How Concerned Should Fashion Be About Chinese Stagflation? | China Decoded, BoF Professional

Many international fashionBeauty and cosmetic companies looked to China for sales relief during the Covid-19 pandemic, and the country has generally delivered.

In recent quarters, luxury names, beauty brands and sportswear players running the gamut from LVMH to L’Oréal to Lululemon, have reported outstanding growth in the world’s second-largest economy.

The growth has been driven by two key factors: first, China’s swift nationwide quashing of the Covid-19 outbreak in the early months of 2020 and second, millions of local consumers — some of whom resorting to shopping at home rather than spending abroad as they would have before travel restrictions kicked in; others investing in health and wellness amid pandemic-induced lifestyle changes — ramping their already-robust spending.

Then there’s the third big factor: China’s broader positive economic trajectory. China was the only major economy to see growth in 2020. GDP grew by 2.3 percent, and data points that range from retail sales to manufacturing activity look strong in the second quarter.

But a different narrative is unfolding in 2021, one that could lead the economy into stagflation — when a country experiences both a slowing or stagnating economic growth and rising inflation. It’s a potentially painful situation that should give pause to companies whose growth plans hinge on a robust Chinese economy.

CMC Markets’ Kelvin Woong stated that key indicators from the last month suggest that the country is shifting gears. This could cause a major dent in consumer desire amid rising prices and slowing economic growth, which could result in lower wages and higher unemployment.

“[S]lower growth and higher prices tend to lead to a stagflation environment and, if entrenched, it may be challenging for counter-cyclical fiscal and monetary policies to reverse [stagflation’s] adverse effects,”Wong said.

The Stagflation Scenario

For several months, there have been concerns that the country could soon find itself in a deep slump or a stagflation situation. While GDP forecasts set for the year are still looking respectable relative to other big economies — OECD estimates from May forecast China’s GDP to grow 8.5 percent this year, compared to 6.9 percent growth for the US — there are worrying pressure points.

The official and private business surveys, which indicate a decrease in key economic drivers, are a good example. The latest data from the country’s National Bureau of Statistics (NBS) showed that China’s official manufacturing Purchasing Managers Index (PMI, a measure based on monthly industry surveys) fell to 50.1 in August from 50.4 in July, which is still above the 50-point mark that separates growth from contraction. However, the official non-manufacturing PMI in August was 47.5, well down from July’s 53.3. This is the first decline in PMI since February 2020, when the country was still afflicted by the Covid-19 virus.

“The latest surveys suggest that China’s economy contracted [in August] as virus disruptions weighed heavily on services activity,”Julian Evans-Pritchard was a senior China economist at Capital Economics and wrote a note. “Industry also continued to come off the boil as supply chain bottlenecks worsened and demand softened.”

Though, Evans-Pritchard noted, the fall in the services sector was largely due to an outbreak of the highly contagious Delta variant of Covid-19 that began in late July, disrupting tourism and the person-to-person service sector, weakness in China’s domestic consumption was already noticeable for months.

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High production costs could result in a decrease in corporate profit margins. This is especially true for companies that sell directly to consumers.

Another consideration is China’s recent “Covid Zero” strategy. The policy prevents the spread of the virus by imposing travel restrictions and lockdowns. This creates supply chain pressures and fuels freight rate increases, which are at an all-time high and can lead to inflation. In August, the world’s third-busiest port, in the eastern Chinese city of Ningbo, was partially shut when a worker tested positive for Covid-19. It was the second major Chinese port shut down in as many months.

China’s policy makers have struggled to keep producer price inflation under control. The producer price index for the country’s industrial sector for July recorded a 9 percent year-on-year change, its seventh consecutive monthly increase. Premier Li Keqiang presided over a May state council meeting. He stressed the need to take policy measures to prevent spillover into consumer price. However, no concrete plan has been revealed. Economists now warn that high production costs could be reducing corporate profit margins, especially for those selling directly.

