BEIJING - Uncertainty is clouding China's retail sector for the rest of the year, even as takings at the till beat economists' expectations last month.

Analysts told The Straits Times that the global chip shortage and slowing disposable income growth are likely to weigh on economic growth in the last quarter.

The Covid-19 pandemic is another factor, even as the authorities in China have become more adept at handling the more contagious Delta variant and keeping outbreaks under control, they added.

Tsinghua University economist Yuan Gangming said that the government can take measures to prevent outbreaks from worsening, but it is impossible to tell where or when outbreaks will occur.

"Outbreaks of the Covid-19 Delta variant had already badly hit retail sales in July and August," he added, referring to the fall-out from China's most extensive contagions since the virus was first reported in Wuhan, the provincial capital of Hubei province, in 2019.

Retail sales grew 4.4 per cent last month from a year ago, according to figures out on Monday (Oct 19) - beating analysts' projection of 3.5 per cent.

The figure is higher than the disappointing 2.5 per cent year-on-year growth recorded in August, when analysts polled by Bloomberg expected a growth of 7 per cent.

Retail sales in July also fell below analysts' expectations of 10.9 per cent, growing by 8.5 per cent from a year ago.

Retail sales is a key barometer in measuring the economy's health and plays an important role in China's national dual circulation strategy, which places greater focus on the domestic economy to lessen the reliance on exports.

"The dual circulation strategy depends increasingly on expanding retail sales to boost domestic spending," said Nanyang Technological University professor of economics Tan Kong Yam. "With rivalry between United States and China having no end in sight, domestic retail sales need to become an increasingly important locomotive for the economy."

The sector's unexpected growth spurt last month was a rare bright spot amid concerns over stagnating growth in the world's second-largest economy.

Analysts have pointed to China's better control over Covid-19 outbreaks towards the end of the third quarter as a main factor for the uptick in sales last month.

"People in China were very worried about the Delta variant outbreaks when Nanjing and Fujian registered cases," said Dr Yuan. "Shops and streets were empty. Everyone stayed home."

South-eastern Fujian province recorded 335 cases last month. This followed an earlier spate of more than 200 infections nationwide after the virus was first detected at an airport in Nanjing, eastern Jiangsu province, on July 20.

Removal of Covid-19 restrictions early last month in a number of affected provinces greatly helped to release pent-up demand, Prof Tan said. "Restrictions may be tightened again if new cases or clusters emerge, which cannot be ruled out in the coming cold winter months," he added.

OCBC Bank's head of Greater China research Tommy Xie said reasons for the stronger retail growth last month include the recovery of catering services, stronger online sales and increasing demand for mobile phones, "probably due to the new launch of the iPhone 13".

For the rest of the year, consumption will play a bigger role in contributing to economic growth, according to analysts.

Mr Xie said: "Investment and production are facing challenges amid debt crisis in the property sector and power shortages."

But the retail sector's outlook hangs in the balance, with car sales remaining weak due to a prolonged chip shortage, analysts added.

China's car sales declined 13 per cent between July and last month from a year ago, according to the China Passenger Car Association on Oct 12.

Growth for disposable income per capita also slowed down.

On a two-year average, adjusting for the pandemic, the disposable income growth is still lower than pre-pandemic growth pace, and this may cap the Chinese willingness to spend, Mr Xie said.

A central bank survey of households earlier showed that propensity to consume fell to 24.1 per cent between July and last month, down from 25.1 per cent between April and June.

Currently, China's vast wealth gap leads to "weak domestic consumption as income and wealth are too skewed", Prof Tan said.

China's economy grew by 4.9 per cent between July and last month - largely in line with economists' expectations - with industrial activity dragging down overall growth. It was the slowest pace of growth since the start of the year.

Late last month, as many as 20 provinces were reportedly hit by a surge in the price of coal and a shortage of electricity, with factories temporarily shuttered or working on short hours.

Beijing has since emphasised that it will boost coal supply and ensure the availability of electricity.