How did China's textile economy 'gain momentum' in 2008?

2008-12-05

What does a GDP growth of 11.4% mean for the textile and apparel industry? What impact will the downward trends in the economies of the US, Japan, and Europe have on textile and apparel companies? With increased efforts in energy conservation and emission reduction, how should companies respond? What challenges do trade policy adjustments bring to businesses?

The recent "China Textile Roundtable Forum 2008 Annual Meeting" summarized the development status of China's textile economy in 2007 and raised significant issues affecting the development of the textile economy in 2008, as well as predicting industry trends for 2008. High economic growth is primarily driven by consumption.

In 2007, the total GDP reached 6.429 trillion yuan, with a year-on-year growth of 11.4%. Yao Jingyuan, chief economist of the National Bureau of Statistics, believes this growth rate has two significances: first, 11.4% is the highest annual growth rate for China's economy since 1995. Second, in the past 17 years from 1990 to now, there have only been two instances where China's annual growth rate exceeded 10% for more than five years: once from 1992 to 1996 and again from 2003 to 2007. Additionally, a significant positive change occurred in 2007; traditionally, investment was the primary driver of economic growth, followed by consumption and then exports. In 2007, this changed significantly. Of the overall economic growth of 11.4%, 2.7% was driven by exports, 4.3% by investment, and 4.4% by consumption. This indicates that for the first time in many years, consumption contributed the most to overall economic growth. Furthermore, energy consumption per unit decreased significantly in 2007 compared to 2006, indicating a change in the mode of economic growth.

The textile industry faces three major uncertainties.

"The economic development of the US, Japan, and Europe this year may show a downward trend," predicted Zhang Yansheng, director of the Institute of Foreign Economic Research at the National Development and Reform Commission.

What pressure will this bring to the textile industry? Zhang Yansheng analyzed that first, after the end of agreements between China and Europe and China and the US, the textile industry faces tendencies towards trade protectionism and potential trade frictions that may be greater than in previous years. Secondly, this year’s trend is an appreciation of the RMB. The pressure on international balance of payments remains significant; last year China had a trade surplus of $262.2 billion, with all components of international balance of payments—including foreign exchange reserves and capital and financial items—on the rise. In this context, there is significant pressure for RMB appreciation. Thirdly, adjustments in foreign trade policies such as "two highs and one resource" will have considerable impacts on the textile industry. In 2008, various uncertainties have clearly increased; for the textile industry, adjustment pressures have also significantly intensified, making the overall situation quite severe.

In 2007, the national goal for energy conservation and emission reduction was to reduce energy consumption per ten thousand yuan GDP by 4% and major pollutant emissions by 2%. "The emission reduction target has been achieved; however, the energy conservation target has not yet reached 4%. Therefore, 2008 is a crucial year for achieving the '11th Five-Year Plan' energy conservation and emission reduction goals," emphasized Zhou Changyi, deputy director of the Department of Resource Conservation and Environmental Protection at the National Development and Reform Commission. "If we fail to meet this year's energy conservation and emission reduction targets again, it will pose problems for achieving '11th Five-Year Plan' goals." Zhou Changyi stated that this year's efforts in energy conservation and emission reduction will be further intensified. First, there will be stricter assessments under responsibility systems for targets. Currently, responsibilities for energy conservation and emission reduction have been assigned to various provinces and cities down to specific enterprises; national assessment efforts are very rigorous with special documents issued by the State Council outlining a series of assessment methods. Second, efforts to eliminate backward production capacity will be intensified. Thirdly, there will be stricter reviews for new projects regarding energy consumption, land use, water usage, and environmental protection; thresholds for new projects will be higher. Fourthly, investment efforts in energy conservation and emission reduction will be further increased. Fifthly, related policies will be more vigorously implemented including eliminating backward production capacity and establishing exit mechanisms. Additionally, mechanisms for charging fees and reforming prices for resource-based products as well as import-export policies will promote energy conservation and emission reduction.

Zhou Changyi suggested that the textile industry should conduct thorough audits or assessments on clean production practices. The textile industry's consumption of electricity, steam, and water is relatively high; thus it should focus on energy-saving renovations in electrical and water systems while recycling wastewater. Zhou Changyi introduced that national policies also support energy conservation and emission reduction projects. Last year, a budget of 7 billion yuan was allocated for energy-saving rewards; for every ton of standard coal saved, a reward ranging from 200 to 250 yuan is given by the state. Enterprises implementing pollution control projects also receive financial subsidies from the state.

A number of leading enterprises have become main forces in domestic and international competition within the textile industry while many small- to medium-sized enterprises face daunting tasks regarding further structural adjustments and industrial reorganization.

According to statistics from January to November 2007, among 43,309 textile enterprises, the average profit was 3.97%. There were 3,069 enterprises with profit margins exceeding 10%, accounting for 7.01% of all enterprises in the industry. The total number of enterprises exceeding an average profit margin of 3.97% accounted for 31.48%, contributing to a total profit share of 81.19%, with an average profit margin reaching 8.43%. Meanwhile, among all enterprises in the industry (68.52%), their average profit was only 0.73%, yet they accounted for about 65% of total employment in the sector.

Xu Kunyuan, vice president of China National Textile Industry Association pointed out that these data indicate that one-third of leading enterprises possess strong core competitiveness with good products and brands in both domestic and international markets resulting in higher added value and better profitability; thus they have become main forces within the industry. Conversely, two-thirds of enterprises lack distinctive products which leads them to have no advantages amid fierce market competition resulting in poorer profitability. These two-thirds face three prominent contradictions: contradictions between production capacity for similar products versus market constraints; contradictions between personalized fashion trends versus structural product issues; contradictions between rapidly rising production costs versus inability to pass on market prices. These enterprises are facing further structural adjustments and corporate reorganizations.

Sun Huaibin, director of China Textile Economic Research Center believes that market differentiation within the textile industry is intensifying along with enterprise differentiation. Particularly some small- to medium-sized enterprises are facing significant difficulties due to excessive concentration on policy costs and factor cost pressures affecting their survival prospects. How small- to medium-sized enterprises can develop is a major issue facing the textile industry in 2008.