SHANGHAI, China — Not long ago, China's vital signs were positively athletic. Most of the numbers that economists track were up and it seemed a matter of course that they would keep on rising. You didn't need to be a financial whiz kid to work out that market indicators like these meant business was good. But last year, for the first time since global fashion players put down deeper roots in China, forecasts for the country were not that hot. Now, the latest figures are out and what they reveal is that the temperature of this gargantuan market can go down a few degrees just as easily as it can go up.

"China’s macro economy continued to suffer decelerating growth in 2013 and 2014, which had an adverse impact on the growth of apparel and footwear," confirms Fangting Sun, a research analyst at market intelligence firm Euromonitor International, who describes the market there now as "tepid.”

'Deceleration' was the first of five dreaded 'D-words' that many operating in China's fashion market would have heard for the very first time this year. So far, there have been the 'disappointing' financial results from the likes of luxury conglomerates LVMH and Kering, which have been closely linked to underperforming sales in Greater China; a 'decline' in the growth of luxury goods sales around the country; a 'decrease' in the rate of retail sales growth; and a 'dip' in the number of Chinese shopping overseas.

Shaway Yeh, an influential figure in China's fashion media, concedes that although such statistics are indeed troubling, they reflect only a quantitative assessment of the situation. Qualitative indicators, on the other hand, are harder to gather, but essential when trying to take the overall temperature of the Chinese market.

"Consumption itself is only part of a much bigger development, which is about the cultivation of the rising middle class as well as their migration patterns and lifestyles. This together with how the domestic fashion industry evolves will be the foundation for the market in the future," says Yeh, group style editorial director of Modern Media group, the parent company of fashion and lifestyle magazine Modern Weekly.

The Rising Mercury of the Masses

Estimates vary on the size of China’s middle class and how to define it. But one rule of thumb is that those living in a household with an annual income of between $10,000 and $60,000 can be considered members of China’s middle class. Using that definition as a guide, the size of this group is roughly the same size as the population of the USA.

Analysts predict that over the next six years, it could swell by 60 percent to reach 500 million people. For global brands eager to gain market share in this mind-bogglingly lucrative market, the challenge will not only be fending off increasingly nimble and entrenched Chinese competitors like Metersbonwe (China's answer to Uniqlo) and Trendy International Group's Ochirly, Five Plus and Trendiano brands, but also keeping a finger on the pulse of a demographic whose tastes are evolving at light speed.

Operational flexibility and strategic partnerships will also be important factors, something that brands like H&M, Uniqlo and Forever 21 must be increasingly aware of since Zara made the unusual move last month to give partial control of its online sales and operations to Tmall, the sprawling business-to-consumer e-commerce platform owned by China's Internet leviathan Alibaba. Analysts estimate that China's online apparel market may reach sales of $100 billion this year, an incredible leap from just a few years ago. No wonder Alibaba's main rival Tencent, the company behind the country's favourite mobile messaging service Wechat, invested in fashion e-commerce platform JD.com earlier this year.

Players at the top end of the market are also readying themselves to cater more to the whims and wallets of China's rising middle class. Alice Wong, executive director of ImagineX, a luxury management and distribution group representing brands like Marc Jacobs and Salvatore Ferragamo in Greater China, sees this socio-economic class as an opportunity for higher-end brands to offer more modestly-priced fashion at a time when the veneer of Chinese business culture is also changing.

“Despite the impact of the [Chinese government's] anti-corruption measures and the shift from gift-giving to own use, the retail business will continue to grow, especially in the premium contemporary segment," she says, referring to president Xi Jinping's much-publicised campaign to limit the widespread use of luxury goods as sweeteners in dealings with profiteering government officials, which has, in turn, had a cooling effect on profits for luxury brands.

Another change in Chinese society that is having a dramatic impact on the fashion market is the ongoing pro-democracy protests in Hong Kong, which, last month, brought much of the city's central business district to a standstill during National Day Golden Week, normally one of the busiest seasons for mainlanders on the Chinese shopping calendar. As a result of the unrest, sales were down for most retailers and the city's reputation is suffering among Chinese mainlanders who typically have little sympathy for the movement as well as among other Asian tourists who expect Hong Kong to be a safe and stable place to shop.

But in spite of these and other disruptive forces affecting the Greater China market, many industry leaders remain confident about its long-term sustainability.

