>CONSUMPTION OUTLOOK | CHINA (NOMURA)

Surprises from consumers

We are impressed by the resilience of the Chinese consumer, evidenced by 9% y-y growth in household spending so far this year. This gives us comfort with our 8% 2009F GDP and V-shaped recovery forecasts, which have been in place since the beginning of the year. While this is a slowdown from last year, the absolute growth is extraordinary amid the global slowdown and reflects, in our view, the secular story of consumption growth in China. We also think consumption growth will start to pick up as fiscal stimulus measures kick in, driving job creation, income transfer, improvement in the social safety net (which should reduce precautionary savings), better infrastructure (to ease physical bottlenecks for rural consumption) and direct subsidies or favourable tax policies. We even look for possible upside risk to our forecasts. Hence, while we maintain our 8% consumption growth forecast for 2009F, our China research team has examined the sensitivity of key sectors of the economy to a possible consumption surprise above this projection. Apart from the obvious consumer staples and retailers, we find that Internet, airlines, autos, telecoms and property are very sensitive on the upside. We round off this report with currently actionable ideas from these sectors.

■ Consumers have not cut spending
Chinese consumers continued to increase spending in 1Q09, despite the weakest GDP growth in more than a decade.

■ Consumption growth should remain strong this year
Consumption growth may surprise on the upside later this year, as both employment and income growth are likely to rebound.

■ Stimulus policies help boost consumption
Contrary to claims that stimulus packages do little to boost consumption, we believe that most of China’s policies are pro-consumption — in the short term as well as the long term.

■ Consumption is already a key growth engine
Consumption growth in China has not been slow at all, in our view. Investment growth has dwarfed consumption growth — common for developing economies. The “unbalanced” growth model may not necessarily be unsustainable.

■ Areas with high growth potential
Still-low income levels in tandem with the high income growth of Chinese consumers provide significant potential for long-term consumption growth in China. We see significant potential for
consumption in rural areas, central and western regions, service sectors, and low-income urban households.

■ What if consumption surprises on the upside?
While we maintain our 8% consumption growth forecast for the year, our China research team has examined the sensitivity of key sectors of the economy to a consumption surprise above this projection. Apart from the obvious consumer staples and retailers, we find that Internet, airlines, autos, telecoms and property are very sensitive on the upside.


To see full report: CONSUMPTION OUTLOOK