Why Retail Will Soar Despite China’s Growing Pains

on May 11 2011 | in Lifestyle Retail Trends | by | with No Comments

Beijing, shopping mall

As the Chinese economy explodes onto the world stage, the nation is still adjusting to its rise to stardom. In the first quarter of 2011, China’s gross domestic product increased by an impressive 9.7 percent—but for economists, this figure causes as much worry as it does enthusiasm.

In March, Chinese inflation hit a 32-month high at 5.4 percent. It is expected to reach and exceed 5.5 percent by the month of June. Economists predict that June will be the high point, however, as Chinese policymakers work to halt creeping inflation rates. In the words of the People’s Bank of China first-quarter monetary policy report, “Stabilizing prices and managing inflation expectations are critical.”

Inflation is not the only issue facing Chinese economists. As real estate takes off, many are beginning to worry about a speculative real-estate bubble. The total value of homes sold in March alone was worth the total of January and February home sales combined. In addition, first-quarter new home construction rose 20 percent, and overall investment in the market rose 34 percent, also in the first quarter.

China’s seventh-largest Chinese lender, China Citic Bank Corp. Ltd., is so concerned with this rapid and risky growth that it plans to cut lending to the real estate sector.

While real estate may be risky now, investors are advised not to miss out on other opportunities in China: namely, retail.

Retail investors may, inadvertently, have the government on their side. Recent government initiatives are focused on giving Chinese more spending power.

“We will insure that people’s income increases keep pace with economic growth and people’s salary growth keeps pace with productivity rise,” said Premier Wen Jiabao.

Jiabao plans to increase per capita household income by 7 percent annually through 2015. Other initiatives to increase Chinese discretionary spending include improving social security and healthcare and raising personal income tax thresholds.

Government efforts like these, in addition to other market factors, led all 31 of China’s provinces to increase minimum wage by an average of 24 percent last year; six provinces have already increased minimum wages this year, and the remaining 25 provinces are expected to follow suit.

Increased income directly translates into increased retail revenue. Figures from the National Bureau of Statistics show that China’s retail sales increased by 16.3 percent in the first quarter of this year.

“China is trying to rebalance its economy to become more consumer oriented. Wages are rising. People are earning more and will shop more, and that’s good news for Chinese retailers,” said Andrew Sullivan, director of Institutional Sales Training at Hong Kong’s OSK Securities.

Luxury sales are no exception. Luxury goods sales in China rose to 30 percent of the global market share in December 2010, with $10.7 billion in expenditures. Doubtless this increase is in part due to the rising number of millionaires and billionaires in China—the number of millionaires on the Chinese mainland is up 9.7 percent from 2010, and, according to Forbes magazine’s 2011 list, China boasts 115 billionaires.

Luxury brands that have benefited most from the surge in Chinese consumerism include fashion brands companies like Coach, Louis Vuitton, Burberry, and Hermes. In automobiles, Rolls Royce sales in China increased 600 percent last year. In general, luxury car sales by unit are expected to increase 125 percent this year from 2010 sales.

In terms of all automobile sales, China is already number one. Last year, 18 million units were sold to Chinese. By 2015, auto sales are forecasted to grow to 23 million.



[business insider]
image credit: alexandra moss

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