The year 2005 has witnessed the end to quota system that had been ruling global textile and clothing for more than 40 years. In spite of the unprecedented textile trade disputes, RMB appreciation, shortage of energy and rising labor costs, China’s textile and clothing industry has utilized the advantages of the elimination of quotas and made great efforts to strive to overcome the difficulties, realizing a steady growth in the country’s textile and clothing trade.

REVIEW OF 2005

u       China’s economy kept booming.

According to China National Bureau of Statistics, the country’s GDP expanded to US$ 2.3 trillion in 2005, an increase of 9.9% over the previous year, or a per capita GDP over US$ 1,700. China became world’s 4th largest economy, surpassing UK and France. As the fastest growing economy in the world, China has been maintaining an average annual growth rate of 9.6% since 1979.

In 2005, China’s investments grew 25.7% to US$ 1.1 trillion, and consumption climbed 12% to US$ 837.5 billion. Urban per capita disposable income came to US$ 1,300, up 9.6%. Rural per capita net income reached US$ 400, a 6.2% rise.

Foreign exchange reserves totaled US$ 818.9 billion at the end of 2005, and US$ 875.1 billion at the end of March, 2006. China surpassed Japan as world’s No. 1 forex reserve holder. Foreign direct investment reached US$ 60.3 billion, a 0.5% drop year on year. China’s overseas investment, however, saw an increase of 26% to US$ 6.9 billion.

As the 3rd largest trading country after the US and Germany, China imported & exported US$ 1.4 trillion worth of goods in 2005, up 23.2%. Export scored US$ 762 billion, up 28.4%; and import totaled US$ 660 billion, up 17.6%. Trade surplus tripled to US$ 101.9 billion. China accounted for 7.5% of world exports and 6% of world imports.

u       Textile production growth slowed down.

China’s major textile production showed signs of deceleration in the growth of output. According to China National Bureau of Statistics, China’s cotton output dropped by 9.8% to 5.7 million tons in 2005. Yarn production came to 14.4 million tons, an increase of 11.5%, 2.4 percentage points less than the previous year. Fabric output rose by 11.9% to 47 billion meters, with the growth rate falling by 6.9 pct points from 2004. China produced 16.2 million tons of chemical fibers, an increase of 13.6%, 7 pct points less than 2004.

According to China National Textile & Apparel Council, China’s textile and clothing industry directly employs 19.6 million workforce, 14 million of whom are migrant workers from rural areas. Textile and clothing workforce accounts for 14% of China’s total employment in industrial enterprises with annual sales above 5 million RMB yuan. The industry consumed more than 7.3 million tons of Chinese natural fibers last year, indicating that it is closely related to the survival of 100 million farmers in China.

u       Textile & clothing trade grew steadily.

According to China Customs, China’s import and export trade in textile and clothing hit a record high at US$ 132.2 billion in 2005, up 18% and accounting for 9.3% of the country’s total merchandise trade. Exports reached US$ 115 billion, exceeding US$ 100 billion for the first time. The growth rate was 20.9%, 7.5 percentage points less than China’s total merchandise exports growth, making 2005 the third consecutive year that has seen an annual growth rate over 20%.

Chart 1: China’s Trade in Textile and Clothing, 2001-2005

China exported 936,000 tons of textile fibres in 2005. Yarn exports hit 1.7 million tons in volume and US$ 5.2 billion in value, up 21% and 18% respectively. Fabric exports totalled 18.6 billion meters in volume and US$ 21 billion in value, up 12% and 16% respectively. Textile made-up goods showed the fastest growth, rising by 36% to US$ 15 billion. In 2005 China exported 45.3 billion pieces garments worth of US$ 73.9 billion, an increase of 15% and 20% respectively.

Chart 2: China’s Exports by Major Items, 2005

In 2005 China’s imports of textile and clothing rose to US$ 17.1 billion, up 1.7% and representing 2.6% of the country’s total imports. As the world’s 3rd largest importer of textiles and 14th largest importer of clothing, China imported 4.6 million tons of fibres (including 2.7 million tons of cotton, 1.1 million tons of chemical fibres, 376,000 tons of linen/ramie and 284,000 tons of wool), 1.7 million tons of yarns, 5.3 billion meters of fabrics and 1.3 billion pieces of garments.