"In the short-term it is challenging but we see great growth opportunities, particularly in womenswear and personal servicing and relationship building. We're seeing growth in men's designer while men's classic continues to be challenging," says Andrew Keith, president of Lane Crawford, a luxury department store which was founded in 1850 in Hong Kong and has more recently become the largest chain of its kind in Greater China.

"Our womenswear customer continues on her journey of self-expression. She’s now spending 18 times more since her initial engagement. We’re also working on expanding our 'Created in China' programme as our Chinese designers are consistently performing strongly," he adds.

At a variety of retailers around the country, China's generation of cosmopolitan designers — led by Uma Wang, Masha Ma, Huishan Zhang and others — are garnering an ever-warmer reception among new types of clients who only a few years ago may have overlooked them.

Pointing to greater penetration in online and click-and-collect services, Keith says that the typical Lane Crawford customer is now looking for product, not price, and holds up the recent online sale of an 80,000 RMB (about $13,000) Givenchy coat to a customer in a third tier city as an example.

Although the system of classifying cities in tiers is still meaningful for marketing purposes, the boundaries between some are becoming increasingly blurred. The gap between style capitals of the Eastern regions like Shanghai, Beijing and Guangzhou and ascendant urban powerhouses of the interior like Chengdu, Chongqing or Wuhan is still pronounced but narrowing.

A Cooler Mood for Cooler Customers

Getting to grips with the astounding levels of wealth in Greater China is not easy, which is why a comparison with other famously wealthy places can help put it into perspective. Hong Kong alone boasts around 102,000 US dollar millionaires, which is more than the number of millionaires living in Saudi Arabia, Dubai and Abu Dhabi combined. Mainland China has ten times more millionaires than there are in Hong Kong. The tally together amounts to well over 1,000,000 millionaires living in Greater China, according to data provided by financial services firm Credit Suisse.

Chinese luxury consumers are now known the world over for being big spenders. But just how much they spend proportionally can be revealed by an interesting figure published this year deep inside a report by global consultancy Bain & Company. While the Chinese make up 14 percent of the total number of luxury consumers around the world, they account for 28 percent of global spend on luxury goods. Yet their collective mood and personal motivations have been changing, which are just two of the many drivers of the recent slowdown in China's luxury consumption.

"We believe the 'red-hot' growth of the past few years was actually a little overwhelming. The recent slowing-down should be a healthy adjustment in the long run," says Sham Kar Wai, the local partner for Galeries Lafayette department store in Beijing and founder of the popular multi-brand retailer I.T, which is known for bringing edgy streetwear and avant-garde designer brands like Comme des Garçons to Hong Kong and several other cities around China.

Characterising his outlook as "cautiously optimistic," Sham believes I.T's unique “multi-brand, multi-layer” business model, which stretches from the high-end to mass and imported to in-house labels, will provide his company with good leverage going forward. Another reality affecting retailers like his is the rise of a new breed of Chinese luxury consumer, who is not only discerning and discreet but also either remarkably restrained or highly experimental.

"Our readers at Modern Weekly are some of the most enlightened in the country and we're constantly pushing them to go further. They no longer see fashion just as a conveyor belt of products that fill their wardrobes. They've known for a while that it's about creating a rich personal identity. Now some of them are beginning to get the cultural, psychological and even political aspects of the fashion they choose," says Shaway Yeh. "And this brings us back to business because when a critical mass in a massive market like China starts to think of fashion on this level, that's when there will be serious money to be made again. But only for the brands who know how to speak to Chinese consumers as equals."

Niche, specialty and under-the-radar brands are becoming popular beyond first-tier cities. Meanwhile, China's inflated prices for luxury goods — which are sometimes 50 percent higher than in Europe, due to a combination of local taxes and the deliberate pricing strategies of some brands — are compelling some to question the received wisdom that designer brands are inherently more desirable than more affordable fashion. Other consumers feel increasingly compelled to use haiwai daigou (private overseas buying agents) or alternative grey market channels, despite a stricter stance by Chinese customs officials to curb the parallel trade which makes goods cheaper by circumventing import tax.

"As the consumer becomes increasingly sophisticated, it's no longer enough to merely treat [China] as some far-flung outpost, where brands can expand purely by opening shops and expecting people to flock to them. Now, they have to treat it as a market like Europe or the US, where you need to do solid work to build up your brand, whether that's through brand management, CRM or otherwise. I think brands who don't focus on this will face a lot of challenges here in future," says Vogue China's editor-in-chief Angelica Cheung.

