Business | Economy
Does China have reason to worry over low retail sales?
Where are all the Chinese shoppers? Official numbers suggest domestic consumption is in fine fettle - retail sales grew by 22 per cent in the year to April - but cracks are appearing in discretionary spending.
- Financial Times
- Published: 23:37 June 30, 2008
Where are all the Chinese shoppers? Official numbers suggest domestic consumption is in fine fettle - retail sales grew by 22 per cent in the year to April - but cracks are appearing in discretionary spending.
Car sales have been falling month on month since April, according to CSM Worldwide, an automotive consultancy. Growth in domestic passenger traffic on flights is also decelerating; Air China, the flagship carrier, saw traffic slump nearly 11 per cent in the year to May.
And port volume growth at the key terminals of Shanghai and Shenzhen has fallen to 11 per cent and eight per cent respectively, according to Citigroup. That is half the levels of a year ago.
Some caution is necessary. Car sales in particular are a volatile series and drivers could well be forgiven for deferring purchases at a time when refiners are keeping petrol pumps empty rather than sell the stuff at a loss (as a result of subsidies).
Last month's earthquake and the snowstorms earlier this year are distorting factors - aircraft were diverted to join the rescue effort in Sichuan, for example.
Nonetheless, markers of ailing consumer sentiment point to three factors. First, inflation and currency appreciation are flattering official data - hence the 28 per cent year-on-year rise in May exports versus the more muted growth in numbers of containers passing through the ports.
Second, Beijing's bias towards tighter monetary policy, in words if not in action, is starting to bite. Discretionary spending data are weaker in parts and household bank deposits are rebounding.
Third, there is a bigger structural shift under way. Rural household incomes have been rising since 2000 and last year rose by 10 per cent, according to Macquarie.
Discretionary spending at this level is more likely to mean a fridge rather than a smart new motor. China's shoppers are far from down and out. But there is more fatigue than headline numbers suggest.
Orphan assets
Orphan assets. Inherited estates. Confusing terminology has not helped the resolution of an issue that has hung over the UK insurance sector for a decade.
The image of a bundle of assets sitting abandoned on a nasty insurer's front steps excites the public as well as investors. Equally confusing, the moniker "inherited estates" makes insurance policyholders think that they will one day be handed a great big cheque.
The truth is far more complicated. Both terms are used to describe the capital some funds have generated in excess of their future liabilities.
This surplus capital comes about because with-profit funds hold back a portion of their gains in the good times in order to smooth over the cracks in the bad times.
And, since markets have generally gone up (and the investment returns of some insurers put hedge funds to shame), the value of orphan assets has grown. Between them, Aviva and Prudential have orphan assets in excess of £10 billion.
No wonder policyholders and shareholders have been desperate to lay their hands on the money. But the case for policyholders bagging a windfall is weak.
There is no reason, aside from the luck of the draw, why a fund's current members should have rights ahead of past and future policy holders, especially as they have not even directly contributed to the inherited estate.
Shareholders have more of a claim: they own the company, after all, and, in most cases, provided the original working capital to the funds.
Last week Prudential finally decided what to do with its inherited estate. Like a rich grandmother spurning her son and daughter in favour of the local cattery, Prudential is keeping the money inside its £79 billion with-profits fund.
Its reasoning that the capital boosts the fund's investment performance is questionable. But having a 10 per cent of capital cushion is no bad thing in current markets. With-profits funds do rob their members in the good times. Policyholders may yet be thankful for it.
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