China’s Stimulus Plan: Spurring Consumption?

All Eyes On Chinese Consumer Data, Particularly In The Luxury And High-End Segments, As Consumption In Other Markets Remains Sluggish

China's traditionally high individual savings rate is showing signs of easing somewhat, as middle-class and wealther consumers head back to stores

China's traditionally high individual savings rate is showing signs of easing somewhat, as middle-class and wealther consumers head back to stores

A number of outlets have given their thoughts on what it will take for Chinese consumers to cut back on their traditionally high savings rate and spend more of their disposable income, with some writing that it will take the creation of a bigger social safety net by the government and others advocating patience and still others defending high savings rates. Today, Susan Weerts writes in Seeking Alpha that data coming out of China this month suggests that consumers there are — without any major need for a socio-cultural shift, spending more on consumer items. This may mean that more confidence in the Chinese economy on the part of the consumer could be largely responsible for more spending in major cities and markets there.

As Weerts writes, the strongest growth in July retail sales was found in furniture, motor vehicles and building/decoration materials, which grew at 42.5%, 32% and 25% respectively, year over year. This massive growth, Weerts proposes, should give luxury brands some cause for (tentative) celebration:

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%.

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 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.

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