Blowing Hot and Cold

Although increasingly prosperous as both a nation and as individuals, market observers have good reason to be concerned by the recent downward direction of growth percentages for Chinese retail and luxury sales. They do represent a loss of some momentum in the fashion market. But the numbers alone don't paint a full picture. And for the more casual observer, they could lead to confusion.

By misinterpreting the smaller growth percentages as a net negative, some risk becoming overly alarmed. With some columnists in the Western press asking hyperbolic questions about whether China's economy might soon "topple" or reach a "dead end," it is easy to forget that the overall size of the Chinese market pie is still getting bigger and that growth is still happening, just at a slower pace than in the recent past.

"I think this is only natural. The fashion market has been undergoing rampant growth over the last few years because before there was nothing here; people were really starved for fashion, but it was never going to be a sustainable phenomenon," says Vogue China's Cheung. "Now that we’re in a ‘post-starvation’ phase where most of the brands are represented in the country, people have calmed down; they are taking time to consider what they really want and what’s really suitable for them."

Yeh of Modern Media agrees: "If we didn't have a slight cooling off period now after all the intense heat we've been experiencing for so long, then we'd be in serious trouble. And so would the rest of the world. Especially where China is right now, fashion can't just be about flows of consumption and profit. I'm not being an idealist when I say this, I'm very much being a realist. China's fashion industry still needs a lot of nutrition. Not just empty calories."

Last year, China's economy grew by 7.7 percent, according to World Bank figures, down from a significantly higher 10.4 percent in 2010, but it is still easily outpacing the economies of other BRIC countries and remains in the top 20 fastest growing economies in the world. GDP growth rates are expected to decelerate by a percentage point in the coming years. But, in more evidence that the overall pie is growing, by the end of this year, China's place in global rankings will reach yet another superlative. Taking into account cost of living, the International Monetary Fund (IMF) recently announced that China will overtake the US as the world's largest economy by the end of this year – five years earlier than previously thought.

That's not the only thing getting bigger. The overall size of China's apparel and footwear market is growing too. The market has seen double-digit growth every year apart from one over the past five years. Euromonitor International projects that the average annual growth rate will continue to exceed 10 percent over the next few years. Although this is less than the 12 to 14 percent growth of a few years back, it will nevertheless boost the overall value of the Chinese fashion market from around $333 billion where it stands today to $486 billion by 2018.

But according to Wong of ImagineX, even expansion has its drawbacks. “Three to five years ago, brands found it challenging to find the appropriate real estate to expand. Today the situation is completely the opposite. It's not difficult to secure a location in a new mall, complete with a good brand mix, but the serious over-supply of real estate in many key cities means low traffic is very much an issue. The ironic thing is that rent is still on the rise for established malls," she says.

In the same way that both China's economy and fashion market are growing at more modest rates, so too is Chinese spending abroad. The recent 'dip' in the number of Chinese overseas shoppers obscures what is still a very big wave of people travelling to places like Europe to spend more money on things like fashion. Traveller numbers were up by a modest 18 percent in 2013 compared to a whopping 57 percent the year before, according to tax-refund company Global Blue.

Similarly, the 'decrease' in growth of domestic retail sales signals not fewer shoppers but a slightly more modest rate of increase. According to the China Bureau of Statistics, retail sales grew 12 percent in the first nine months of 2014 compared to 13 percent last year.

Nevertheless, China's new reality of decelerated growth is a hard pill to swallow.

International fashion firms that aren't exposed to the Chinese market in a big way are in the minority. And the majority who do depend heavily on China seem to have taken it for granted that their business here was safe. In a country with a centralised government that is able to impose economic, social and political edicts at whim, while having, miraculously, helped to lift 600 million people out of poverty since the 1980s, the temptation has been to assume that exceptional growth would be a long-term phenomenon.

But more and more, respected economists and market analysts are predicting a cooler future for China. While it is hard to imagine the once incandescent fashion market becoming 'lukewarm' any time soon, there is no doubt that it is already a bit less hot than it used to be. What is important to remember, however, is that for a nation of China's epic scale, even not-so-hot is still pretty hot.

The fallout of being hot-but-not-so-hot, as Wong suggests, is that everyone has to work harder to get the same results out of China and that now, "it’s easier for brands and retailers new on the market to get burned."

Visit BoF's new China Hub to discover more English-language news and analysis on China, as well as a live index of the most influential players shaping the Chinese fashion market. For Chinese-language content, please visit: cn.businessoffashion.com