Potential problems seem to be emerging in China

Potential problems seem to be emerging in China

China's leader Xi Jinping last year adopted The China Dream as the theme of his presidency, combining "economic prosperity" with "national rejuvenation". But Mike Flanagan suggests the second part of this vision is starting to look troubling - as recent events have shown - with potential to impact the apparel industry.

For the past five years we've been hearing how rising wages in China are forcing garment buyers to look elsewhere. But despite all the noise, China's share of Western garment buying has hardly moved - partly because Chinese garment makers have kept their prices competitive.

In the first five months of 2014, US importers paid $3.38 per square metre for clothes from the world outside China - but just $2.82 from China, or 83% of its competitors' prices. Its competitive edge has widened since 2011.

There's no single explanation why China has squared wage rises with growing competitiveness: it's probably a combination of:

  • Some surreptitious government help;
  • Rising productivity, mainly from better-equipped factories;
  • Internal production shifts, from the densely-populated, labour-poor, coastal cities to places inland where labour is easier to find;
  • Rising wages elsewhere in Asia;
  • Cross-subsidy from garment makers' other activities, like retailing or property development.

Surely this trend will change?
Many Westerners are convinced hidden tensions in China will spill over and kill the country's competitiveness - but this is often just wishful thinking.

April's massive strike at the Yue Yuen factory in Guangdong, for example, was settled peacefully, more or less to the strikers' satisfaction - and there have since been almost no other disputes in our industry in China that have needed strikes to resolve them.

China certainly has enormous pollution and corruption problems. But since Xi Jinping became President, there have been real signs that polluting plants are being phased out and bribe-takers are getting punished.

Indeed, there really are few signs that China's carrot and stick approach to managing dissent is breaking down. Keeping people well-off, with the unspoken threat of repression if they step out of line - whether by corruption, pollution or public dissent - seems to be keeping most Chinese content.

But other potential problems have emerged in China

Cross-subsidising by other activities might have run out of steam. Though China's apparel retail market is still growing, its profitability is going backwards. The recent 32% fall in Bosideng's profit, for example, isn't the result of declining garment sales - or the weather, as the company suggests. Instead, blame Bosideng's tolerance of unprofitable outlets and high inventories. But give it credit for a plausible-sounding recovery programme, which recognises past mistakes.

China's hokey shadow loan market. With tougher rules on credit, many businesses make money pledging their assets for loans to other businesses they're connected with - like customers - at rates between 15% and 25%.
If the borrower can't repay, the lender's apparently shrewd favour can put his business into serious trouble. In Hangzhou, a textile centre near Shanghai, a group of spinners and weavers got dragged into around $500m worth of bad loans in April.

And in June, garment maker China Ting had to write off a $27m loan (50% more than its profit) to a Hangzhou shopping mall after its developer was charged with a raft of frauds in just one of 40 real estate projects around Hangzhou going into liquidation.

The race to the top is slowing elsewhere. Over the past four years, most other Asian garment exporters have seen wages rise as fast as China's. Now, though, employer associations in Indonesia and Vietnam are pressing hard for annual wage rises to be not much faster than inflation.

In China, official inflation was 2.5% in 2013. But the country's Bureau of Statistics recently estimated inflation for migrant workers was 22% - which is likely to create pressure for even faster wage rises.

Capital investment. After a decade of ever-increasing investment in new kit, and total dominance of the market for new spinning and weaving machines, businesses based in China bought less textile equipment in 2013 than in 2012.

Internal relocation. Xinjiang province - physically huge, relatively poor, with high unemployment and close to abundant cotton fields - should be terrific for relocating garment factories and spinning mills. But problems recruiting enough local Uighurs (mostly Muslim, speaking a language close to Turkish), have meant rapid immigration of Chinese-speakers (known as Han) from the rest of China.

Some Uighurs resented the influx of Chinese speakers, and protested. Repression (by an almost entirely Han army) upset a lot more Uighurs, and the province is now seeing repeated terrorist bombings - which provokes further repression. On 2 July, China banned Xinjiang Party members, teachers and students from Ramadan fasting - just one of many pointless but offensive attacks on Uighur traditions.

Though effective elsewhere, China's carrot and stick is probably counter-productive in Xinjiang - and by helping recruit more terrorists, is undermining its attraction as a low-cost place for factory relocation.

Anti-Japanese riots. That upsurge in Uighur discontent started about 18 months ago - roughly the same time that China's share of Japanese apparel imports fell from 85% to their current 76%, after official Chinese anger at Japan started off attacks on Japanese property in China.

The "China Dream": other people's nightmare?
About the same time, Xi Jinping described the theme of his forthcoming presidency The China Dream: "economic prosperity for people's well-being - with national rejuvenation."

China has shown extraordinary pragmatism in achieving the first half of that dream without losing jobs. It's the second half that sets the alarm bells ringing.

Sun Yeli, vice director of the Chinese Communist Party's Literature Research Office, says that after a "shameful period of foreign domination that began in the 19th century" the China Dream aims "to make China rich and powerful." But "national rejuvenation":

  • To many Xinjiang Uighurs, sounds like making the Han Chinese powerful in Xinjiang.
  • To the Vietnamese rioting in May against Chinese-looking foreign factories, means straightforward aggression after China drilled an oil rig in waters Vietnam claims are it own.
  • To many in Hong Kong, means the Chinese army putting on a 2 July open day in its Hong Kong barracks, and running demonstrations of "anti-terrorism" operations - just as outside protesters staged mass demonstrations.
  • To three Europe-based shipping lines (with 47% of the container trade between Asia and Europe), means the Chinese being a great deal tougher to hoodwink than the EU's hopeless Competition Commission.

In the latter case, the three claimed to be surprised at the decision by China's Ministry of Commerce in June to reject their proposed P3 cartel, already approved by the EU and US. But the Chinese had announced their worries about their cartel plans in September last year.

Personally, I - like the European Shippers' Council (which represents European importers and exporters) - think the Chinese were looking after the interests of European importers and consumers a great deal better than the EU.

But that wasn't China's motive. For China's regulators, "national rejuvenation" means being instinctively opposed to anything that smacks of foreigners trying to squeeze China out of things.

Which worries other people - whether it comes out as real aggression, or decisions some Westerners don't like.

Can China repeat the success of the past 25 years?
In February, the Footwear Distributors and Retailers of America (FDRA) issued a report highlighting the dangers to the world's shipping lanes of growing disputes - all attributable to the China Dream - between countries around the South China Sea.

That shipping disruption hasn't materialised. But no-one predicted the impact of "national rejuvenation" on Xinjiang's economy, European plans to reorganise shipping lines, Vietnam's attractiveness for Chinese investors, or the medium-term future of stable Hong Kong.

That there'll be more, similar, effects of "national rejuvenation" on the world's economy is as certain as China's continuing commitment to real improvements in its citizens' living standards.

But what is less certain is what happens when other people's interests clash with "national rejuvenation" and whether China can display the same pragmatism it used to combine growth with rising wages.

Our industry's key issue over the past decade has been understanding the consequences of China's economic dream. The next ten years will likely be preoccupied with the consequences - some benign, some probably scary for many - of China's "rejuvenation" Dream.