Originally published on Forbes.com
by Gordon Chang
Sunday, Beijing’s National Bureau of Statistics reported that retail sales in China jumped 10.8% in August compared to the same month last year. That was substantially better than every consensus estimate. Analysts had predicted sales would come in at 10.5%, the same increase as July’s.
Most observers are bullish about consumption as the next driver of the Chinese economy. The dominant narrative tells us China is in a transition from investment-led growth to growth propelled by consumer spending. The oft-cited Andy Rothman, now at Matthews Asia, calls the country “the world’s best consumption story.”
The evidence supporting that proposition looks compelling. Apple, from the first indications of a few hours ago, immediately sold out its iPhone 6S and iPhone 6S Plus in China. Express parcel deliveries were up 47% in July compared to the same month in 2014. Box office revenues? For the first eight months of this year, they skyrocketed 48.5% from the corresponding period last year.
Consumption contributed 50.2% of growth of gross domestic product in 2014. In the first half of this year, it accounted for 60.0% of GDP. That was, according to NBS, up 5.7 percentage points from the first six months of 2014.
In the current quarter, the percentage of consumption’s contribution may even be higher. Why? Investment by business looks like it is stagnant or shrinking, with non-financial services expanding and financial services and manufacturing contracting. Net exports are falling.
That means most growth these days—to the extent it exists—is coming from government spending and spending by consumers. Yes, the economy is in transition to a consumer-led model, but that is not because consumption is growing robustly. The economy is in transition because the other components of gross domestic product are stagnant or falling.
In reality, it’s hard to gauge consumer spending. As an initial matter, forget the retail sales number as an indicator. Even if it is accurate, it appears to include government procurement and unsold inventory.
Of course, there are some sectors doing well. There’s no doubt movie theaters are packing them in, for instance. With new screens opening all the time, box office revenues are increasing.
Yet it’s important to put other good news into context. First, Apple’s new products are attracting buyers, but overall smartphone sales are declining, falling 4% in Q2 year-over-year according to research firm Gartner. That’s the first time such sales have dropped in China. As the market has already reached saturation, growth will continue to head south.
Second, online retailers are doing well, which means package deliveries are way up, yet sales growth is slowing fast. Slow growth was evident from last Tuesday’s warning from “new-economy bellwether” Alibaba Group. Gross merchandise value for the quarter that ends this month will be “mid-single-digits lower than our initial expectations” said Jane Penner, the company’s chief of investor relations.
Moreover, growing online transactions are not conclusive evidence of growing consumption. Online sites are growing largely by taking sales from bricks-and-mortar locations, which are regularly reporting declines.
The Q2 results from foreign retailers and consumer products companies doing business in China are an indication that spending is soft. Anheuser-Busch InBev, for instance, reported volume fell 6.5% in China during the period. Yum! Brands said same-store sales declined 10% and China sales were down 4% even though there was 7% unit growth.
Apart from the good news that is not really so good, there is the bad news from the closely watched vehicle sector. Passenger car sales, according to the China Association of Automobile Manufacturers, were down 3.4% in August, the third consecutive month of decline.
In January, CAAM forecasted 7% growth in combined passenger cars and commercial vehicles. In July, the government-backed organization lowered its prediction to 3%. Now, even the reduced figure looks optimistic. SAIC Motor, China’s largest carmaker, predicts zero growth for the industry this year, and AlixPartners, an advisory firm, says this could be the first year of contraction since 2008.
Price cuts do not seem to be having much effect stimulating buyer interest. A warning sign is that dealer inventories have remained consistently above the “alert level” of 1.5 months of sales.
Moreover, plunging imports suggest weak consumer demand. In dollar terms, imports fell 13.8% last month from August 2014 according to the Ministry of Commerce. The ministry, however, rigged the numbers, using July’s exchange rate. If its statisticians had instead used an August rate for August imports—in other words a rate taking into account last month’s devaluation—imports as measured by dollars would have decreased by more than a staggering 17%. The drop was so deep that not all of it was due to idle factories buying less from abroad. In any event, imports have now declined for ten straight months.
The problem is that consumer spending does not occur in isolation. “Consumption doesn’t drive growth,” notes China bull Yukon Huang. “It’s the result of growth.”
The economy, as a growing number of analysts and economists note, is growing far below official estimates, and Beijing’s panicky actions—one fumble after another since early July—confirm these dour assessments. In any event, plunging stocks, falling currency, and accelerating outflows of capital mean consumer spending will have to fall in coming months. People who earn less spend less.
And do not take too much comfort from the growing number of theatregoers. Movies, after all, did very well in America during the Great Depression.