Chart 3: China’s Imports by Major Items, 2005

u       Contribution of textile & clothing to total trade surplus significantly dropped.

Trade surplus in textile and clothing increased 25.1%, standing at US$ 97.9 billion and contributing 96.1% of the country’s total trade surplus. The contribution of textile and clothing to the country’s total trade surplus has significantly dropped: in 2004 textile surplus was 140% bigger than the total trade surplus.

u       Trade dispute with the EU and US were properly resolved.

The textile trade dispute with the EU and US, involving US$ 9 billion worth of products and 1 million Chinese employments, was a focus of attention and top concern for the sector in 2005. The textile agreements that China had reached with the EU and US on June and November 2005, allowed China further growth in the products of concern, and provided exporters and importers with stable and predictable trading environment.

China-EU Textile MoU: Both sides agreed to manage the growth of 10 categories of Chinese textile and clothing during the period from June 11, 2005 through the end of 2007, with growth rates ranging from 8% to 12.5%. The EU promised to exercise restraint in using textile safeguard.

Tabel 1: China-EU Textile Agreement

Note: To resolve the issue of blockade, both sides agreed on Sept 5 2005 to transfer from 2006 levels, and set up new 2006 levels for Cat. 5, 6 and 7 as shown in the table above.

China-US Textile MoU: Both sides agreed to set annual levels for 21 categories of Chinese textile and clothing products from Jan. 1, 2006 through Dec. 31, 2008. The calculated growth rates are: 10%-15% for 2006, 12.5%-16% for 2007 and 15%-17% for 2008. The US promised that safeguard should not be used against the 21 categories and products liberalized before Jan. 1, 2002. The US will also exercise restraint in using safeguard of products not covered by the Agreement.

Table 2: China-US Textile Agreement

u       Market share gains in leading destinations

According to the latest WTO statistics, in 2004 China accounted for 21% of the US$ 453 billion worth of world trade in textile & clothing, with 17% share in textile trade and 24% share in clothing trade.

US: According to the US official data, China’s share in US textile and apparel import market in 2005 was 25% in value and 33% in volume, both 8 percentage points higher than 2004. China’s unit price was US$ 1.34/m2, 7.1% higher than 2004.

EU: According to the EU official data, in the first nine months of 2005, China took up 30% of EU’s textile and apparel imports in value and 28% in volume, respectively 8 and 7 pct points higher year on year. China’s unit price stood at 7.9 Euro/kg, 3.3% higher than 2004.

Japan: According to Japan official data, China’s share in Japan’s market remained stable in 2005, 76% in value and 71% in volume.

u       Major changes in trading partners

In 2005, China’s textile and clothing industry exported to 218 countries/regions in the world, with 21 markets buying more than US$ 1 billion and 74 markets buying more than US$ 100 million. Meanwhile, the country imported from 148 countries/regions, with 13 suppliers selling more than US$ 100 million. The strategy of “Market Diversification” continued to be implemented in the sector.

The US and EU replaced Japan and Hong Kong as the top two biggest markets for Chinese textile and clothing, followed by Japan, Hong Kong and Russia. Exports to the US market enjoyed the fastest growth at 70.5%, and exports to the EU scored a similar increase of 56.9%. China’s exports to Russia, Canada, India, Pakistan, Vietnam, Indonesia, among others, enjoyed a growth rate above 30% in 2005.

Due to the introduction of export tariffs on textile and clothing products by the Chinese government at the beginning of 2005, as well as the shift of shipments to the US and EU, exports to previously quota-free regions were affected in the first half of 2005. Exports to Japan only increased 5.6%, and Hong Kong even suffered a loss of 14.5%. However, starting from the third quarter of 2005, the momentum of exporting to the US and EU was curbed and exports to Japan and Hong Kong picked up. It could be expected that with the re-imposition of quotas by the US and EU, Japan and Hong Kong’s share in China’s exports will soon be resumed in 2006.

China’s largest suppliers of textile & clothing imports for 2005 were Japan, Chinese Taipei, South Korea and Hong Kong, along with the other 8 countries/regions that exceeded US$ 100 million of export value to China. Noticeably, Pakistan, the US, the EU, Vietnam and the Philippines have increased their exports to China by more than 20%.

