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WRAPUP 1-China retail sales, foreign investment rise

By Scott Hillis

BEIJING, March 15 (Reuters) - China's retail sales, which Beijing hopes will play a larger role in driving economic growth, were 10.5 percent higher in the first two months of 2004 than a year earlier, powered by buying of cars and mobile phones.

Also, foreign direct investment (FDI) in China in February rose a modest five percent from a year earlier, to $4.2 billion, as overseas businesses kept up their march into the booming economy.

The sales figures released on Monday showed a slightly slower growth rate than in December data, supporting a view from some analysts the economy may avoid overheating and resurgent inflation.

Still, many say Chinese should spend more if economic growth is to rely less on state spending and investment.

"The reason why consumer spending is still not strong enough, I think, is because China overall still suffers from an over-investment and under-consumption problem," said Citigroup economist Yiping Huang. "Improvement can only be gradual, though I think it's happening now."

At the opening of the annual session of parliament this month, Chinese Premier Wen Jiabao called for expanding consumer credit and boosting consumer confidence.

"Balancing investment and consumption is an important aspect of this year's work for macro-control. Consumption occupies too small a proportion of China's GDP," Wen said.

UNCERTAINTY

But Beijing may have little power to convince people to buy in the face of rising unemployment and wrenching economic change.

"Do you really want to go spend like crazy if, tomorrow, you don't know how much your kid's education is going to cost or what your pension will be?" said HSBC economist Qu Hongbin.

The State Statistical Bureau combined data for January and February to smooth out distortions from the "Golden Week" Lunar New Year holiday, which came in January this year but February last year.

Sales were 878.1 billion yuan ($106 billion) in the two months. The 10.5 percent increase compares with a rise of 10.9 percent in the year through December. They were up 9.1 percent for the whole of last year from 2002.

China's economy rose 9.1 percent in 2003, but Wen and other policy makers have charted slower growth this year to focus on problems like a growing wealth gap and rising inflation.

Fears have arisen in recent months that inflation could make a comeback in the world's sixth-biggest economy.

In January, consumer prices were up 3.2 percent from a year earlier, the highest annual inflation rate in nearly seven years. Prices in February were up 2.1 percent from a year ago.

But the rise has mostly come from soaring food prices, with prices of manufactured goods falling almost across the board amid rapid industrial expansion that has some economists worried about over-investment.

FDI RISES

Car sales were 60 percent higher in the two months than a year earlier, while sales of telecoms equipment, including mobile phones, one of China's hottest consumer items, rose 61 percent.

Cars, petrol and telecoms amounted to just 6.5 percent of total sales, but accounted for nearly a quarter of sales growth.

China's strong economy and cheap labour have also made it a magnet for foreign investors, who pumped in $8.3 billion in the first two months, up more than 10 percent from the same period last year.

Contracted investment, watched by some as an indicator of future trends, was $19.1 billion in January-February, up nearly 35 percent from a year earlier.

China drew $53.5 billion in FDI in 2003, up just 1.4 percent from 2002 due in part to the SARS outbreak that led to some contract signings being delayed or cancelled.

Foreign firms have flocked to China to set up factories to export goods, and a growing number have been targeting the domestic market's increasingly wealthy consumers. (US$1=8.28 Yuan) (Additional reporting by Lee Chyen Yee in Shanghai and Juliana Liu in Beijing)