And though China’s official urban unemployment rate was 5.1 percent in July, Wong questioned whether that might be painting an “over-optimistic” picture of the labour market, particularly since the country’s significant population of migrant workers are not included in that rate. The jobless rate for young people aged 16-24 was 16.2 percent in July.

The full list of repercussions fashionThe future of retail companies in China and other countries remains to be determined. But freight and other rising costs — including for cotton and other raw materials — mean that companies must decide whether and by how much to pass on the price inflation to consumers, at a time when demand appears to be diminishing. Chinese brands have not yet signaled their intention to increase prices in recent earnings reports, unlike international brands like Ralph Lauren and Michael Kors.

Although consumer prices remain relatively low, core consumer inflation (excluding food costs and energy costs), rose 1.3 per cent in July, the highest in 18 months. Wong of CMC Markets explained that this indicates that consumer prices are still in a moderate state. “producers may have started to pass on the higher cost of production to consumers.”

Uneven Impact

Although luxury brands such as Chanel, Balenciaga or Balenciaga seem to be able raise prices without reducing consumer demand, other global brands will need to make a strong case for higher costs being passed on to Chinese consumers.

Chinese brands have not yet signaled their intention to raise their prices in recent earnings reports, unlike international brands.

“I think what we are continuing to see is that within the mid-market or upper mid-market, foreign brands are facing a variety of challenges in maintaining and growing market share,”Ben Cavender is the managing director of China Market Research Group. He stated that success for non Chinese companies could be found in “smaller niche brands that are seen as being the best of their specific category or where they are seen as offering brand heritage or an interesting designer or interesting concept that will still get domestic consumers to open their wallets.”

Put another way, regardless of whether a brand raises prices in China as a result of inflationary pressures, it likely won’t be the price alone that influence consumers’ decisions to make a purchase.

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However, with a higher proportion of Chinese consumers feeling pessimistic regarding their economic futures after the pandemic, it is reasonable to expect that at least some consumers will start tightening their belts. Particularly for discretionary categories such as fashionThis means that even a hint or stagflation could cast unfavorable clouds.

时尚与美容

FASHION & BEAUTY

Since 2018, Lu Han has been Audemars Piguet’s brand ambassador. Lu Han Studio Official Weibo.

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Ruyi Group’s once-stated ambition to become China’s LVMH Group continues to fall short. The 2021 half-year report shows that the group, which is based in Jining in Shandong province, reported total revenues of 261 million Yuan ($40.4 Million), a decrease of 20.43 percent over the previous year, while its net loss increased 392.9 percent to 44.75 millions Yuan ($6.93million). The group has three main businesses: textile manufacturing, apparel, and textile raw materials trading. The group’s largest business is apparel. This sector suffered the most severe losses. Revenue dropped 44.67% and gross margin fell 12 percent. Apparel accounted for 53.24 percent of Ruyi Group’s revenue, down from 76.57% to 53.24%. (BoF).

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科技与创新

TECH & INNOVATION

Customers will still be redirected to luxury brands' mini-programme to complete purchases. Louis Vuitton WeChat.

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消费与零售

CONSUMER & RETAIL

China Duty Free Group's Sanya Duty Free Complex in Hainan. CDF Group.

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Retail Growth in Hong Kong Slowed Again in July

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政治,经济与社会

POLITICS – ECONOMY – SOCIIETY

Kris Wu and other idols have been under increasing scrutiny from Chinese authorities in recent months. Shutterstock.

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Alibaba Promises $15.5 Billion ‘Promote Common Prosperity’

Alibaba Group announced Friday that they plan to invest 100 billion Yuan ($15.5 Billion) in China. “promote common prosperity”China. The new Alibaba Group Common Prosperity Advancement Working Committee will be headed by Daniel Zhang (chief executive and chairman of Alibaba Group) and will focus on delivering initiatives that are focused on technological innovation and economic development. It will also care for vulnerable groups. (BoF).

China Decoded would love to hear from readers. Send tips, suggestions, complaints and compliments to our Shanghai-based Asia Correspondent [email protected]

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