China Retail Sales Rise 22%, Help to Counter Slowdown (Update3)

By Nipa Piboontanasawat

Nov. 12 (Bloomberg) -- China's retail sales rose 22 percent, close to the fastest pace in nine years, signaling that domestic demand may help the fourth-biggest economy withstand a looming global recession.

Sales climbed to 1.008 trillion yuan ($148 billion) in October, the statistics bureau said today, after gaining 23.2 percent in September from a year earlier. The increase matched the median estimate of 16 economists surveyed by Bloomberg News.

China's government pledged $586 billion of spending on low-cost housing and infrastructure on Nov. 9, seeking to boost confidence as the economy loses steam. Waning export demand and slumping real-estate sales threaten to undermine growth that has already slowed to the weakest pace in more than five years.

``The big package sent a signal for people to keep shopping,'' said Arthur Kroeber, head of research at Dragonomics Advisory Services Ltd. in Beijing. ``Rising domestic consumption will help to cushion economic growth in the coming months.''

The benchmark CSI 300 Index of shares closed 1.2 percent higher. The yuan rose to 6.8285 against the dollar as of 3:58 p.m. in Shanghai from 6.8305 before the announcement.

Automobile sales climbed 19.6 percent in October from a year earlier, boosting the Chinese ventures of Volkswagen AG and General Motors Corp. Jewelry rose 30.6 percent.

Andrew Wu, the group director in China of luxury goods maker LVMH Moet Hennessy Louis Vuitton SA, said Nov. 11 that he was ``cautiously optimistic'' about the economy after the stimulus announcement. ``China is in a strong position.''

Signs of Weakness

Signs of weakness included slower sales growth across sporting goods, cosmetics, jewelry, furniture, garments and food. Spending on telecommunications equipment and construction and decorating materials fell.

Household electronics rose only 0.8 percent after a 30.3 percent gain in September.

``Stiff headwinds are ahead and we expect a slowdown in retail sales growth in coming months,'' said Merrill Lynch & Co.'s Hong Kong-based economists Ting Lu and T.J. Bond.

Ha Jiming, chief economist at China International Capital Corp. in Beijing, said the retail figures were inconsistent with evidence that growth in household spending had already weakened.

Rural sales helped to underpin today's figure, accelerating to growth of 21.9 percent from 21.8 percent in September. For urban spending, the gain was 22.1 percent, down from 23.9 percent.

Investment, Construction

China's economy expanded 9 percent in the third quarter from a year earlier, the slowest pace since 2003.

Falling demand for real estate is undermining investment and construction. In Shenzhen, a manufacturing and exporting hub on the nation's east coast, house prices declined 12.6 percent last month from a year earlier.

Inflation has halved from a 12-year high of 8.7 percent in February. Exports grew by the least in four months in October and manufacturing contracted by a record. The benchmark CSI 300 Index of shares has dropped 67 percent this year.

Wage gains may sustain spending. Urban disposable incomes climbed 7.5 percent in the first nine months of 2008 from a year earlier, after adjusting for inflation. Rural incomes climbed 11 percent.

PepsiCo Inc., the world's largest snack maker, said this month that it plans to invest $1 billion in China in the next four years to increase production and sales.

Railways, Roads

The stimulus package, running through 2010, includes housing, rural infrastructure, railways, roads, airports, tax cuts for business investment and subsidies for farmers.

The central bank has already lowered interest rates three times in two months and reduced restrictions on lending to stimulate growth. The key one-year lending rate is 6.66 percent.

For the first 10 months, retail sales climbed 22 percent from a year earlier to 8.8 trillion yuan, the statistics bureau said. That was up from 16.8 percent for all of 2007.

In the first half, consumption contributed 50.2 percent of the nation's economic growth, investment 44.9 percent and net exports 4.9 percent. Last year, net exports accounted for 21.5 percent.

The biggest gain in China's retail sales since Bloomberg data began in 1999 was a jump of 23.3 percent in July this year.