Chart 4: Top 10 Markets for China’s Exports, 2005

Chart 5: Top 10 Suppliers for China’s Imports, 2005 

u       Continued growth in general trade and slowdown of processing trade

General trade has been maintaining faster growth for the recent four years with annual growth rate above 20%. In 2005, exports by general trade (exports of products made of domestic materials) increased by 24.5%, and accounted for 69% of China’s total textile & clothing exports. Exports by processing trade (exports of products made of imported materials) grew 12%, representing 26.5% of the total.

Imports by general trade (imports of products for domestic consumption) reached US$ 2.1 billion, up 21.6% and taking up 12.1% of total imports. Imports by processing trade for further processing and re-exports totaled US$ 14.6 billion, down 0.7% and accounting for 85% of the total.

The shares of export and import by general trade in the total both showed a modest increase of around 2 percentage points. The decreasing share of processing trade has reflected the successful upgrading of China’s yarn and fabric sector. This structural change in trade pattern also signaled China’s fast-expanding domestic market demand for high-end textile and clothing imports.

u       Private companies topped as biggest export group.

With the development of the market-oriented economy, Chinese private enterprises have been enjoying fast growth for recent years. That fact is particularly prominent in the textile and clothing industry.

In 2005, there were altogether more than 58,000 companies engaged in textile and clothing trade in China, a 17% increase in the number of companies. Among them, the number of exporters increased by 20% to 46,000, and the number of importers rose by 8% to around 30,000.

Among exporters, 52% are privately-owned domestic companies, which enjoyed fastest growth and increased by 42.5% in export value. Foreign-funded enterprises came at the second place, accounting for 37% of the total. The number of companies with state-owned shares decreased by 11% and only took up 10% of the total.

When we look at the imports, foreign-funded companies accounted for 71% of total import value, showing that the major business model for this type of company is assembly with imported materials.

u       Eastern coastal areas remained as export base.

Textile and clothing trade highly concentrates in China’s eastern coastal region, where manufacturing cluster has been well developed. Zhejiang Province remained at the top of the export list, with more than US$ 20 billion worth of exports, followed by Guangdong, Jiangsu, Shanghai and Shandong. The big five represented 77.2% of total exports, each exceeding US$ 10 billion in export value. In 2005, 25 provinces and municipalities in China recorded an export value of more than US$ 100 million, indicating the extensive geographic coverage of the sector and its importance to China’s manufacturing.

In terms of imports, Guangdong, Shanghai, Jiangsu, Shangdong and Zhejiang ranked top 5, representing 85% of the country’s total imports in 2005, and each exceeding US$ 1 billion in import value. Guangdong Province alone, where processing trade dominates, accounted for 45% of China’s total textile and clothing imports. 10 provinces and municipalities in China reached an import value of more than US$ 100 million.

Outlook for 2006

u       Favorable factors

China-US and China-EU textile agreements have ensured a smooth transition to post-quota era and created a foreseeable and stable trading environment for Chinese textile and clothing industry in the 2-3 years to come. The agreements are helping recover the normal trade flows between China and the US and the EU which were disrupted by the uncertainty and chaos that safeguards measures had aroused, while allowing a steady growing market share of Chinese textile and clothing in the US and EU. Apart from that, the voices of some of the developing countries that had been complaining about China’s exports could go lower, since the agreements also provided these countries with an extra period for adjustment and adaptation.

Global economic growth is forecasted to be around 3% in 2006, indicating that there will be a stable market demand for Chinese textile and clothing. China’s major markets show positive signs of growth: Japan remains on its way to recovery; the US maintains fast growth; and the EU keeps steady increase, although at a lower level. The economic globalization will continue to bring about more opportunities and possibilities for Chinese textile and clothing companies to develop international cooperation in the fields of sourcing, manufacturing, innovation, brands, marketing & etc.

The continuous and robust economic growth in China generates huge domestic market potentials for China’s textile and clothing industry, the ultimate momentum for the industry to thrive. It is projected that China’s economic growth rate in 2006 will be well above 9%, and will remain over 8% for the next five years. With its 1.3 billion population, China has now become world’s biggest fiber consumption market, with its fiber consumption per capita rising from 4.1 kg in 1980 to 14 kg in 2005.

