China’s retail economy to remain robust

Photo by gelarian

In the most recent issue of research firm Access Asia‘s weekly newsletter, there is a piece titled ‘5 Reasons Why Retail Consumption Will Hang in There in ’09’. It is republished below with permission.

Regular readers will know that this email is not just another ‘booster go-go’, all is great, if you’re not here you’re nowhere, kind of China newsletter. So, you know we have no other ulterior motive for what follows than that we think it so. And what follows is that, while it won’t be quite the strong growth rates of previous years and the first half of 09 will be tough we’re willing to bet that retail consumption will remain generally positive in 2009. Here’s why:

1.China’s social fundamentals are good

A lot of talk of economic fundamentals and far less of the social fundamentals – increasing urbanisation (and even if people don’t want to, by moving to a city they inevitably consume and spend more); the demographic “sweet spot” of plenty of 20/30 something consumers; new consumers coming online inland and; the one-child policy meaning spending on kids is still concentrated on one Little Emperor and not spread across several (i.e. the ‘go play with your brother’s PlayStation’ or ‘just ride your older sisters bike’ rule that dampens kids spending in a recession elsewhere doesn’t apply in China).

2. Rising incomes

Urban income growth has slowed somewhat, but growth is still apparent. The strong growth rates of the last seven years have meant that, unlike many Europeans and virtually all Americans, Chinese consumers have been able to both save and spend, rather than choose one or the other. At the same time, inland wage growth has been far stronger than anyone predicted, and even at the low end (the peasantry) some discretionary income has appeared.

3. Jobs

Ten years ago, during the closest thing to a 2008 slowdown we’ve seen before in China, the result was unemployment as the SOEs laid off hundreds of thousands. This time around, it is less about unemployment and more about wages for white-collar workers. People understand that high wage growth is not possible, and a small or zero increase is of course preferable to unemployment. Therefore, while factory workers might lose their jobs (and in the world of retail consumption it has to be said most of these people don’t really count) urban white-collar unemployment is expected to be limited. Wages may not grow much, but confidence remains as people remain employed. Inland, and in rural areas, the stimulus package (or effectively packages plural now) will, if nothing else, create some jobs and income at the lower end that will filter into the retail sphere.

4. Property

Despite the tough conditions in the property market and the collapse of the A-share market, no negative wealth effect has really been evidenced in China as many predicted. But, in 2009, the property market should pick up following government interest rate cuts, property tax adjustments and banks encouraged to lend – showrooms have already seen an uptick in interest. There is still pent-up demand for home ownership. The knock-ons for retail are significant through the chain and the sectors.

5. Inland Growth

Retailers, particularly the domestic ones, report that retail sales in tier-2 and -3 are holding up reasonably well. There is some unemployment, but this is being more than counterbalanced by the continued emergence of new consumers entering the retail market for the first time as tier-2 and -3 cities (often those that rely more on China’s continental economy for their growth and expansion than overseas conditions and export orders) continue to grow.