C&B Notes

Big Trouble in Little China?

In a trend we continue to watch with interest, new home prices fell in 69 of the 70 markets monitored by the government, making the total price decline 11% for the year.  Additionally, multinational brands are seeing declines in consumer spending in the second half of the year — seemingly worse than the official statistics reflect (and we put more credence in the companies’ information).  And to further impugn the credibility of the government’s numbers, the discrepancy between government export numbers to Hong Kong and Hong Kong’s import figures (theoretically equal) is growing again.  The collective impact of all these trends will likely be further declines in the country’s already-slowing GDP growth rates, which would lower world GDP growth.

The correct read on Chinese shoppers’ propensity to buy is key both for the companies who are increasingly dependent upon the market and for the country itself: consumption, billed as a new growth engine, is required to offset the slowdown in investment.  Consumer goods manufacturers Unilever, Nestlé, and Colgate-Palmolive all reported declines in China sales in the third quarter to the end of September, with Unilever’s China sales down 20 per cent in value terms.

China’s National Bureau of Statistics, meanwhile, says retail sales grew 12 per cent in the first nine months of 2014, down modestly from 13 per cent last year.  But analysts say the official data conceal a sharper consumption slowdown.  Sales by the 100 largest retail enterprises grew just 0.1 per cent in the year to September — down from 10.1 per cent in the same period last year, according to the China General Chamber of Commerce, an industry association.  “It’s clear that household consumption, after holding up pretty well in the first half of 2014, slowed in the third quarter,” said Andrew Batson, China research director at GaveKal Dragonomics, a macroeconomic research company in Beijing…

China’s leadership has embraced the goal of increasing the role of consumption in driving overall economic growth, while pulling back on investment.  In reality, economists say both investment and consumption will slow in the coming years.  Rebalancing will occur if consumption slows more gradually than investment.  The risk is that the investment slowdown, especially the sluggish property market, drags consumption down with it.  Consumption last year accounted for just shy of half of China’s economic output, of which household consumption made up 36 per cent and the government the balance.