China's Textile Industry Spinning a New Yarn

Cancelled export quotas, a historic revaluation of the yuan and an increase in raw material costs have all contributed to a stunted growth for China's textile industry this year.
 

Zhejiang, one of China's major textile manufacturing bases, has witnessed a remarkable slowdown in export growth rates since February.
 

According to statistics from Ningbo customs, exports to 67 of Zhejiang's 143 textiles export destination countries, dropped significantly. The decline was most marked for exports to the EU and the US.
 

The export quota dilemma
 

According to agreements signed last year between China and the EU, and China and the US, annual growth rates for the export of certain textile products are restricted to between 8 to 12.5 percent and 10 to 17 percent respectively until 2008.
 

Based on these restrictions, China's Ministry of Commerce assigns 70 percent of available quotas directly to enterprises in accordance with export volumes, and the remaining 30 percent are allocated through a bidding process.
 

According to ministry figures released on April 12, the lowest bids for the 31 categories of clothing and textiles which have been placed under export restrictions were generally higher than last year's. The lowest bid price for knit fabric, which is exported to the US under the No.1 category, was almost six times more than last year's.
 

However, the current market price for quotas is already 10 percent lower than the bid price, according to insiders.
 

Moreover, customs statistics show that by mid-April, the customs clearance rate for most categories of textile products placed under export restrictions by the EU and the US was less than 20 percent.

Ironically, there is now a surplus of quotas.
 

The problem reportedly starts with the quota allocation system. The key complaint is that there just aren't enough quotas being given out or auctioned off. Moreover, the bulk of quotas are given to big companies, which affects the market circulation of these quotas.
Further, the quotas that are allocated are in turn insufficient to satisfy customer demand, which then forces customers to find new suppliers in Vietnam, Myanmar and North Korea, for example.
 

Consequently, the quotas are under-utilized, causing a drop in their market price.

Despite the obvious inconveniences, the ministry has said it will not change the quota allocation system.
 

Further, many listed textile companies in Zhejiang acknowledge that the quota system can help regulate the textile export market and stabilize the production and profits of textile companies.
 

Time to spin a new yarn
 

In order to improve their current situation, textile enterprises in Zhejiang are turning to product structure adjustments, product innovation and value-added mechanisms to generate more profit. They are also lobbying the government for more reasonable policies to regulate the textile market.
 

Companies like Zhejiang Zhongda Group Co., Youngor Group Co., and Ningbo Veken Elite are increasing exports of products not limited by quotas to offset the reduction in exports of quota-restricted products. This should help to even out their foreign trade businesses this year, although growth rates will be lower. They are also seeking to penetrate overseas markets other than the EU and the US.
 

China's exports are mainly characterized by low added-value, a lack of domestically owned brand names, and low gross profit margins. These are the main reasons for the sluggish development of the textile industry, according to Zhu Xiehe, a senior official with Zhongda.
 

Analysts explained that increasing products' added-value is a way for textile companies to pass on to clients increases as a result of a yuan appreciation and higher raw material costs.