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Op-Ed: As China’s Economy Struggles, What Happens to Sourcing?

Often big ideas are hailed as history-making; that is until high-flying aspirations collide with the realities of limits.

Take China, for instance. The very fabric of the country is made up of one big idea: managed growth. For a nation bedeviled by a complicated history and complex economics, the government has espoused a simple theory of social cohesion. There’s an implicit bargain between the Chinese government and the common person: stay out of politics and we’ll make you rich. Or put another way, it’s good to aspire to be rich, and that economic growth is critical to China’s future.

For hundreds of years, the Chinese people have only known poverty, autocracy and social unrest, while suffering from surly treatment by the West. China, however, now has its day in the sun. Its economic achievements are truly something to behold, advancement on a historic scale, much to the chagrin of Americans and Europeans alike.

China aspires to be a leading world power. It has succeeded. But along with its success, China has now experienced the unpredictable downside of success. Indeed, the government has prided itself on its ability to manage its politics and economy, but now the realities of economics have challenged the status quo. Growth may be good but it has shortcomings.

Nevertheless, the growth of China would not have been possible were it not for the legions of Western buyers. Moreover, were it not for Western demand for Chinese goods, the China miracle would not have been possible. In turn, the industriousness and creativity of Chinese workers and business leaders make this a two-way arrangement.

Life, however, injects an unexpected element on occasion, as we witnessed with China’s financial crisis last year. What began as a modest currency devaluation of the renminbi turned into a run on China’s stock market. Growth comes with costs, and the bills came due—all at once. Of course, these problems didn’t just happen overnight. Problems had been creeping into the system for some time.

It now seems that China’s seemingly endless demand for commodities has come to an end. And that has spooked global markets as many investors felt endless Chinese demand for products and services was essential to the strength of global growth and, along with it, global prosperity.

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Indeed, without China consuming at ever-accelerating rates, where else was there? Europe is still mired in a tepid economic recovery while the U.S. doesn’t seem to have the wherewithal necessary to pull the entire global economy out of the doldrums.

Economics is economics, and reality is hard to avoid. Any given country is only going to develop as rapidly as it can absolutely. To expect otherwise is wishful thinking, if not foolish. The same goes for China: eventually, it would top out. After all, there are only so many buildings that can be built, crops consumed and people employed. At some point, it all slows as a country reaches full capacity for production and consumption.

China has actively embarked on a transition to a consumer society initiated by government powers to overcome the limits of the export-led model of the old, manufacturing-based economy. To their credit, they foresaw the need for economic change. However, today they have to guide the country to embrace a new economy. That has proven very tough and fraught with problems. A volatile stock market is but a symptom of the overall problems in the economy.

For textile and garment companies, the message is simple: China may still be a good place to do business, but a sensible hedge is to diversify into other Asian countries.

Many have already done so. Many more will. Currency devaluations make exports from China cheaper. For Western buyers, at least for the short run, this will translate into higher margins. But what about over the long-term? Many brands are eager to tap China’s consumer market but currency depreciation means foreign products are only going to become more expensive for increasingly skittish Chinese consumers.

China faces myriad problems as a rising standard of living propagates new challenges. The Asian powerhouse has built a new silk road, so to speak, but it suffers from potholes. Economic growth always comes with costs. Societies change. China is no exception. For businesspeople, though, this means what had previously worked has evolved into something different.

Will textiles and apparel always be produced in China? Of course. But the industry will steadily lose its luster over time.

In many ways, it has outgrown its manufacturing roots. The export model has worked very well for China, only now the limits of that model have come home to roost in a weakened financial sector, a shaky stock market and amid global uncertainty.

The road to hell is paved with good intentions, so goes the aphorism. For our industry’s sake, let’s hope that China’s road to consumerism can be made less bumpy.


By Robert P. Antoshak
Managing Director
Olah Inc.