The world gets flatter

The Redwood Blog
Published:  26 May, 2015
Mike Redwod

The surprise announcement from China's Ministry of Finance that from the June 1, 2015 it will make a hefty cut to import duties on a wide range of products including footwear is a real indication that the Chinese Economy is struggling more than expected. It became clear at the APLF in Hong Kong that reports on China were likely underestimating the problems and in reporting the duty reduction Reuters said that it is primarily intended to "help bolster domestic consumption ... to prop up a faltering economy" which indicates we were right. 

The reduction for footwear is just about 50% and should greatly benefit sports footwear companies among others. The news comes on the back of good figures from France regarding growth in exports of high value French footwear into China.

The Chinese Ministry of Finance said in a statement this was as an "important measure to create stable growth and push forward structural reform". Part of China's problem is that high duties and weak regulations related to counterfeit products have made record numbers of Chinese tourists go abroad to buy. Retail sales in China have been growing, but not strongly enough for the government to be confident that growth can be held at the 7% it fell to in the first quarter of 2015. Without more actions like this a 5% level looks more likely.

The Chinese government's attitude to foreign companies has long been part of the problem as a series of quite blatant moves by various authorities deliberately pick out overseas investors ahead of all others whenever the government wants to show it has teeth. The automobile industry is a perfect example where overseas brands appear to have felt the need to capitulate in the face of unfair fines in order to keep doing business in an important market. Just a few years ago I was on the board of a small US engineering business when we had to exit the Chinese market after our agent there began copying our brochures to sell counterfeit products he sourced locally under another name: we had no sensible legal option.

As a result of the government in China having such an anti-foreign approach the Chinese consumer ends up paying considerably more for foreign goods as a result of tariffs and other high costs of navigating China's complex retail and legal system. No wonder Chinese consumers go abroad or use "daigou" shopping agents to buy a wide range of items. The Chinese Ministry is hoping that by lowering duties it will create a "shift in consumers' shopping habits, helping boost imports and domestic consumption".

Hopefully this signals a new reality. Chinese businesses have shown that they can be quite superb in many ways. Efficiency, innovation and speed of reaction to customer needs have been obvious differentiators for Chinese companies when compared to most other emerging markets over the last decade. China is quite clever enough to fully compete on an equal basis, and they need their government to recognise this. 

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Mike Redwood

mike@internationalleathermaker.com

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