BREAKINGVIEWS-Shoes and drinks are canaries of Chinese slowdown

Thu Jul 12, 2012 3:00am BST

Quotes

   

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Wei Gu

HONG KONG, July 12 (Reuters Breakingviews) - Chinese consumers were supposed to kick in when the country’s export machine slowed down. But results from some mainland branded goods groups - from drinks-maker Master Kong to sneaker-producer DongXiang (3818.HK) - suggest that’s not happening. It’s hard to see how China’s economy will rebalance towards consumer-led demand if even staples moulder on the shelves.

It was one thing when high-end luxury brands took a hit. That’s been happening for some time already. Tiffany & Co (TIF.N), for instance, cited softening growth from China and other areas, when it cut its growth expectations for 2012 to as much as 8 percent from 10 percent previously. Burberry (BRBY.L) China said on July 11 comparative sales growth dropped to "mid-teens" percent in the first half from about 20 percent in the second half of 2011.

But it’s quite another problem when domestic retailers of more mundane goods like sneakers and cell-phones issue similar warnings. China’s handset sales declined 6 percent year-on-year in the first quarter, far worse than the 2 percent drop globally, according to Gartner. Nokia’s (NOK1V.HE) China mobile handset sales plunged 62 percent during that period. Consumers are even having second thoughts about a more basic necessity: footwear. China DongXiang Group said revenue from selling sneakers for the first six months declined by about 29 percent from a year earlier.

Even basic consumer staples are struggling. Tingyi Holdings (0322.HK), maker of Master Kong instant noodles and beverages, reported a 5 percent year-on-year decline in first-quarter turnover. Master Kong said sales of its sour date juice and oolong tea drinks fell 22 percent during the quarter. Sluggish pork demand may hit sales growth of Yurun Food Group (1068.HK), too, according to analysts, who have ratcheted down their estimates for the company.

Some of this anecdotal evidence may be self-inflicted, or brand specific. Some consumer goods groups implemented aggressive price increases last year. Shoemakers, for instance, are grappling with too much supply precisely because they increased production too rapidly. And incentives given to car and appliances buyers in 2009 may have front-loaded demand.

But the evidence suggests that Chinese consumption is still highly leveraged to the health of the country’s export sector. As one slows, so does the other, and with it the notion of a great rebalancing of the Chinese economy looks increasingly challenging to realize.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:

www.breakingviews.com/TOPNewsSubscription

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

CONTEXT NEWS

- China DongXiang Group, a maker of athletic shoes, said on July 6 that revenue for the first six months is expected to decline by about 29 percent from the same period in 2011, and margins are expected to be cut almost by half to 10 percent to 12 percent. The company blamed intense competition and excessive inventory.

- Tingyi Holdings Corp 0322.HK, which sells instant noodles and beverages under the Master Kong brand, reported a 5 percent decline in its first-quarter turnover. Beverage sales fell 22 percent during the quarter.

- Retail sales in China during the first five months of 2012 rose 14.5 percent year on year, down from 17.1 percent in the same period a year earlier, according to China’s Commerce Department.

- Reuters: The Big Picture: GROWTH IMPERATIVE [ID:nHEJ7Vd83y]

- Reuters: China slowdown hits Burberry sales [ID:nL6E8I99IW]

- For previous columns by the author, Reuters customers can click on [GU/]

(Editing by Rob Cox and Katrina Hamlin)

((wei.gu@thomsonreuters.com)) Keywords: BREAKINGVIEWS CHINA CONSUMPTION

(C) Reuters 2012. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing, or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.