At the Haiyang Zhuangshi Co. hardware store in Beijing, sales of paint and aluminum window frames are slowing, one sign of a diminished role for consumer spending in China that’s foiling government objectives.
“It seems the peak days are gone,” said owner Hu Mengbin, 42, whose daily revenue has dropped to about 3,000 yuan ($463) from as much as 4,000 yuan last year after China stepped up efforts to rein in home prices. “Between 2006 and 2008 when the property market was red hot, we could make quick money.”
Hu’s loss underlines the dilemma for Premier Wen Jiabao: his campaign to control inflation is undermining attempts to make consumers a bigger driver of the world’s second-largest economy. Failure to lessen dependence on exports and investment spending leaves the nation more vulnerable to swings in external demand and subject to asset booms and busts.
Government data this week showed retail sales growth slowed to 16.9 percent in May, less than the average of the past five years and a figure that’s inflated by soaring prices for food. By contrast, spending on fixed assets such as factories and property climbed 26 percent, excluding rural households, in the first five months, the fastest pace in almost a year.
“Consumption hasn’t taken off,” said Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing. “What has happened is a shift from exports to investment as a driver of growth.”
Analysts at Capital Economics, a London-based research group, estimate that private consumption may have fallen to 34 percent of gross domestic product last year, the lowest level since China began opening its economy to market mechanisms more than three decades ago. Just 10 years ago, the share was 46 percent, Capital Economics calculates.
“Just at a time when the government in China and a lot of people elsewhere are hoping to see Chinese consumers step up to the plate, actually they’ve been staying away from shops,” said Mark Williams, an economist in London with Capital Economics and a former adviser on China to the U.K. Treasury. “The trend over the past couple of years has been relentlessly downward.”
Food costs jumped 12 percent in May from a year before, eroding the purchasing power of Chinese households even as policy makers embrace wage gains to bolster domestic demand. Savings are also being hurt, with the one-year deposit rate of 3.25 percent more than 2 percentage points less than the 5.5 percent annual pace of inflation. Limited exchange-rate appreciation also means imported products are more costly.
Property prices are also a burden, with 74 percent of people seeing them as too high, according to a People’s Bank of China survey released yesterday. Even after interest-rate increases and curbs on second and third mortgages, home prices rose for the ninth straight month in May, according to data from SouFun Holdings Ltd. Worker discontent has deepened, contributing to riots and demonstrations in some regions.
The Shanghai Composite Index has dropped 13 percent from this year’s April high on concern stepped up efforts to cool inflation near a three-year high will hurt earnings. The gauge was up 0.4 percent as of the 11:30 a.m. local time break in trading today.
China’s leaders have vowed to boost consumption’s share of GDP since at least 2006, so far to no avail. The ratio is about half that of the U.S., and about 60 percent of both Europe and Japan, according to Credit Agricole CIB.
With the Obama administration and U.S. lawmakers claiming that China’s limits on appreciation of its currency give its exporters an unfair advantage, Chinese officials have also repeatedly forecast that the nation’s trade surplus will shrink. Even so, the excess of exports over imports reached $13 billion in May, the highest level this year.
Growth driven by exports leaves China vulnerable to external slowdowns such as during the 2008 global recession, while expansion driven by investment is less likely to improve living standards, said Li Wei, an economist with Standard Chartered Plc in Shanghai.
The risk is pertinent now after the U.S. unemployment rate climbed back above 9 percent and as the euro region faces a renewed bout of investor unease about some of its members’ debt loads. While China unleashed a record fiscal stimulus and credit expansion in 2008, now its flexibility is restricted by the need to check inflation.
Rising wages may yet spur a pickup in consumer spending. The pay of migrant workers jumped 40 percent in 2010 and will continue to climb 20 to 30 percent annually in the next three years as China’s leaders endorse income gains to strengthen domestic demand, according to Credit Suisse AG. The government has also increased spending on health care and pensions and aims to build 36 million low-cost houses by 2015.
‘No Turning Point’
“It’s a good plan but up to now we do not see a lot happening and growth is still driven by investment,” said Shuang Ding, an economist with Citigroup in Hong Kong. “There’s no turning point so far.”
Growth in furniture sales eased to 26 percent in May from 37 percent a year earlier, while household electronics sales rose 15 percent after gaining 27 percent, official data show.
Passenger-car sales fell for the first time in more than two years in May after subsidies for purchases ended this year, supply chains were disrupted by the Japan earthquake, and the property clampdown helped to depress demand.
Consumption would have to grow three percentage points faster than GDP to reach 40 percent of the economy within five years, according to Michael Pettis, a finance professor at Peking University in Beijing.
“We would need the highest consumption growth ever recorded,” Pettis said. “In the short term we’re not going to see a lot of change.”
Beijing store owner Hu isn’t expecting any quick turnaround either. “Making money is getting harder this year,” he said as he stood in his 20-square-meter shop. “Business is slack.”