Did Chinese Stimulus Measures Spur Consumption Growth?

Includes: CAF, FXI, GXC, HAO, PGJ
by: Susan Weerts

China's National Bureau of Statistics released key economics data from July on August 11. Total retail sales of consumer goods reached 993.7 billion yuan, or $146.13 billion based on the exchange rate of 6.8, an increase of 15.2% compared to a year ago and 0.2% increase compared to June.

Although it is called “retail sales”, the figures include wholesale and retail businesses. There might be the issue of double counting in the data. Total retail sales include food services.

Consumption growth reached its peak at 23.3% in July 2008. It trended lower and stayed flat below its means in 2009. The rate of increase in July decreased by 8.1% compared to a year ago. Despite the amount of money and incentives that the Chinese government deployed to stimulate the domestic consumption this year, consumption growth in 2009 appeared much lower than in 2008. This begs the question of whether the Chinese stimulus plan had any effect on consumption.

A look at the monthly change of total retail sales over two years showed the strong seasonality. The monthly growth rates in the first half of the year were minimal, except in May. The first week of May was considered the “golden week”. We see a jump of 7.33% in May while the rest of the months in the first half of the year were under water.

Chinese domestic consumption was generally strong in the second half of year. It is expected to jump at least 7% monthly in the fall.

The breakdown of July retail sales by commodity categories showed a very interesting story. The growth of furniture, motor vehicles and building/decoration materials consumption were strongest, at an eye-popping YoY 42.5%, 32% and 25% respectively.

The second strongest growth groups were personal spending/health care, cosmetics at 20.3%, medicine at 19.5%, garments at 19.1%, and jewelry at 18.4.

The newly rich Chinese are increasingly willing to spend money on pampering themselves. This will be a good news for the luxury brands, such as Esprit (very popular in China), Lancome, Louis Vuitton, etc. The sales of commodities grew at 16.3%.

The growth of foodstuff consumption stood at 13.3%. Growth of household appliance consumption was at 8.3% (5.6% in January-July). With office supplies at 3.8% (3.5% in Jan-July), would this indicate that business is not necessarily expanding?

It is a big surprise to discover the stagnant growth on communication and petroleum, up only 1.3% and 1.1% respectively (-5.8% and 1.4% in January-July). Aren't all the new cars in China running on gasoline?! We certainly didn't see the strong petroleum consumption growth predicted by oil traders.

At first glance, July retail sales showed no sign of a spike on consumption growth from the government stimulus measures. The growth rate deteriorated after it reached its top in the fall of 2008.

However, a close examination of retail sales by commodity categories indicated that the government's stimulus measures indeed spurred the consumption growth and that the growth rate would have been much worse without them.

The tax incentives and rebates successfully enticed impressive car sales, however failed to foster the substantial interest on household appliances that the government directed at rural areas. Car sales will likely remain high after the incentives expire.

The turbo-charged growth rate on housing relative consumption were the byproducts of the white hot housing market. If the housing market shows any signs of weakness, it will likely to take the wind out of these high growth rates.

The future organic Chinese consumption growth will likely come from personal spending and pharmaceuticals/health care. The data showed that the expectation of high petroleum growth was not materialized in Chinese consumption.

One thing to notice is that the market and many economists have anticipated stellar consumption growth in the second half of the year. Consumption growth has to go above 20% YoY in the fall to justify the strong performance of the stock market.

Disclosure: No positions