Lunar New Year sales in line with expectations

According to some international observers, the Lunar New Year sales indicate a plunge in Chinese consumption. Economic realities tell a different story.

Chinese Lunar New Year can be seen as a barometer for Chinese private consumption, due to gift-giving and family reunions. Consequently, both holiday data and its international coverage are of great interest.

Here’s the bottom line: During the Lunar New Year holiday in early February, Chinese retail and catering businesses generated a record over 1 trillion yuan ($148 billion). Sales by retail businesses rose 8.5% from a year earlier.

Here’s how the data has been reported internationally: “the slowest increase since at least 2011” (Bloomberg), “Cooler pace of [sales] growth added to evidence the economy is slowing” (Reuters), “China’s lunar new-year spending growth slowest since 2005” (Financial Times).

A dramatic plunge in Lunar New Year sales would indicate that China’s ongoing rebalancing is failing - and yet, that’s not the case.

Shifts in retail sales

One of the key reasons for retail pessimism in international media is that holiday spending appears to have hit profits of foreign high-end companies, such as Apple, Swatch Group and luxury car makers.

But what’s so surprising about that? Good times drive consumer nondurable and durable goods, while uncertainty undercuts the sales of relatively more expensive consumer durables (e.g., cars, appliances, furniture), and over time even cheaper nondurables (e.g., clothing, food, and clothing).

Other observers have lamented that auto purchases are in contraction for the first time in almost three decades. Inevitably, the Trump administration's unilateral tariffs on U.S. car imports are weighing on Chinese consumers. Last year GM’s car sales were down 10%, Ford fell 37%, Tesla had to cut prices for Model 3 in China and Jaguar Land Rover temporarily closed a factory.

U.S. tariff wars have contributed to the gains of China’s domestically- manufactured models, which grew some 3.9% last year and made up more than nine of ten cars sold in January. And in the absence of tariffs, Japanese Toyota is expanding in China. Sales of the Japanese carmaker’s vehicles surged 14%, while Volkswagen held its ground.

In the 1970s and ‘80s, Japanese carmakers beat U.S. giants because the former offered smaller, more fuel-efficient and affordable models. Today, Japanese and European producers push attractive hybrid vehicles. Trump's America does not take climate change seriously; China, Japan and Europe do.

Until spring 2018, global prospects still looked positive and expansion in the U.S. and Europe had momentum. It was the White House’s new protectionism that undermined the promising future, as evidenced by the Baltic Dry Index. It rose to almost 1,800 until July 2018. After the Trump White House began to implement its tariffs against China, the Index has plunged to less than 600 – lower than amidst the 2008 global crisis.

Consumption on track

Like their counterparts in the West, Chinese consumers are now more cost-conscious as they should be, thanks to tariff wars. But it does not follow that Chinese rebalancing toward consumption and innovation is falling.

Despite international negative hoopla, Chinese GDP growth in 2018 was broadly in line with expectations since the beginning of the year, as even World Bank has acknowledged.

Much of international media mistakes secular, long-term trends with cyclical, short-term fluctuations. So the deceleration of Chinese growth is portrayed as secular slowdown. In reality, deceleration reflects the eclipse of the intensive phase of industrialization, which heralds a shift to post-industrial society, and deleveraging, which will make that transition more resilient.

In the early 19th century, England experienced its "growth miracle." In the late 19th century, US growth accelerated. As these countries began to move toward post-industrial services, growth acceleration gave way to deceleration. That’s the norm with industrializing economies. Similarly, a decade ago, China still enjoyed double-digit growth. But today growth is slowing relative to its past performance.

Chinese consumption is a different story, however. In 2018, it contributed 76% to GDP growth. Retail sales, the key component of consumption, rose 9% from one year earlier, down from 10.2% in 2017. Yet, both figures were 2-3% higher relative to overall GDP growth.

In other words, China’s structural rebalancing toward consumption and innovation remains on track. That’s why most analysts see consumption as the largest driver of the Chinese economy in the 2020s.

Recently, Chinese economy has accounted for some 30-40% of global growth, thanks to Chinese consumption. If and when U.S. tariff wars penalize that consumption more, global growth prospects will be undermined accordingly.

That’s the not-so-secret secret of the ongoing tariff wars. Due to its importance to global economy, China fuels growth prospects of many other economies. Consequently, unilateral tariff against China will penalize global economic prospects.