How China’s Stock Market Volatility Affects Shoes

While Greece has dominated headlines over the past few weeks, footwear and apparel businesses are sitting up and taking notice of the volatility of China’s stock market and the Chinese government’s attempts to prop up prices.

As the Shanghai Composite continued its downward spiral, many are asking if this is the bubble of exceptional growth bursting in China. For footwear and apparel labels, the volatility is a big issue when it comes to capitalizing on the ever-important Chinese consumer.

“China is one of fastest-growing international markets for U.S. brands,” said Nate Hermann, VP of International Trade of the American Apparel & Footwear Association. “If the stocks aren’t doing well, then the middle class is unable to buy our products.”

In the past few weeks, the Chinese Shanghai Index has lost more than $3.25 trillion, or about a third of its value — and that’s despite a rally on Thursday after two days of losses and weeks of a downward slide.

The majority of stock listings affected by the massive losses are small-cap stocks, which mostly have smaller-scale, middle-class investors.

What this means for footwear is that for key growth markets outside of luxury, in a country filled with a rapidly expanding middle class, consumer confidence is slipping, and expendable cash is quickly disappearing as the stock market tumbles.

It also is a big indication of the long path ahead for China as it tries to build a consumer spending-based economy.

“The transition from an industrial- to a consumer-driven economy is a real long-term investment,” said Camilo Lyon, an investor at Cannacord Genuity. “If you have a situation where people are facing steep losses because they weren’t paying attention to valuation but were chasing the runup, it would impact their ability to spend.”

The bigger concern is what the China slowdown means relative to the rest of the global economy.

“On a comparative basis, the numbers in China are stronger than others, but the rate of change is slowing. There is a deceleration happening, and the government is doing what it can to mitigate that,” said Lyon. “From the global perspective, China is a big source of demand for other nations. The concern is that if China is slowing to any degree, this is going to have an effect on other countries that have been benefiting from China’s higher rates of growth.”

Taking the rest of the Chinese economy into account, from GDP growth to increased consumer spending — which is about 10 percent, according to the Chinese government — the stock market is just one narrow component of China’s economy. The big question might actually be how much this continues to affect the rest of the economy, monetarily or psychologically.

Investors and market watchers seem convinced that this is just the beginning of a more significant, and somewhat predicted, slowdown in China.

On the sourcing side, China is a key export market for shoes. Around 79 percent of all shoes imported to the U.S. last year were made in Chinese factories, according to the Footwear Distributors & Retailers of America.

Some market watchers say that this bottoming out may not be an entirely bad thing for sourcing.

“If you’re looking to China for growth, this could be an issue. If you’re just sourcing, it is probably a net benefit,” said Steve Marotta, an analyst with CL King & Associates. “The contraction in the economy and instability economically is a benefit because [capacity use] in footwear factories would go down, and then incremental pricing would go down, too.”

Matt Priest, the president of the FDRA, agrees. He says many brands are already moving out of China and looking to diversify, so those left can capitalize on the markets.

The impact on the shoe business will likely be seen only after the market finally levels out, with or without the government’s help.

“There is a lot of volatility right now, in China and Greece,” said Priest. “And this is happening at a time when our own economy is recovering.”

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