Judging from mall traffic, sinking rent, and rising vacancies, the effort by China to hand off growth from fixed investment to consumer consumption is not going well.

Reuters asks Why are Chinese Malls Closing if Consumption is Rising? 

 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.

Major listed mall operators are also feeling the pain. Dalian Wanda, a big property developer, said in January it would close or restructure 30 of its retail venues and in August said more adjustments were underway.

Malaysia-based Parkson (3368.HK), which operates more than 70 department stores in China, closed several of its stores in northern China last year following a 58 percent drop in China net profit in 2013.  

“As growth in retail sales slows because of the country’s lower GDP growth, and in cities where mall space is abundant, vacancy rates have risen substantially,” said Moody’s analyst Marie Lam in a research note.

In its latest efforts to reenergize the economy, China’s central bank on Friday cut interest rates for the sixth time in less than a year. 

Tim Condon, an economist at ING in Singapore warned that investors should not read China’s official retail figures as exclusively reflective of rising household consumption, noting that the data also capture some government purchases.

Shopping Overcapacity

China is currently the site of more than half the world’s shopping mall construction, according to CBRE, a real estate firm, even though it appears that many of these malls will not produce good returns for their investors.

A joint report by the China Chain Store Association and Deloitte showed that by the end of this year, the total number of China’s new malls is projected to reach 4,000, a jump of over 40 percent from 2011. 

“If you build it and they’re not coming, that’s a non-performing loan,” said Condon of ING.

“That’s the banks’ problem.”