Daniel H. Rosen and Bao Beibei write:
In August, China reported year-on-year retail sales growth of 13.4 percent, the highest this year. Monthly retail sales data is a useful proxy for the country’s household consumption, the Achilles’ heel of the economy many analysts believe is in urgent need of improvement if economic rebalancing is to be achieved.
Compared to other economies, China’s consumption as a share of GDP is surreally low: 36 percent in 2012, compared to the world average of 60 percent. Critics argue that such a low consumption ratio will threaten growth sustainability as soon as Beijing stops pumping cheap credit into heavy industrial projects and real estate. Therefore, after a brief upturn in the share of consumption in quarterly GDP numbers in the first quarter of 2013, a return to investment dominance in the second quarter triggered charges that reform must be stalling.
How do we reconcile strong August retail sales figures with the weak consumption story? Pessimists answer that such retail sales figures must be unreliable. But there is a simpler and clearer explanation for these patterns: investment is highly volatile, and makes consumption look larger or smaller depending on where it stands in its manic swings, but the real growth of consumption in hard money terms has been both very strong and very stable over time.
