Retail discounting spreads to smaller China cities

Now even retailers in tinier, less competitive tier-4 cities are heavily discounting their goods as consumer demand remains weak.

CIMB said that Chinese retail sector faces a breadth of near-term challenges, including a softening economy and a high base of comparison.

But the brokerage firm said it is "guardedly optimistic" for a sectoral growth rebound in the 2H given fresh government stimulus and a lower comparison base.

Here's more from CIMB:

We are guardedly optimistic that growth will improve in 2H given government stimulus and a lower base.

We visited Wuhan and a couple of tier 4 cities, Ezhou and Huanggang City, about 1.5 hours’ drive east of Wuhan, to get a feel of the market both in a typical inland tier 2 city, and in lower-tier cities with lower penetration of national retailers.

We find: (i) slow May sales precipitating earlier and heavier discounting than usual, (ii) 4th tier cities being only marginally more insulated than a tier 2 city as far as discounting is concerned, (iii) retailers not looking for significant business upturn until fall/winter as price competition will likely stay intense in summer and near-term consumer sentiment remains weak.

Recent reduction in inflationary pressure (e.g. May CPI deceleration), initiatives by the central government to stimulate economic growth, and lower-base comparisons should boost retail performance later in the year.