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Sep 12, 2007
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Chinese retail sales surge, fuelled by inflation

By
Reuters
Published
Sep 12, 2007

By Jason Subler and Zhou Xin

BEIJING, Sept 12 (Reuters) - Chinese retail sales surged in August at their fastest pace in more than three years, beating forecasts, but analysts said the jump reflected strong inflation more than a quickening of the underlying growth rate.

Retail sales, which are tracked in nominal terms, grew 17.1 percent from a year earlier, compared with 16.4 percent in July. The increase roughly mirrored the rise in annual consumer price inflation in August to 6.5 percent from 5.6 percent in July.

"Retail sales growth is obviously strong. The problem is that the figures are being pushed up by the rising inflation as well. So actually, on a real basis, I don't think there's much of an acceleration," said Paul Cavey, an economist with Macquarie Securities in Hong Kong.

August's increase, the biggest since May 2004, beat economists' expectations of a 16.5 percent rise. Consumer price inflation released on Tuesday was also higher than expected.

Beijing would be pleased if the country's consumers bought more, as it is trying to tilt the economy away from what economists call an unsustainable reliance on exports.

Not only does China's huge trade surplus -- $25 billion in August -- contribute to tensions with major trading partners, it also exposes the economy more to any downturn in the United States or elsewhere.

Cavey said a focus of Beijing's efforts to spur spending would be in the countryside, but a recent deadly epidemic among pigs was likely to blunt growth in spending there this year.

"We will expect retail sales growth to continue to be strong next year as the countryside gets over all this," he said.

SPLASHING OUT ON LUXURY

Two indicators of inflation released on Wednesday further supported the picture of rapidly rising prices for goods and assets, which are a cause of concern for policy makers.

The corporate goods price index, a measure of what businesses pay for a range of inputs, rose 6.5 percent in August from a year earlier, accelerating from 6.1 percent in July.

And property prices in 70 major cities grew an annual 8.2 percent, up from 7.5 percent in July.

In part to fend off inflation, the central bank has already raised interest rates four times and increased banks' required reserves seven times this year.

Economists said money supply figures issued by the central bank on Wednesday, which showed the broad M2 measure growing at a rapid 18.1 percent in August from a year earlier, underscored the need for vigilance.

"This has, of course, increased the possibility of further tightening measures, including reserve requirement increases and interest rate hikes," Qiu Gaoqing, an economist with Bank of Communications in Shanghai, said of the money supply figures, which also showed a rapid increase in lending to households.

In the detail, the retail sales data suggested a significant impact from the recent spike in food price inflation.

Sales of grain and edible oils, and of meat, eggs and poultry, two categories where price rises have been most striking, rose 44 percent and 45.2 percent respectively.

Qian Wang, an economist with JPMorgan Chase in Hong Kong, said an analysis of the data showed that, in terms of volume, growth in sales of such foodstuffs probably slowed significantly in August.

But continued robust spending on certain durable goods and discretionary purchases such as jewellery, cosmetics and household electronics reflected a strong upward trend in domestic consumption, Wang said in a note to clients.

"Meanwhile, the recent stock market rally, which has improved household balance sheets notably, has likely provided an additional boost to consumer sentiment," she said. (Additional reporting by Langi Chiang)

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