China’s textile industry reported remarkable profits last year given its struggles with the soaring yuan, higher production costs and slashed export tax rebates. Analysts put the sector's success down to stronger domestic demand largely offsetting lost revenues from export markets. Wang Shunchao and Winny Wang report in the Shanghai Daily that the trend is expected to continue throughout this year

Last year, China's domestic retail spending rose 16.8% to US$1.24 trillion (RMB8.92 trillion), representing 4.4 percentage points of the nation’s 11.4% increase in gross domestic product. This made domestic spending the single biggest driver of economic growth for the first time in seven years.

According to the National Bureau of Statistics, middle class families, defined as those with annual incomes between US$8,435 and US$70,291 (RMB60,000 to RMB500,000), made up 12% of China’s population last year. Highly brand conscious, this group is setting its sights on more and more expensive products. A 17.2% jump in disposable income in rural China to RMB13,786 last year was also a major factor contributing to the consumption gain.

The textiles industry was a key beneficiary of the spending boom. The sector’s profits hit RMB115.2 billion last year, up 32% from a year earlier. Profits are expected to grow a further 27.5% this year, according to www.webtextiles.com, China’s flagship textile website.

Garment production amounted to 17.9 billion pieces from January to November last year, up 13.44% year-on-year. Output grew 11.84% in 2006, but with surging investment in the industry, Ping An Securities predicts garment sales will grow 15% in 2008.

The sector had some significant hurdles to overcome last year. Rising production costs, in part due to the new labor law, and a stronger currency impacted the industry's development. Cheap labor has always been China's competitive edge, and the loss of this is expected to be devastating to the manufacturing industry.

"The average wage of textile workers rose 15% in the first eight months of 2007," Li Zhixian, an analyst with Guotai & Jun'an Securities Research Institute, said. “But the average wage still represented just 70% of the average wage of workers across the manufacturing industry nationwide, which indicates there is still room for further increases. This poses a great danger for the labor-intensive textile industry."

Higher costs may drive manufacturers with low profit margins out of China, dampening the investment in factories that has helped push inflation to an 11-year high. A large number of manufacturers have already moved some of their business to neighboring countries to access even cheaper labor.

The rising yuan and lower export tax rebates have also hurt textile exports. According to webtextile.com, every 1% the yuan gains on the greenback will cause a 2% to 6% drop in profits in the textile and garment industry. The China National Textile and Apparel Council estimated that the yuan's appreciation deprived Chinese exporters of a combined US$1.25 billion (RMB8.9 billion) in the first eight months of 2007.

Textiles have always been China's biggest export industry, with 50% of textile manufacturers relying heavily on exports. China exported US$156.6 billion worth of clothing and textile products in the first 11 months of last year, up 20% from a year earlier, the National Development and Reform Commission, China’s top economic planner, announced on December 21.

China's growth of garment exports may slow after 2010, and its purchases of shoes and clothing from overseas may rise as domestic consumers become more affluent, Robert Antoshak, president of Nashville-based cotton information provider Globecot Inc, said.

It is anticipated that this booming domestic demand will offset to some extent falling export revenues, while China's textile exports are also expected to receive a 15% boost this year after the European Union raised quotas on 10 categories of textiles imported from China.

"Although we estimate exports will maintain a stable growth this year, we are still confident about the domestic market, particularly for sportswear, women's ware and baby products," Li said.

In the first 11 months of 2007, fixed-asset investment in the textile industry expanded 27% to US$19.34 billion (RMB137.6 billion) and fixed-asset investment in the apparel industry rose to US$9.24 billion (RMB65.7 billion).

This article originally appeared in Chinese in the Shanghai Daily on February 27, 2008. The China Perspective takes no responsibility for the accuracy of the original article.