones) are booming while some retailers collapse. But sales are very real.
Sorry folks who are naysayers about everything, most of my clients are seeing record sales in China and they certainly are not selling everything to the govt or being forced to fake numbers.
I would like to believe you but my observations are very different from yours. I frequently visit the retail shopping malls and there is a distinct absence of buyers (particularly for the big brand name items). For example, in Beijing there are plenty of shoppers at Yashow market buying knock-offs but almost no buyers in the upscale malls shopping (and in many new malls not even window shoppers).
On Sep 16 08:57 AM Shaun Rein wrote:
> It really amazes me how folks continue to be so bearish on retail
> sales in China... and even more surprising that folks say that the
> sales are massaged by the Govt etc. or made up.
>
> It is simple... call the retailers and interview consumers. Consumers
> keep on spending and some retailers (the better branded ones) are
> booming while some retailers collapse. But sales are very real.<br/>
>
> Sorry folks who are naysayers about everything, most of my clients
> are seeing record sales in China and they certainly are not selling
> everything to the govt or being forced to fake numbers.
For someone who posits the question about the stone age, one can only conclude that that was the period in which you received whatever education you might have.
That said, I'm happy to give you a clue: it's called 'resource utilization'. Perhaps you will report back your findings from the Pleistocene epoch?
On Sep 14 04:22 PM huangthomas wrote:
> It is unbelievable that the recovery and growth
> of the economy at 8% annual rate without electricity. Is China still
> in the stone age?
On Sep 15 11:33 PM kalasend wrote:
> You do know that China is the most populated country in the world
> right?
Confidence from these people are pointless when you're talking about China where 90% of the people are under delusion about their country's greatness. These people are my friends, my relatives, my cousins and uncles and aunts. I don't just hear them. I can feel them. And I'm not optimistic.
On Sep 17 01:03 AM Shaun Rein wrote:
> Sales in Beijing is certainly not indicative of sales throughout
> China. According to our research, the most pessimistic consumers
> (aside from those in Guangdong) are in Beijing and Shanghai. Growth
> is being driven in 2nd, 3rd and 4th tier cities. Brands that have
> exposure there are doing fabulously well, while brands that only
> focused in BJ/ SH are getting hit harder. Also, some brands are
> taking a hit while others (usually the ones that are better branded)
> are doing very well so empty malls in Beijing mean nothing to overall
> retail sales. We have conducted what I think is the most exhaustive
> research into Chinese consumers... 15 cities in recent months ...