Fear and Loathing Along the Silk Road

Wednesday, September 16, 2015

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

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, its good to aspire to be rich, and that economic growth is essential to Chinas 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 the 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, sometimes injects an unexpected element. We witnessed this most recently with Chinas financial crisis. What began as a modest currency devaluation of the renminbi turned into a run on Chinas 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 now.

For textile and garment companies, the message is simple: China is still 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. The currency devaluation makes exports from China cheaper. For Western buyers, at least for the short run, this will translate into higher margins. But what about in the long run? Many brands are eager to tap Chinas consumer market, but depreciation means foreign products are only going to become more expensive for increasingly skittish Chinese consumers.

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

Will textiles and apparel always be produced in China? Of course. But the industry will lose its luster over time. Chinas government is consciously shoving the country towards a consumer-based society. In many ways, it has outgrown its manufacturing roots. The export model has worked very well for China, only that now the limits of that model have come home to roost in a weakened financial sector and a shaky stock market.

The road to hell is paved with good intentions, so goes the aphorism. For our industrys sake, lets hope that Chinas road to consumerism can be made less bumpy.

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