SHANGHAI – Among the raft of bad economic news coming out of China, retail sales and consumer confidence are proving resilient, for now.
China’s list of economic maladies seems to lengthen by the day. There’s the long-standing slowdown of GDP growth, which government spokespeople insist will stay at around 6.5 percent for the foreseeable future, down from 10.6 percent in 2010 and an estimated 6.9 percent in 2015.
Manufacturing orders have been contracting for more than a year, while rises in costs have driven a significant percentage of textile and garment manufacturing into the arms to cheaper developing nations in south and southeast Asia.
China’s currency situation is also a cause for heightening concern, with any move from Beijing to weaken the yuan in order to stimulate exports greeted with fallout in other markets.
Given the flow-on effects over the past week on a weaker yuan coinciding with stock market crashes in China and significant declines in global markets, economists continue to fret about the impact of a devalued yuan on the world economy.
“The currency devaluation is meant to spur Chinese growth, but if the devaluation shocks European and U.S. markets to the point that it triggers extreme risk aversion and possibly recessions there — then it is counterproductive,” Peter Tchir , head of macro strategy at Brean Capital, wrote in a note earlier this week.
Also a concern is that dramatic devaluation could spark a currency war in Asia as trading partners such as South Korea, Indonesia, Malaysia and Taiwan weaken their own currencies to stay competitive with China.
“The challenge with the currency depreciation that we’ve been seeing is that it doesn’t necessarily make manufacturers more competitive when exporting. This is because most wholesale buyers are very quickly demanding discounts and because any further weakening in the yuan is likely to cause countries in emerging markets to also weaken their currencies,” said Benjamin Cavender, principal at China Market Research Group.
The start of this year has bought no joy for the Mainland stock markets, with China’s retail investors showing little confidence in the mainland markets in the first week-and-a-day of trading.
Recent plunges in the Shanghai Composite after last week’s much criticized experiment with a “circuit breaker” mechanism (designed to prevent wild swings in the market) led to trading being suspended on two days.
Though turbulence in the Chinese markets has been blamed for poor performances in financial markets around the world, from the U.S. to Australia, as well as Europe, those most familiar with China are quick to emphasize the historical lack of correlation between broader economic concerns and the Chinese stock market, which is something of a singular entity.
“The stock market has relatively small effect on China’s economy overall, given limited number of investors and its retail, rather than institutional, nature but the mishandling has a psychological effect and raises questions about the competence of the authorities,” said Jonathan Fenby, cofounder of Trusted Sources, an Emerging Markets Research and Consulting Firm.
“Currency is more important; it’s likely to depreciate steadily this year but can it be managed as Beijing administration would wish? Not so far,” he added.
All this comes as the Chinese government wrestles with the need to transform its economy from its manufacturing roots to a new era of domestic consumption. Xi Jinping and his team are charged with the delicate balance of reforming the economy. It’s a job Gordon G. Chang, author of “The Coming Collapse of China,” believes Beijing’s central government is botching.
“[China’s economy] is slowing because of the exhaustion of the country’s decades-old growth model and the inability of the leadership to implement structural reform. Yes, leaders talk about change but actually implement little of it,” Chang said.
“China is growing but only in the low single digits, maybe the 2.2 percent that people in Beijing were talking about last year. And the economy is trending down fast, despite heroic efforts to pump it up.”
Despite this raft of bad economic news, retail sales continue to show considerable resilience, with nominal retail sales up 10.6 percent in the first 11 months of 2015 compared to the same period of 2014.
“While the pace of real retail sales growth is forecast to moderate from 10.3 percent per year over the 2011 to 2015 period to 7.7 percent over the 2016 to 2020 period, the size of China’s consumer economy has grown tremendously over the last decade, and currently accounts for an estimated 9 percent of world consumption in 2015, compared to just 3 percent in 2005,” IHS Global Insight’s Asia-Pacific chief economist Rajiv Biswas pointed out.
Consumer confidence among mainland consumers has also managed to hold steady, and even rise slightly, to 101.6 in the fourth quarter, returning to an optimistic level from 97.2 in the third quarter, according to a joint inter-university study tracking the consumer mood in mainland China, Hong Kong, Macau and Taiwan.
The quarterly study, which was conducted by China’s Central University of Finance and Economics, Taipei Medical University and the Macau University of Science and Technology, found Mainland consumers to be the most optimistic of those surveyed, with 100 the dividing line between optimism and pessimism.
These numbers obviously don’t take into account the potential impact of the stock markets’ poor performance so far in 2016, and it remains to be seen whether this confidence can hold in the face of further economic malaise, should the trend continue, as most expect it will.
“I think the first thing is that while we are seeing a slowdown in growth we should see China’s retail sector continuing to hold up alright this year,” Cavender said.
“However, brands are going to have to focus much more on articulating a clear brand position and value proposition to consumers while at the same time improving operational efficiency. As the economy cools and consumers become more cagey about what they buy, brands need to take a close look at which products are performing best for them.”
Rajiv Biswas believes though a sluggish economy might lead to a slower retail market, that doesn’t mean international brands can afford to turn their attention away from China and its consumers, who will remain a vital cog in the fashion and luxury machine worldwide.
“A further slowdown in Chinese growth could have impact on the pace of retail sales growth. However, over the long-term outlook to 2035, the total size of Chinese consumption is expected to become significantly larger than Western European consumption. Therefore China will be one of the most important long-term growth markets for fashion and luxury firms over the next 20 years,” he said.
Chang, on the other hand, has a more dire prediction for the future of consumer spending in China.
“In China, consumer spending is not creating growth, it is the result of growth,” he explained. “Eventually, that spending will be pulled back to earth by an economy that is about to fall off a cliff.”