Concerns about austerity? Not in China. Strong retail sales growth tells us that Chinese consumers are still optimistic about the prospects for their economy and income growth. This is fueling currently buoyant purchasing behavior.

While retail sales growth has been the highlight of China's economic growth in 2010, growth in the consumer goods segment is showing particularly strong momentum. This trend is expected to continue going into 2011.

Robust domestic demand is also taking over as the main driver of economic growth. China has put together a multi-dimensional reform plan entailing a shift in focus towards domestic demand. Income distribution and currency reform will be features of the country's upcoming 12th Five-Year-Plan.

Several factors bode well for domestic consumption including expectations regarding inflation and negative interest rates.

The headline inflation rate will likely remain flat at 3.6 percent year-on-year in October while real interest rates remain negative despite the 25 basis point interest rate hike to 5.56 percent on October 19. This will continue to stimulate consumption and support retail sales growth.

The real interest rate has fallen into negative territory since early 2010. Retail sales of consumer goods have grown above 20 percent year-on-year since then.

Meanwhile, double-digit wage growth also continues to support retail sales. The minimum wage in some provinces has been raised and urban household per capita income is rising steadily throughout the country. Purchasing power is released through the steady rise in disposable income.

While retail sales figures of consumer goods have been strong throughout 2010, retail sales figures for jewelry and furniture showed surprising strength.

Precious metals, particularly gold, shine amid buoyant consumption. These days, gold is gold. Against other consumer goods, retail sales of gold, silver and jewelry, as a category, soared 54.9 percent over a year ago. While seasonality has contributed some 23 percent of the gain, the surge in gold prices, on its own, contributed 30 percent. Such strong momentum is expected to extend to the fourth quarter of this year as gold enters its best performing quarter. Historically, gold price performance has been strongest in the fourth quarter. The fourth quarter of this year will not be an exception.

While many stocks within the consumer sector experienced their own "great-leap-forwards", the 2011 price/earning ratio (PER) forecast tells us that investment opportunities are still there to be had.

Metals and mining companies, especially those with high gold exposure, are set to benefit from the seasonal pattern of gold.

The author is an economist and associate director at the economic research division of CCB International Securities Ltd. The opinions expressed here are entirely his.

(HK Edition 11/02/2010 page2)