Chinese consumer spending grows strongly.

The last time Market: Asia Pacific looked at retail sales in China in detail (January 2006, 15:1), the analysis showed that the year-on-year rate of growth was steady. The perspective is different in the graph above. This time we consider month-to-month changes in retail sales.

As expected, the graph shows that month-to-month sales are obviously more volatile than the longer view and annual numbers we presented previously.

What this analysis shows, however, is that the rate of growth in increasing. And the trend increases in spite of the sharp drop in retail sales in January 2007. Sales recovered quickly in February 2007. According to a brief report distributed by Agence France-Presse (AFP) retail sales in February 2007 increased 16.9 percent when compared with the same month in 2006. (This comparison is different than that shown in the graph above, which uses month-to-month statistics as mentioned.)

The China Economic Review, a Shanghai based business magazine in English said that these very strong retail sales results are due to the fact that, "The government has raised minimum wages and increased welfare spending to boost consumption and reduce the economy's dependence on exports and investment." The retail sales increase was the highest in two years, said the magazine.

The AFP story cited above said, "A booming economy will lift China to second place behind the United States as the world's biggest consumer market by 2015." Source: A mid-March 2007 research report published by Credit Suisse.

The strength of China's economy, which the International Monetary Fund (IMF) says will grow 10 percent in 2007, continues to impress. With retail sales growing at such a fast pace, however, there is some concern about inflation.

Because the Chinese government asserts its power to regulate prices, China has had an enviable record in controlling inflation. Inflation was seriously out of control in 1995, with the rate of inflation increasing 17.1 percent from 1994. The rate of inflation surged again in 1996 growing 8.6 percent. But since 1996, the growth in the rate of inflation has averaged 0.93 percent, according to IMF statistics. The IMF expects the rate of inflation to increase only 2.2 percent in 2007.

A graph presented with a National Bureau of Statistics (NBS) press release on March 13, 2007 shows a sharp increase in China's Consumer Price Index starting in October 2006. By February 2007 the index was still slightly below 103 points (the index for 2006 is set at 100), but the increase in prices was still quite noticeable.

Rural prices were also presented in the graph, and they did exceed 103 points.

Some observers have expressed concern about these increasing consumer prices. The NBS release said the CPI was 2.7 percent higher than it was in February 2006. A more detailed look at the sub categories of price increases showed food prices to be rising significantly with the gain posted at 6.0 percent in February 2007. Poultry prices and the price of fresh eggs jumped into the double digits. The loss to China's poultry industry from avian flu exceeds us$1-billion, according to a separate March 2007 China Economic Review story, and has undoubtedly exerted upward pressure on China's food prices.

Conclusion: Chinese consumer spending will continue to grow strongly, unhindered by inflation.

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