Will the bubble burst?

The growth of the All China Leather Exhibition/Moda Shanghai has mirrored the growth of the Chinese leather sector. Nowadays, most of the major joint-venture tanneries are already established and the wave of South Korean, Taiwanese and American companies setting up leather making facilities in China has peaked. Additionally, all of the major chemical and machinery suppliers have established joint-venture companies or agents and distributors working on their behalf. Large players, such as BASF and Bayer, have a fully integrated network of sales and production sites serving tanners throughout China. Both are highlighted in this issue. How long can the growth in China go on for before the market is saturated? Is China still an unknown, untapped market? The statistics suggest that the growth of the tanning, finished leather and leather products sectors in China are still growing overall but slowing in some segments. Total leather and leather product exports were up by 2.5% for the first five months of this year, according to CLIA figures. Entry of China into the WTO should help open up new markets for the Chinese such as the EU and let us not forget the huge potential for future domestic consumption in China. However, I detect that things are beginning to change and they may or may not have a bearing on future growth. Speaking of the leather sector, the statistics suggest to me that more and more footwear is being made in China but the amount of profit per pair is falling. Some of this is due to higher costs and increased competition. Also the consumer is becoming wiser as the global economy takes a dip. The public are shopping around for discounts on low/medium priced leather shoes. Further indications of a slowdown can be seen in the garment market. Export value of leather garments fell by 17% from January-May. Garment producers in China point towards expensive raw material prices and an over saturation of cheap leather garments on the market. On a recent visit to a centre of the Chinese garment industry, Xinji City, I was told by two of the largest local tanners and garment makers that they were switching part of their production to upholstery as the demand for garment leather had fallen. Outside the leather industry, there are other disturbing signals. I have read reports that foreign banks are banding together to protest against a government rule that could lead to a drying up of their local currency: the renminbi (RMB). The People's Bank of China (PBOC), the central bank, told bankers that they were proposing to limit their borrowing of local currency from Chinese institutions. The rule would effectively cut-off the single most important source of RMB for foreign banks and is against the liberalisation timetable laid out in China's accession to the WTO. Foreign banks rely heavily on local institutions for RMB as they are not allowed to take deposits from the Chinese and have only a narrow base of foreign multinationals and joint-ventures to take deposits. Foreign banks with existing licences may have to refinance their liabilities by asking customers to repay loans early, an embarrassing course of action. One banker is reported as saying that: 'It's a pure protectionist measure which is contrary to the spirit of the WTO.' I think that for foreign investors, the Chinese market still has opportunities but for the first time I see that some segments of the market such as garment and footwear are close to saturation and the number of tanneries already in China have the capacity to fill the gap. The really good times in China are passing and from now on it will be just as competitive as other tanning markets such as South Korea and Thailand. Cases such as the proposed changes in the banking laws also go to highlight that the Chinese government still wants to maintain a grip on the economy when it feels it needs to protect its own interests.