China faces a retail reality check
By Olivia Chung
HONG KONG - Chinese Premier Wen Jiabao warned this month that his country's
economic rebound was "unstable", suggesting that the populist premier puts more
trust in the experience of the country's consumers and retailers than in
official statistics. His countrymen are prepared to buy - but not yet at a
price that drives profits, and without profit, economic growth is a myth.
Wen told a conference in the northeast industrial center of Dalian on September
10 that stimulus measures would be continued as the rebound "is unstable,
unbalanced and not yet solid ... we cannot and will not change the direction of
our policies when the conditions aren't appropriate".
Yet a day later, the National Bureau of Statistics released figures that spoke
to surging growth and strength: retail sales surged 15.4% in August compared
with a year earlier, even more than the
12.3% reported gain in factory output for the period. Retail sales rose 15% in
the first six months this year from the same period in 2008, according to the
bureau, with growth 3.7 percentage points stronger than the year-earlier
period.
More in line with Wen's dire warning of instability are the earnings results of
China's retailers - the companies that actually move factory products into the
hands of consumers, often at steep discounts to ensure sales, if not profits,
in the downturn.
Sales at Suning Appliance, the biggest electronics retailer, gained only 5.5%
in the first half, about a third of the official "retail" growth rate. Its
closest competitor, Gome Electrical Appliances Holdings, did much worse, with
revenues crashing almost 18% in the period.
Outlets with a broader range of goods did little better. Department store
operator Maoye International Holdings, based in the one-time export boom areas
of Shenzhen and Guangzhou, reported a revenue gain of only 6.6% in the six
months through June. Parkson Retail Group, the mainland's largest department
store operator, lagged the official "retail" growth figures by about a third,
with first-half sales up 10.3%.
China's retailers announced their reports towards the end of August, about nine
months after Wen's government announced a US$586 billion stimulus package and
after a record $1 trillion in lending in the six months to June as the global
economic crisis led to a slump in exports. That pump-priming is helping to
drive official "retail" sales, but these figures also include much government,
rather than consumer, spending.
Chen's apparent skepticism towards the official data may stem from his tutelage
under former premier and central bank governor Zhu Rongji, who successfully
reined in rising prices and helped reform financial markets in the mid- to
late-1990s, another turbulent period of China's recent growth.
It was Zhu who promoted Wen to take care of agricultural and financial policies
in the run-up to China's membership of the World Trade Organization. Wen was
also secretary of the now-defunct Central Financial Work Commission for four
years to 2002. The commission oversaw the People's Bank of China and state
financial regulatory bodies.
China's State Information Center in August reaffirmed its view that the economy
had bottomed out. It said gross domestic product (GDP) growth of 8% was
attainable this year, citing improving fixed direct investment and retail sales
figures. That came a month after the International Monetary Fund upgraded its
forecast for China's GDP growth this year and the next by 1 percentage point,
to 7.5% and 8.5%.
Such data encourage overseas investors such as billionaire hedge-fund manager
George Soros, who in early July said China could become "one of the motors of
the world economy", attributing its possible success to the government's
massive fiscal and monetary stimulus policies.
The much-trumpeted November stimulus package was heavily weighted towards
investments in infrastructure projects. Spending on urban fixed-asset
investment, that is outlays on big-ticket items such as railways and other
infrastructure, jumped 33% year-on-year in the first seven months this year, to
9.59 trillion yuan (US$1.4 trillion), according to the National Bureau of
Statistics. That was 5.6 percentage points higher than the same period last
year.
The package also included incentives for people to buy household electric
appliances, which the government hoped would gear up domestic consumption and
pick up some of the slack in demand as exports fell away. China's exports
continue to slide, tumbling 23.4% in August from a year earlier, slightly
steeper than a 23% decline in July.
Yet the government stimulus was not enough to prevent Gome, which was running
about 847 stores at the end of June, from closing about 100 stores across the
country in the six to seven months after the stimulus was announced, while
opening 30 new outlets. Sales at the stores it kept open from a year earlier
dropped 8.3% in the three months from March, continuing a decline that was a
steep 36% in the last quarter of 2008.
Gome's first half net profit plunged just short of 50% from a year earlier, to
580 million yuan, figures that the company attributed in part to its internal
management problems. Gome founder and former chairman Huang Guangyu was
arrested last year on suspicion of share manipulation in listed companies.
"Uncertainties in the business following the police investigation of the
company's former chairman ... caused some operational distractions," the
company said in a statement.
