Rising Costs, Inflation Hit China

The action by China?s central government to step in with new tax policies to boost flagging textile and apparel production was welcomed by the industry.

A “For Sale” sign hangs on the wall of a Chinese factory.
Appeared In
Special Issue
WWD Sourcing Horizons issue 09/16/2008

BEIJING — The action this summer by China’s central government to step in with new tax policies to boost flagging textile and apparel production was welcomed by the industry, but executives said that small step is inadequate to bandage the bleeding sector.

This story first appeared in the September 16, 2008 issue of WWD.  Subscribe Today.

Across the Pearl River Delta, China’s main manufacturing hub, thousands of textile, clothing and shoe factories have shut their doors in the past year. Vast stretches of what was China’s main production hub are now home to empty factories, with some companies moving to cheaper locations and others having quit the business entirely.

Nearly all have fallen victim to rising production and labor costs, and rapidly increasing prices for raw materials and transportation. Spiraling domestic inflation and a new national labor law that protects employee rights while boosting company costs hit first and hardest the textile and apparel industries, the lower end of manufacturing where profit margins were already slim. Rising internal costs coupled with sagging external demand as the U.S. and other countries weather a difficult economic slowdown have created particularly tough times for China’s textile and clothing makers.

On Aug. 1, the central government implemented an adjustment to the value-added tax, increasing rebates for exports of textiles and clothing from 11 to 13 percent and giving the industry at least an emotional boost.

“Before this, the whole industry felt like it had been abandoned, but the implementation out of this policy gave the industry a little bit more confidence,” said Xiao Jiancheng, secretary general of the Guangdong Home Textile Association. “As for its real impact on profits, that will not be seen very quickly.”

As the industry limps along, the government has been markedly silent about further potential plans to help clothing and textile manufacturers shore up their businesses or move into other production sectors.

Cao Yinyi, vice director of the China Chamber of Commerce for Import & Export of Textiles, said China’s exports of textiles dropped 20 percent during the first five months of this year compared with 2007. Cao said part of the problem has been that China’s manufacturing base has been built on large-scale production heavily reliant on the American market. As such, the industry has not been able to absorb the downturn as it might have with a more broadly diversified consumer base. Chinese companies are looking to domestic markets and emerging markets in the Middle East and elsewhere as potential customers.

Still, the U.S. market downturn has had a major impact in China. For the first half of the year, manufacturers wondered if or when the government would step in with preferential tax policies or other measures to help. In the first six months of the year, China’s Producer Price Index, the main measure of raw material and factory production tool costs, rose 7.6 percent over a year earlier.

Around the same time the tax move was unveiled, Premier Wen Jiabao visited the Pearl River Delta and was photographed in a shoe factory trying to reassure workers that the country’s industry base could survive by becoming more competitive. His appearance, widely reported in state-run media, seemed timed to inspire industry confidence.

Still, Wen did not announce any new measures nor promise anything on the horizon to shore up the manufacturing industries. Further, the Aug. 1 VAT tax rebate change was half the amount the industry had requested. Economists say the lack of swift and strong government response to sagging textile and apparel production likely has to do with long-term policy to encourage more innovation and higher-value industries.

“The textile industry has become an unfashionable industry for some policy makers,” said Ding Li, an industrial economic researcher with the Guangdong Academy of Social Sciences.