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.