Chinese textile companies reported an average profit margin of only 3.7 percent last year, much lower than the national average of 5.69 percent for all industrial enterprises, according to a National Development and Reform Commission (NDRC) report.

"China's textile exports, pressured by the appreciating yuan and the reduction in tax rebates, are losing their low-cost cutting edge across the global market," said the report.

The sector generated an aggregate output of 2.5 trillion yuan (about US$329 billion) last year, up 21.2 percent from the previous year, registering 88.3 billion yuan (about US$11.62 billion) in combined profits, up 28 percent. Exports accounted for 43.8 percent of the aggregate output.

The performance was better than expected following a warning from the NDRC last September that textile companies could barely absorb the costs of the rising yuan and would start to lose money.

The central parity rate of the yuan gained a monthly high of 99 basic points against the US dollar on Wednesday to 7.7496 yuan, breaking the 7.75 mark for the first time.

Last year, China's garment exports rose 28.9 percent to US$95.2 billion while the exports of textile yarn and fabrics climbed 18.7 percent to US$48.8 billion. From 2003 to 2005, both reported a growth rate of more than 20 percent.

Cao Xinyu, deputy director of the China Chamber of Commerce for the Import and Export of Textiles, predicted that textile exports would grow at a slower rate of 15 percent this year to US$161 billion.

"Expanding domestic consumption has helped cushion the negative impact on exports. In the future, the focus of China's textile and clothing industries will gradually shift from abroad to home," said the NDRC report.

Figures from the National Bureau of Statistics show retail sales of clothing in China climbed 21.5 percent in November, about 7.4 percent higher than the average.

Domestic textile companies channeled 203 billion yuan (about US$26.7 billion) into fixed assets investment last year, up 27.1 percent, with most of the investment going to central China. Shandong, Shanghai, Beijing and Tianjin reported a decline in textile investment.

This year, the profits of China's textile industry are expected to grow at a slower rate of 11.2 percent to 98.2 billion yuan (about US$12.92 billion), according to predictions by the China National Textile and Apparel Council.

In an effort to help textile companies improve their competitiveness and efficiency, China has set up a special fund using revenues from textile export tariffs.

The 1.36 billion-yuan-fund (US$170 million) will be used to boost technical innovations in production, develop new fibers and help make the industry more environmentally friendly and energy efficient.

In 2006, only 15.2 percent of China's textile companies reported deficits, down 2.6 percent. (Source: English Site of USA)