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A LEX column in this week’s Financial Times had an optimistic article about China’s economic rebalancing.
Governments all over the world are bemoaning the non-consuming consumer. But in China, at least, the masses are doing their part. From January to November, nominal retail sales rose 17 percent year-on-year.
The article then goes on to detail why this a hopeful sign that China may be rebalancing. The piece finishes:
But it is cause for some cheer that real retail sales growth – at 11.3 percent over the first three quarters is stretching away from growth in real gross domestic product (9.4 percent). A precondition for a switch in growth is place.
There are several problems with relying on these numbers as a proxy for rebalancing in the Chinese economy. The statistic, retail sales of consumer goods, is from a National Bureau of Statistics (NBS) survey.
First, if you read the footnotes for the survey (Chinese language), you’ll notice that retail sales of consumer goods category includes the sales of both wholesalers and retailers. Obviously we don’t want to include the activities of wholesalers in our analysis of whether or not Chinese consumers are playing a larger role in the economy.
Second, data on retail sales of consumer goods is compiled on the basis of point of sale, not the nature of the buyer. Therefore even if we could strip out wholesalers, retail sales of consumer goods numbers include more than the activity of just private consumers. The purchases of the government or corporations when they occur at retail outlets will be included in the statistics.
Third, and perhaps most importantly, the data on retail sales of consumer goods does not include services. As consumers grow wealthier, they shift consumption towards more services and less physical goods. Dragonomics estimates that services account for 30 to 40 percent of house hold consumption expenditures. The fact that retail sales of consumer goods are running so far ahead of consumption without including services (the fastest growing component of household consumption) should lead us to be quite skeptical of relying on this data as a stand-in for private consumption expenditure. The chart below shows the growth of retail sales of consumer goods has significantly outpaced household consumption over the past decade.
Real year-on-year growth in retail sales of consumer goods has run ahead of GDP growth for several years, but the consumption share of GDP continues to decline, weakening the case that this will lead to rebalancing.
The takeaway from all this is that retail consumer sales are not a very good indicator of economic rebalancing. Similar to the monthly Treasury TIC reports and Fixed Asset Investment numbers, these types of high frequency data often leave a lot to be desired.