China’s having some serious growing pains — making what was fashion’s golden opportunity into something of a problem child.
The massive economy logged its weakest growth in 24 years in 2014, slowing to a rate of 7.4 percent from 7.7 percent a year earlier. That deceleration comes at a time when China is trying to push through a slate of pro-business reforms, regulate its stock market more tightly and move away from the business of exporting in favor of domestic consumption.
And each step along the way, the country’s evolution has rippled around the world, causing agita for somebody. (Including its own investors: A move by regulatory agencies to crack down on the practice of buying stocks with borrowed money sent shares on the Shanghai Stock Exchange down nearly 8 percent Monday).
Premier Li Keqiang was in the spotlight this week, reassuring nervous world leaders at the Davos World Economic Forum that China “is not heading” for a hard landing. Structural reforms will be carried forward, “no matter how difficult,” Li said. “We will continue to move along the path of reform and restructuring with great determination.”
Li said the reforms would expand domestic demand and would put in place market access initiatives. The top official said the government also rejected protectionism.
The premier outlined the platform, which included tax reforms, especially for small and medium enterprises, strengthening enforcement of property rights and weeding out rent-seeking and corruption.
They will also treat “Chinese and foreign companies as equals,” he noted.
In one way or the other, China’s been the focus in fashion for more than a decade — first as a production center as the global quota system that regulated apparel production was dismantled and then as the most promising of luxury markets.
But in both cases, the bloom has come off the rose. Production prices have risen and competitors such as Vietnam have grabbed share. And the consumer’s market changed, as well. Many Chinese are no longer interested in flaunting their wealth, especially since the government’s moved to crack down on bribes to officials in the form of luxury goods.
“The consumer is growing up,” said Christine Chen, senior investment analyst for the global consumer area at Ashfield Capital Partners. “They’re becoming choosier.”
Chen said the anticorruption continues to intensify and hurt luxury goods, but noted that consumers might have moved toward lesser-known brands even without the crackdown.
“The consumer there is just becoming a little more sophisticated,” she said. “They started out needing to have the brand that everyone else had because that showed you arrived.”
That is no longer the case.
“It will be interesting to watch emerging Chinese designers and see how they do domestically,” she said.
The country’s policy makers are looking to see the same as it seeks to build consumption at home.
Li said the country’s slate of reforms seek to boost “mass entrepreneurship and innovation” and to spearhead growth for the nation’s 900 million-strong workforce, which includes 70 million enterprises.
He emphasized the economy had entered a “new normal” and indicated the goal now was to achieve “medium to high-speed growth.”
The premier said that the economy, the world’s second largest, increased output by $800 billion in 2014, or the same amount as when the economy grew at 10 percent five years ago.
Business and political leaders said Li was making a move in the right direction.
“Looking into the next 12-month perspective, I think we already clearly see China addressing and publicly committing that certain realignments in their economic development need to be and will be addressed in the coming months,” said John Danilovich, secretary-general of the International Chamber of Commerce.
“The meager slowdown in the Chinese economy,” the ICC chief said, “is also a good thing, both domestically for China, for countries in the region, and for the overall global community.”
In a similar vein, former Australian prime minister Kevin Rudd said, “the premier is saying in Davos ‘don’t get spooked’ by the 7.4 percent growth. This is a planned slowing, and necessary to usher in the next wave of economic reforms.”
Rudd, a fluent Chinese speaker, said the new drivers of the economy would be “domestic private consumption and innovation.”
George Yeo, a former trade minister of Singapore, said “there’s a slowdown in China and we all feel it,” but remarked “it’s gentle, deliberate.”
Yeo, who is chairman of the Hong Kong-based Kerry Logistics Network, said China’s slowdown is also healthy, as it will help remove many imbalances, including easy money, excess production capacity in some sectors and corruption.
Hari S. Bhartia, cochairman of Jubilant Bhartia group, India, said, “I think the Chinese will adjust very fast. They learn very fast and growth at 7 percent is still good growth.”
He said the adjustment from investment and export led growth to consumption led growth would take two to three years.
But Bhartia stressed that “China will certainly not give up on exports. The area is still of huge importance and with U.S. economy growing, there will be opportunities for China to continue export growth.”
Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University’s Smeal College of Business, said the country was doing an “OK job” shifting away from exports and noted that it has plenty of cushion to smooth over bumps in the road.
Ghadar pointed to problems in the banking sector and a glut of apartment buildings.
“There’s probably going to be a real estate crisis there,” he said. “The difference between China and Europe is that China is sitting on more than a trillion dollars of reserves so they can basically spend their way out of the problem.”
Phillip Swagel, a professor of international economic policy at the University of Maryland, said, “The premier was up front about the slowdown but also confident about the ability of the Chinese government to support growth even while their manufacturing firms continue to adjust.”
Swagel said the Chinese government is facing pressure to allow the yuan to weaken against the dollar, as the euro and yen also continue to weaken.
Swagel said the strong dollar would mean lower costs for imports from Europe in particular and thus increase the competitive pressure on China.
He noted the biggest impact would be on the higher-end firms that compete with Europe.
“The mass market retailers that source from Asia will face higher wages in China but the impact on costs should not be so much that it disrupts our trade relationship with China,” Swagel said.
Joshua Meltzer, a fellow on the global economy and development at the Brookings Institution, said the Chinese premier’s economic reform strategy is the right path, taking China from a more export-oriented economy.
He said he expects business opportunities to increase in the services sector but to decrease in several manufacturing sectors, including apparel production, as labor costs continue to rise in China.
“China is the world’s largest manufacturing country and will remain there,” Meltzer said. “I think the question for China is to what extent it can move out of the high-energy intensity, pollution areas, such as coal and steel, and move into a more high value-added economy. That will be possible if China successfully makes the transition to a more services-oriented economy.”
Wage growth, which has been fairly substantial in China in the last few years, will continue, he said.
“As a result, a lot of that apparel manufacturing in China will increasingly look for homes in more low-wage parts of Asia, in such countries as Vietnam, and other parts of Southeast Asia,” Meltzer said.