Reality Check
March 16, 2009 Although mahjong is the traditionally favored game in China, in some circles the rules of dominoes are being ruefully learned.
This is a game no one expected to crash China’s party. The global financial crisis is being felt acutely by most “lao bai xing” (common people), thanks to falling property prices, rising costs of food staples and loss of jobs. In the manufacturing crucible of the Pearl River Delta alone, around 68,000 small companies closed in 2008, and by the end of the year 2.5 million laborers may be unemployed. This is alarming for the Central Government, which, above all, insists on social stability and does not tolerate unrest.
This is a time of global economic transition, and it is beginning to seriously affect China, as well. Put into perspective, last year China’s GDP growth was a healthy 11.9%, which fell to 10.5% in the first half of 2008, and declined further to 9% in the third quarter of this year.
It is the rate at which the growth index is decreasing that has everyone worried. 2008 has seen the worst performing Chinese economy in six years. Now analysts are looking at what could be an economic breakpoint. The magic number below which many factory jobs become unsustainable seems to be 8% growth.
Still, in the industrial and manufacturing sectors, China remains a giant – albeit a somewhat diminished one. How fast will China’s industrial engine be allowed to decelerate, and what can the government do about it?
Holding Ground
In these times of runaway-train volatility, China is determined to maintain economic stability and to minimize the impact of the crisis on the country. Recent measures taken to prevent extreme peaks and troughs in the economy include an interest rate cut, reduced costs for home buyers, new infrastructure projects to create jobs, the scrapping of stamp duties on stock purchases and a state buyback of shares in three major banks. In the long term, China is on track to continue its course of sustained growth, if not at the breakneck speed it has enjoyed over the past 20 years. As China is now integral to the world economy, its health is a global concern.
The prognosis for the textile industry, in the short term, is not optimistic. In fact, the industry is going through its most difficult period in 10 years due to rising production costs and decreasing exports, in spite of growing domestic demand.
Two-thirds of all textile companies are operating at a loss. Most of the remaining one-third needs diversified portfolios, including construction or real estate, to subsidize their textile operations. Some of the remaining one third are even expanding, either buying up the smaller failing manufacturers or putting in new production lines. For the majority, however, predictions for 2009 are worse, with a weaker international market, a flat domestic market, high costs of materials and labor, and policy issues such as the export rebate to address.
As for cotton, during the past year we have seen a contraction of overall demand for textiles, and accordingly sales for the fiber have dropped. But not all is doom and gloom. China still needs more cotton than is domestically available. While total production for the crop year 2007/08 reached nearly 8 million metric tons, China imported 2.4 million metric tons of cotton, of which 39.8% was of U.S. origin. Although this figure is far below the record total of 4.1 million metric tons imported during the 2005/06 season, it is 7% higher than last year.
What is in store for 4th quarter 2008 and next year? Realistically, more of the same – industry retraction and reductions in production volumes. The industry is in transition, and transition processes are usually painful. Nevertheless, China will by no means disappear as a core textile manufacturing base. It will only consolidate and progress towards what the government has stipulated as its goal – to become a value-added industry, higher up the supply chain.
While it will take time for this ambition to be realized – and while various sectors of the supply chain, such as cut-and-sew and finishing, are finding their way to other countries such as Vietnam, Cambodia and Bangladesh – China’s infrastructure ensures that on a global scale it will continue to dominate the industry.
What China is looking for are customers. With exports to the U.S. and the EU slowing, China must look for other markets. The most natural place to look is right at home. China’s domestic retail sales have recently enjoyed an astounding growth rate, which was over 20% in the first two months of 2008, indicating that the future lies in systematically developing demand for cotton-rich textiles in the Chinese domestic market. Programs such as Cotton Incorporated and CCI’s COTTON – BEYOND YOUR IMAGINATION™ and COTTON USA’s co-branding consumer promotions with popular international and domestic brands at retail are working effectively toward this goal.
CCI’s attitude is “don’t panic, get busy.” Now more than ever, the U.S. cotton industry requires a strong presence in the Chinese market so that, when the dust settles, the U.S. cotton industry will be well placed to continue strong partnerships with those Chinese manufacturers who have weathered the storm.
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