2015-09-15

Debate on Retail Sales in China

First some comments from Christopher Balding on the retail growth in China. The whole piece is worth reading.

Balding: Digging Beneath the Surface of China Data: Retail Sales Edition
If we look at the year to date YOY sales of the top 50 retail enterprises, total retail sales grows by 0.9%. In fact, only one category grows by more than 3%, jewelry which grew at only 4.2%. The short version is that looking at the major retailers of China, there is no evidence to support the official statistics that consumer retail spending is a robust 10.8%.

...There are a few points of economic analysis worth mentioning. First, we pay close attention to GDP and retail sales because we expect them to be good proxies of economic health and activity. However, firms pay with money not official GDP figures. Consequently, even if we stretch credibility and accept official GDP and retail sales numbers as perfectly accurate, firms are not seeing the related cash flow. Second, it appears that the retail slowdown has been much more prolonged than people realize. I present data here that covers revenue growth for the retail industry for all of 2014 showing sales growth of 3.8%. Again, if we believe the official retail sales growth number of 12%, firms live on cash flows and the slow down appears to have begun no later than 2014. Third, this data directly contradicts the entire economic rebalancing story in China. According to the data consumption is simply not outpacing growth in the traditional drivers of Chinese growth such as fixed asset investment. Fourth, this data comes much closer to matching most other data points we have such as consumer output, electricity, freight, and related data. If we ignore the topline official data, none of the underlying and independent data supports a 7% growth story.
He doesn't mention the Internet in there and online sales are a growing factor in China. High commercial rents due to expensive real estate and the shift to online consumption could be a big reason why retail sales numbers don't look good.

Consumer companies seem to confirm Balding's take though.

Chinese food maker Tingyi Q2 profit slides as economy weakens
Tingyi, owner of the Master Kong brand, said profit fell to $90.7 million in April-June, while revenue dropped 6.4 percent from a year ago to $2.55 billion.

For the first-half, profit fell 14.8 percent to $197.7 million while revenue dropped 11.5 percent.
How do sales at major consumer companies fall during a growing economy?

One firm is doing better: Uni-President’s innovative strategy pays off, but:
“We believe more product diversity could help it [Uni-President China] to reverse sluggish market growth [in China],” Credit Suisse’s Taipei-based equity strategist Jeremy Chen (陳建名) said in a report last week.
In addition, lower raw material costs and fading competition with Ting Hsin International Group (頂新集團) — known for its popular Master Kong (康師傅) brand in China — would be important drivers to maintain Uni-President China’s business momentum further, Chen added.
Stock performance hasn't been good for Chinese consumer stocks, but it isn't simply a bear market. Sales have been sluggish for several of the top firms, which points to economic weakness rather than firm specific issues.

Scott Sumner sees the headline retail sales as accurate: China's Retail Boom
Of course just as in America, some of this growth is coming at the expense of brick and mortar firms, and there are indications that sales are flat for many ordinary retailers. But don’t underestimate the importance of online; Alibaba alone now sells more than $100 billion dollars per quarter. If we assume the entire online sector is around $150 billion per quarter, then growth in that sector (year-over-year) is probably on the order of $50 billion per quarter, or $200 billion per year. Thus online growth alone can explain about half of the growth in China’s $4 trillion retail sector.

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