- Textile

Pessimism in the Chinese Textile Industry

A recent research report showed that in China’s textile industry, two-thirds of companies are having an average operating margin of only 0.62%. If these companies fail, it will affect 15 million jobs.

Textile is one of the most representative exports of China, with a trade surplus of US$150 billion last year. But the Chinese RMB has gone up 14% against USD since the currency reform, and the US subprime crisis is spreading to other countries. As a result, the whole Chinese exporting sector is surrounded by a pessimistic atmosphere.

High level action

“One third of textile companies will go broke in 2008,” such a rumour was circulating the internet in China in early January, and it caught the attention of the Ministry of Commerce of China and China National Textile and Apparel Council (CNTAC). Therefore in March, 6 research groups were sent to the top 6 textile provinces in China, namely Jiangsu, Zhejiang, Shandong, Guangdong, Fujian and Hebei, as they have a collective textile export share of 85% nationally.

What the research groups want to find out include impacts from the rising currency, raw material costs, rising labor costs, reduction of export rebates, increase in export duties, etc. In light of the intensive policy adjustments and environment changes, how are Chinese textile companies coping? What more can they afford?

No one knows exactly the number of textile companies in China. The official statistics show that there are currently more than 40,000 companies with annual sales above 5 million yuan (US$660,000), based on export statistics. But CNTAC said that there are hundreds of thousands of smaller players.

According to Mr Sun Huaibin, Director of China Textile Economic Research Centre, 80% of profits in the Chinese textile industry were contributed by 1/3 of the companies in 2007. These companies have a profit margin of 6%-10%, against the industry average of 3.9%. But even this profitable one-third is having a hard time now. “Due to various factors, long term sales contracts are no longer easy to get now,” said Mr Sun.

Another rumour has been circulating since January that export rebates will be cut by a further 4%. Although this has not been officially confirmed, many companies are already factoring into this effect when negotiating export prices. And investment bank analysts are also predicting that RMB will rise another 10% this year.

China exported US$176 billion worth of textile products in 2007, up 19% from 2006, the lowset growth rate since 2003. In the first two months of 2008, China exported US$16.4 billion clothing and accessories, up only 5.7% from previous comparable period (pcp).

CNTAC recommendations

According to the National Bureau of Statistics, the Chinese textile sector registered operating revenue of US$96 billion and profit of US$3.8 billion between January and November 2007, up 23.54% and 42.7% from pcp respectively.

But Mr Sun pointed out that there is a terrible polarisation in the Chinese textile sector. So even the overall statistics showed that textile exports are still rising, many small to medium companies are on the struggle.

CNTAC people also revealed that companies in Humen of Guangdong Province, a major textile trade centre of China, are now actually easier to find labours, which indicates the rising level of textile unemployment. On the other hand, the international market is becoming more and more competitive, China, Vietnam and India are all fighting for supply orders.

The labour-intensive textile industry is a truly sensitive industry. There are more than 20 million textile workers in China, with about 13 million are rural migrant workers. If 2/3 of the companies fail, the remaining 1/3 can only absorb half a million of them. Ms Xu Wenying, vice-president of CNTAC, suggested that “the government should also pay attention to this problem when they are tackling trade surplus and inflation issues. It will endanger the social stability if there are suddenly tens of thousands of people losing their jobs.”

Against the backdrop of rising currency, CNTAC hope that the government can seriously consider returning some export rebates, or at least not further reducing the rebates. A researcher said that the rising currency is the biggest problem faced by the textile industry. As macro economic policy cannot be altered for a particular industry, he hoped that the government would use rebates to adjust the situation.

Historically, textile export rebate in China was once as low as 11%, but it was increased back to 15% in 1998 due to the then industry difficulties. It was again reduced to 11% last year.

The cotton import slip-tax is the most debated among textile and cotton companies in China. Mr Sun revealed that China has an annual cotton shortage of 4.5 million tons, but import quotas were only 900,000 tons. So any above-quota imports will incur cotton import slip-tax, which increases the cost of cotton by US$260 per ton. As 70% of operating cost for a typical Chinese textile company goes to raw materials such as cotton, cotton costs are vital to a company’s profitability. CNTAC suggested that as post-tax imported cotton has now become even more expensive than domestic cotton, this renders the cotton slip-tax meaningless.

In addition, the textile industry has repeatedly called for the return of import duty exemption of automatic bobbin winders and air-jet looms, as the government removed the exemption in July 2007. Textile companies thought that such a policy has hit them hard and deterred their technological advancements, further putting pressure on the industry.

The textile industry also has to face the financing difficulty under the Chinese central bank’s tightening bias. And textile companies are demanding a transitory period for the newly implemented labour regulation.

People from CNTAC said that the government had not listened to enough opinions from the industries when devising industry policies. And they are hoping that the latest government departmental reform could address this shortfall.