After a seven-month suspension of the Hong Kong-listed company's stock, Gome in
late June announced plans to raise US$431 million to finance new stores, revamp
existing outlets and repay debt. "First-half sales slowed due to a lack of
funding," Ashley Cheung, analyst, BOCI Research Ltd, was quoted as saying by
Bloomberg.
Yet rival Suning, untroubled by scandal and well placed to gain from the woes
at Gome, saw first-half same-store sales tumble more than 4%, despite
promotions such as cash coupons and gifts. Gome is offering steep discounts to
sweeten sales, cutting prices for flat-panel TV sets, for example, by up to
6,000 yuan.
Single-digit positive sales growth looks good in hard times anywhere, but these
pale drastically in comparison to earlier growth.
Take Lianhua Supermarkets, which boasts of directly operating 3,872 outlets
across 20 provinces at the end of 2008. The company that year reported
first-half sales growth of 19.8%, and a same-store sales growth for the full
year of 8.3%. In the 2007 period, half-year sales leapt 21.2%, in 2005 31.4%.
This year, same-store sales declined 1.7% in the first half. Total sales gained
a mere 2.2%, less than a third of the previous worst comparable period of 7.5%
in 2007.
Improved efficiency and other measures are helping some retailers get the right
balance between promotions and profits. Suning's first-half income surged
almost 15% from a year earlier; Parkson's by more than 12%. Others are
struggling. Maoye International's net profit tumbled 19%. Scandal-hit Gome's
gains crashed 50%.
Alex Liu, analyst at researcher Euromonitor International, blamed discounts and
promotions for the stores' tumbling profits and said they would continue,
though with prospects of an economic recovery they might not be as deep.
Despite the damage done to profit margins, a Gome executive said promotions
would continue as "we have no choice, as rivals would do the same thing, and
maintaining consumers and sales growth is very important to us".
The government's so-called stimulus package also highlighted auto-purchase
incentives that encouraged consumers, but they are doing little to help
carmakers, whose sales are surging and profits plunging. Car sales soared 25.6%
to more than 4.5 million in the six months to June after China halved the
purchase tax on passenger cars to 5% for models with smaller engines (those
less than 1.6 liters) and handed out subsidies for car buyers in rural areas,
according to the China Association of Automobile Manufacturers.
Among the association's members, SAIC Motor Corp, China's biggest domestic
carmaker, reported a near 24% sales jump to 1.23 million vehicles. The company
then reported a 26% crash in first-half profit to 1.45 billion yuan. That
figure included write-offs after Korean unit Ssangyong Motor entered
receivership on tumbling sales of sports-utility vehicles.
Even more-focused Tianjin FAW Xiali Automobile Co, which makes small cars, saw
net profit plunge 49% as sales jumped 11.3% to 111,361 vehicles. Sister company
FAW Car Co did little better, with profits up only 5.83% to 535.28 million yuan
(US$78.4 million) on a 27.6% gain in sales to 75,315 vehicles. FAW blamed the
government for the difference. "As a medium-to-high-end sedan provider, FAW
could not benefit from government policies, which are mainly for small cars,"
it said.
The distorting impact of government incentives for small cars is evident at the
country's third-largest automaker, Dongfeng Motor Group, which reported a 5.4%
gain in first-half net profit as sales rose 4%. The overall figures mask a 23%
gain in passenger car sales and a 27.5% plunge in the commercial vehicle
segment.
Tang Sai-kit, a Hong Kong-based commentator on the automotive industry,
attributed the slow overall sales growth at Dongfeng, the Chinese partner of
Honda Motor Corp and Nissan Motor Corp, to a reliance on commercial vehicles.
Yet it is such vehicles that are required to hump and carry the numerous
products and tools of the millions of private-sector workers who are most
closely related to the country's recent industrial growth.
Chinese and overseas investors, impressed by the country's economic
"resilience", continue meanwhile to pour money into the China growth story.
Shares in Lianhua are now about 30% higher than their highs last September
immediately before the global stock market crash.
On August 3, shares in Wumart Stores, Beijing's largest supermarket chain,
surged 38% amid expectations that higher consumer spending would boost
earnings, according to Bloomberg. Its report quoted Tim Condon, head of Asia
research in Singapore at ING Groep NV and a former economist at the World Bank,
as saying, "The closer you are to China, the better off you are."
Echoing his thoughts, the Shanghai Composite Index has gained 14% this month,
and the benchmark measure of China's stocks and their economic performance is
now up about 5% in the week since Premier Wu issued his warning of the
instability of his country's recovery.
Olivia Chung is a senior Asia Times Online reporter.
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