Retail sales, FDI point to solid China momentum

Beijing, Nov 14 | Updated: Nov 15 2005, 05:30am hrs
China on Monday reported sturdy retail sales and foreign direct investment in October, reinforcing the message from other data that the economy shows little sign of losing momentum. With growth set to top 9% this quarter for the 10th quarter in a row, economists say policy makers are likely to feel comfortable about letting the yuan rise further now they can see the economy has absorbed Julys landmark 2.1% revaluation.

By the end of 2005, money market interest rates may rise by around 25 basis points, and the renminbi will appreciate more rapidly against the dollar, said Ha Jiming, chief economist with CICC, Chinas largest investment bank.

The yuan, also known as the renminbi, was already on the rise on Monday. It closed at a post-revaluation high of 8.0831 per dollar as traders bet that US President George W Bush would pile on pressure for a stronger yuan when he visits Beijing at the weekend.

The currency, which was unshackled from the dollar in July and allowed to float within tightly managed ranges, has now inched up a further 0.33% against the dollar. Last year, the United States trade deficit with China grew to $162 billion and is poised to pass $200 billion for 2005, accounting for about a quarter of the US total. China, which last week reported a monthly record trade surplus of $12 billion for October, is alert to the political sensitivities of trade and is trying to redirect the economy away from export-orientated investment towards consumption.

Retail sales in October rose 12.8% from a year earlier, prolonging a trend of chunky gains entrenched since early 2004.

Retail sales will extend the solid trend next year as the government gradually unveils policies encouraging consumption, such as an increased threshold on personal income tax and a probable increase in salaries for civil servants, said Zhu Jianfang, an economist with China Securities in Beijing.

Rising incomes are underpinning consumption. Urban workers had 9.8 percent more disposable income in the first nine months than a year earlier; rural incomes rose 11.5%.

Government price curbs mean consumers have borne only a small part of the sharp rise in crude oil prices this year, while a recent drop in food prices will leave people with a bit more cash in their pockets, said Ben Simpfendorfer with Royal Bank of Scotland in Hong Kong. We see strong consumer demand through mid-2006, he said. Theres no real risk to demand over the next nine months or so.

Still, Chinas flimsy welfare net, fear of job losses due to shakeouts at state-owned firms and low overall income levels mean households save a quarter of their disposable incomes.

-Reuters