China Online Spending Power Unmasked

China’s Internet sales are surging as Alibaba Group Holding Ltd. and rivals lure more of the nation’s 618 million users to shop online, suggesting conventional retail-sales figures understate the strength of consumer demand.

Online retail sales, first reported by the statistics bureau in April, jumped 52 percent in the first four months of 2014 from a year earlier, compared with a 12 percent gain in the broader gauge that represented the weakest start to a year since 2004. Shanghai-based iResearch Consulting Group sees annual growth of 20 percent to 30 percent in Internet purchases over the next three to five years.

The data, a bright spot for an economy projected to grow this year at the weakest pace since 1990, also help to improve the reliability of Chinese consumption statistics that JPMorgan Chase & Co. questions. The numbers underscore the shift in citizens’ spending habits as Alibaba, the world’s biggest online bazaar, prepares for a U.S. initial public offering with an estimated market value of $168 billion.

“Online shopping has unleashed consumer demand, particularly because people can now buy stuff online they couldn’t get before in the shops, especially outside the biggest cities,” said Song Yu, senior China economist with Goldman Sachs Group Inc. in Beijing.

China’s data collection system is a legacy of the old planned economy, and online purchases are a “part of sales that they weren’t capturing fully before,” Song said.

Annual Growth

IResearch measured a 40 percent increase last year to about 1.84 trillion yuan ($295 billion) in online retail sales, including purchases on mobile devices.

Broader retail-sales gains have slowed amid anti-extravagance and anti-corruption campaigns started by Xi Jinping after he took over as head of the ruling Communist Party in November 2012. The data include purchases by the government and companies, distorting the picture of spending by consumers.

“Government purchasing is slowing down as the new leadership pursues its frugality campaign, which has affected retail-sales growth,” said Bob Chao, Beijing-based chief analyst for iResearch. “But in terms of the ordinary consumer, e-commerce is what’s driving internal demand.”

China’s online shoppers reached 302 million in 2013 and more than double that number were using the Internet, according to China Internet Network Information Center figures cited in an Alibaba stock-exchange filing this month.

‘Problematic’ Data

China’s official consumption figures have “probably underestimated” true household spending, according to Zhu Haibin, JPMorgan’s chief China economist in Hong Kong. The government’s numbers on spending and unemployment are “problematic” for data that are critical for understanding the economy, Zhu told reporters May 16.

Releasing online sales data is part of the statistics agency’s “proactive improvement of statistics methods to reflect new changes in China’s economy as quickly as possible,” spokesman Sheng Laiyun said at a quarterly press briefing April 16.

The shift isn’t unique to China. South Korea’s imports through e-commerce sites rose 47 percent to about $1 billion in 2013. In the U.S., e-commerce sales rose 15 percent in the first quarter to $71.2 billion, representing 6.2 percent of total sales, according to the government.

China’s online sales are a smaller fraction of the total. The NBS counted 113.9 billion yuan in Internet purchases from large vendors in the January-April period, just 1.4 percent of the broader figure.

Smaller Vendors

The retail-sales data cover companies with annual sales of 5 million yuan and above. Alibaba data indicate the average retailer on its marketplaces such as Taobao, where one can buy anything from imported U.S. cherries to shoes, had annual sales of less than 200,000 yuan last year.

The statistics bureau signed agreements with Alibaba and competitor Inc. to obtain sales data covering small vendors, and figures will be available after the second quarter, Sheng said in April. The agency didn’t respond to faxed questions from Bloomberg News.

Virtual shops and marketplaces have given consumers access to a wider variety of goods amid a supply of bricks-and-mortar stores that lags other major economies. China’s per-capita retail floor space was 0.6 square meters in 2013, compared with 2.6 in the U.S., 1.3 in the U.K. and 1.3 in Japan, according to Euromonitor International data cited by Alibaba.

Art Auction

Alibaba is going beyond everyday goods. Taobao this month auctioned a Pablo Picasso linocut for 1.2 million yuan and a Salvador Dali sculpture for 357,001 yuan, the company said.

Record sales on Alibaba’s Taobao and Tmall on Singles’ Day, a modern Chinese take on Valentine’s Day, on Nov. 11, illustrate the impact of online spending. The Hangzhou, Zhejiang province-based company, founded by billionaire Jack Ma, sold 35 billion yuan of goods in 24 hours, up from 19.1 billion yuan the previous year.

“Online sales is the new trend for the generation of consumers born in the 1980s and 1990s and the Singles’ Day promotion on the Internet is a good example,” said Hu Yifan, Hong Kong-based chief economist at Haitong International Securities Group Ltd. and ranked by Bloomberg as the most accurate forecaster of China’s retail sales. “If we’re missing this kind of data it’s not giving a very accurate picture of consumption.”

While there are some concerns about how the data are calculated, such as whether online sales by bricks-and-mortar retailers are included, “it’s a good reference and hopefully we will get more data on breakdowns and trends,” Hu said.

— With assistance by Nerys Avery

Before it's here, it's on the Bloomberg Terminal.