A China twist: why are malls closing if consumption is rising?

http://www.reuters.com/article/2015/10/26/us-china-retail-idUSKCN0SJ0XD20151026

Markets | Mon Oct 26, 2015 1:23am EDT
A China twist: why are malls closing if consumption is rising?

SHANGHAI/HONG KONG | BY PETE SWEENEY AND JESSICA MACY YU

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A woman rides an escalator at a shopping mall in Beijing, China, September 23, 2015.
REUTERS/KIM KYUNG-HOON
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The Di Mei shopping center in downtown Shanghai is a surprisingly depressing place to shop.

The underground mall is located in one of the most shopping-mad cities in China, and yet it is run down and starved of customers.

“Sometimes I cannot sell even one dress in a day,” said dress shop owner Ms Xu, who rents a space in Di Mei.

Rising vacancy rates and plummeting rents are increasingly common in Chinese malls and department stores, despite official data showing a sharp rebound in retail sales that helped the world's second-largest economy beat expectations in the third quarter.

The answer to that apparent contradiction lies in the rising competition from online shopping and government purchases possibly boosting retail statistics. Add poorly managed properties into the equation and the empty malls aren't much of a surprise.

More importantly, the struggles of Chinese brick-and-mortar retailers amplify a policy conundrum; these malls, built to reap gains from rising consumption, are instead adding to China’s corporate debt problem, currently at 160 percent of GDP – twice as high as the United States.

Less foot traffic means cash flow of mall owners and developers are getting squeezed – a potential hazard for an economy growing at its slowest pace in decades.

Di Mei's owners are trying to refurbish, but it's unclear whether it will pay off, and others are just closing down. The Sunlight Store in Beijing, for example, is located in another prime pedestrian hub, but it closed its blinds this month, with manager Ni Guifang telling Reuters they are seeking greener pastures online.

“The sales were just OK, but the overall sales were on the downward trend,” Ni said.