China’s market opening moves in the implementation of its WTO commitments have provided remarkable opportunities for world’s textile and clothing companies. In 2006, China’s overall average commodity tariff rate is 9.9%. Specifically, the average tariff for textile and clothing is 11.4%, 9.6% for textile and 16% for clothing respectively. Apart from significant tariff cuts, China had also opened up its foreign trade and distribution sectors in 2004, allowing foreign companies to conduct international trade and distribution activities in China. These measures have attracted an increasing number of international fashion brands who moved quickly to set up their stores and distribution channels in China.

The comprehensive competitiveness of Chinese textile and clothing industry, including capacity, quality, price, delivery time, labor cost, service, availability of raw materials, efficiency, management, infrastructure & etc., although facing the danger of losing edge to some competitors, remains to be quite attractive to foreign buyers for the time being.

u       Unfavorable factors

Trade protectionism in various forms continues to be a major threat to the industry, such as anti-dumping and safeguard measures, especially after 2007/08. After China reached the textile agreements with the US and EU, trade frictions with developing countries have become more prominent. In addition, the emerging tendency to put the issue into Doha round talks needs to be warned against.

Lack of brands and less value added production are severe problems that the industry has to tackle with internally. Although the industry is big in its size of exports, its growth could be mainly attributed to quantitative growth of low-end products, the price of which is a major means of competition. Due to lack of branding and designing capabilities, the sector can only make money from manufacturing, which accounts for a merely 10% of the total value that is added throughout the supply chain. This has been regarded as a major problem that could curb the industry from further upgrading in longer term.

Rising costs in labor, raw materials and energy are adding extra burden on exporters. For example, China is now 20-30% higher than Vietnam, Sri Lanka and Cambodia in labor costs, which undoubtedly makes it less competitive. Parallel with the improvement of the living standard of farmers in rural areas where most of the textile workers come from, previously abundant supply of labor became to show signs of shortage. Soaring oil prices, as well as increasing costs of land, water and power will make the pressure even heavier.

Possible RMB appreciation is also a prominent factor that will have significant impact on the industry which has already run on the basis of very low profit margin. It is estimated that every 1% appreciation of Chinese currency will result in a 2%-6% reduction in the profit margin of the sector. Although Chinese exporters could still manage to live with the 2.1% rise of the Chinese exchange rate adopted in July 2005, any further appreciation would possibly mean shift of orders and loss of profits.

The growing-up of some competitors is posing challenges to China’s exports. Indian, Pakistani and Bangladeshi industries have already implemented long-term development strategies to enhance their all-around competitiveness, and their governments also take concrete measures and initiatives to encourage their industrial upgrading.

u       Priorities and tasks for Years to Come

Structural readjustment and industrial upgrading will be further pursued on the basis of maintaining the current scale of trade. Specifically, the industry will focus on transforming from a growth model based on quantitative increase to the one based on quality and efficiency improvement.

Developing China’s own brands is a long-term task for the industry. To achieve that goal, the industry will start with manufacturing higher-end products instead of merely concentrating on cheaper end of the market, and move up along the value chain with more customized and integrated services and value-added activities, such as product designing, logistics, material sourcing, & etc. It can be expected that after decades of efforts, a few outstanding companies will be able to penetrate into international marketing and distribution networks, and ultimately build up their own brand names in world market.

Dialogues and cooperation with textile and clothing industries of other countries, particularly the developing countries and LDCs, will be strengthened, aiming to generate mutual benefits for both China and its trading partners.

By adopting the strategy of “going global”, the industry will take more active moves to invest abroad by setting up overseas production facilities, R & D and distribution centers, to diversify risks as well as obtain maximum benefits from globalization.

Resource-efficient and environment-friendly production and CSR compliance will be further stressed within the sector with a view to building up a harmonious society.

Since China’s entry into the WTO, especially the elimination of quotas, Chinese textile and clothing industry has been undergoing remarkable growth, as well as many difficulties, especially in various forms of restriction, such as safeguards and anti-dumping measures. The impact of the change of global textile and clothing trade regime has been far-reaching and extensive. An increasing number of Chinese exporters have come to be aware that they could no longer survive in this complicated trade environment and increasingly intense competition with a business model based merely on quantity. They must focus on quality and efficiency, move up to more value-added parts along the supply chain, make quicker reactions to market and policy changes and be more responsive to social and environmental needs. Accordingly, the strategies of technical innovation, industrial restructuring and upgrading, brand promotion, “going global’ as well as CSR compliance have been adopted by the industry to better compete in this changing environment, thus helping to maintain the healthy and sustainable development of the sector.