Factors driving China to “look inwards”

RICHARD SMITH

 

There are other objective factors which have acted as a catalyst causing attention to be refocused on the Chinese internal market. These factors are:

• Revaluation of the yuan from 8.28 to 6.77 (18%+) in US dollar terms in just four years making Chinese exports more expensive

• Punitive import duties imposed by the European Union and now by major South American markets, most recently Brazil and Argentina, on footwear exports.
• Wage demands will erode China’s competitive edge for exports causing manufacturers to sell more products within China.
• The economic recession started with a vengeance in September 2008. This prejudiced Chinese footwear and leather goods exports worldwide and encouraged manufacturers to look inwards at their own domestic market.

 

Western manufacturers should also be looking at the Chinese internal market but the CLIA is encouraging local tanneries to “invest in new technology, manage resources better and improve their environmental performance”. With 84 tanneries due to be closed  this month in China due to environmental considerations by the Ministry of Industry, the environment will be an ongoing concern. In addition, Madam Zhang encouraged manufacturers to develop and market up to five new footwear brands for the international market which will probably sell at premium prices.

With demands for rising wages  now becoming an increasingly important element in Asian and Chinese production costs, products will gradually lose their competitive edge and more especially for China, if China’s Central Bank continues to allow the yuan to strengthen against other international currencies. With 80% dependence on exports it can hardly have been a surprise that products in the leather industry were exported at low prices which led to more and more trade disputes and trade barriers in recent years.

If China does lose overall export market share longer term in its traditional markets, this will be offset in the next five year plan for the growing leather industry with more output being directed into the domestic market.

The chess pieces of international and domestic trade policy are gradually being moved by the CLIA in the light of the changes outlined above. It is vital for China to maintain job levels for social stability and hence it is logical step to aim at developing the huge internal market longer term.

In effect, the CLIA is preparing and contributing to the paradigm shift from a “production model to consumption model” based on the implications of the press conference given at the ACLE event.

Looking ahead

Will Chinese manufacturers still be willing to import up to 70% of their raw materials to keep the production lines running as the industry doubles in size? This amounts to billions of dollars of hard currency spent on raw material imports. Will they have any choice in this matter within the context of the 2010 – 2015 five year plans?

Perhaps we are getting ahead of ourselves with these observations but sooner or later such questions will have to be tackled since the leather industry trade surplus could be substantially diminished. 

Just as the recognition of the production > consumption paradigm shift has come to the fore in less than one year, its effect on China’s trade position in the global leather industry will have to be analyzed during the application of the five year plan announced in Shanghai on September 1st.