By Zhu Qiwen (China Daily)
Updated: 2008-04-02 07:22

Though the necessity to reduce China's external trade imbalance has been widely recognized, the extent of the reduction is proving more difficult than expected for some export-oriented industries to accept.

Policymakers need to pay close attention to the suffering of exporters. But any government aid to relieve their pain should not come without real progress on improving the country's export mix.

A recent survey by the China National Textile and Apparel Council found that the industry's profit margins averaged 3.9 percent last year. And two thirds of the companies surveyed reported an average profit margin of only 0.62 percent.

For an industry that employs more than 15 million workers, such paper-thin profit margins ostensibly do not bode well for itself as well as the country's employment prospects. To create enough jobs for some 10 million people entering the workforce every year between now and 2010, China simply cannot afford a massive closure of textile companies.

Yet, worse than last year, China's export growth fell significantly in the first two months this year with low-value added sectors like the textile industry bearing the brunt.

Being a labor-intensive industry that has capitalized on China's comparative advantage of low labor costs, domestic textile companies have more than doubled their exports over the past five years despite the trade barriers erected by other countries.

However, growth of the country's exports in clothing and textiles have now fallen abruptly from 20 percent last year to only 5.7 percent in the January-February period. Guangdong province, the country's largest textile export base, even reported an 11.3 percent decline in exports in the same period.

If the above-mentioned industry survey has raised concerns, the latest export growth figures should justify some government response to the hardship of textile exporters.

It is reported that the government has already sent teams to investigate. To identify some of the major causes for the decline may not be difficult.

First, the continuous appreciation of the yuan is affecting all Chinese exporters including textile companies.

The Chinese currency is approaching 7 to one US dollar now. It has climbed 3.9 percent so far this year, more than half of the 7 percent gain of last year. Faster appreciation will only make Chinese exports more expensive and erode domestic manufacturers' competitiveness.

Second, a US-led slowdown of the world economy is considerably cutting external demand for Chinese goods. Customer statistics showed that China's textile and garment exports in February dropped 32.9 percent from the previous month, though, partly due to the Chinese Lunar New Year and the severe winter weather that disrupted production and shipments.

Third, rising costs of both raw materials and labor have further squeezed profit margins, pushing many small textile companies to the brink of bankruptcy.

Input costs continue to spiral, implying a spillover of price pressure from the food sector to other areas of the economy. The country's producer price inflation in February rose 6.6 per cent year-on-year while consumer inflation reached 8.7 percent, the biggest jump in nearly 12 years. The former directly adds to the cost of textile companies, and the later propels workers to demand higher wages, which, on average, have climbed by more than 10 percent annually in recent years.

Besides, the country's adjustment of trade and tax policies to pursue stringent environmental and energy efficiency standards have also worked against most of the textile firms which are usually small, less efficient in energy use and environmental protection.

Obviously, the combination of all these domestic and international factors has caused trouble for many domestic textile manufacturers.

It is the obligation of the policymakers to understand the difficult times these exporters are facing. But they must resist the call to backpedal on rebalancing the country's economic growth.

Some people have asked the government to stop reducing tax rebates for textile exports. That sounds like an easy solution to the current predicament of the textile industry. But it will not only undermine the Chinese government's efforts to rein in trade surplus growth but also do nothing to improve the mix of the industry's exports.

Instead of offering a bailout for all, the government should come up with good incentives that can encourage textile companies to climb the value chain. The current difficulties are an opportunity to goad low-value-added exporters to abandon reliance on low wages, improve their use of energy and upgrade their environmental standards.

Under increasing pressure of costs, many textile manufacturers may have realized the necessity to find other ways to survive rather than engage in price wars. A helping hand from the government is more than needed at present to tilt the balance in favor of those companies who are willing undertake painful reform and restructuring to upgrade their products and growth models.

The government should help them survive, not only by incentives, but also on their ability to adapt to changes.

(China Daily 04/02/2008 page8)