Sun explained that textile enterprises are confronted with growing polarization. Although aggregate exports are increasing, many small and medium-sized textile enterprises are on the brink of bankruptcy.

Xi Guoying argued that the export increase has been in quantity, but not in profit. Many companies have tried to grasp as much market share as possible without caring about profits, expecting a time when the trade environment would turn for the better. Under such hasty export circumstances, foreign dealers seized a large proportion of profits.

Chances to see a turn for the better look slim. At the 103rd China Import and Export Fair (Canton Fair) opened in late April, the exhibition hall for textile and apparel products only had a few foreign visitors. Guangdong Customs calculated that Guangdong Province exported $6.93 billion worth of textiles and apparel in the first quarter, a growth of 0.5 percent from the same period last year.

Mei Xinyu, researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce, pointed out that the real export value has actually declined due to foreign exchange losses. Mei said that this is because the Chinese currency appreciated 8.6 percent against the U.S. dollar this March compared with the figure of March last year. Because a majority of Chinese exports are settled in the U.S. dollar, Mei argued the currency factor must be taken into consideration.

A number of reasons

As for the reasons why there have been profit drops, Xi Guoying attributed them mainly to renminbi appreciation.

On April 24, the middle price of the renminbi against the U.S. dollar was 6.9890 yuan, appreciating nearly 5 percent from the beginning of this year. This means profits would drop 5 percent if companies exported the same quantity of products at the same price.

"Judging by the current situation, the textile industry brings in a large amount of foreign exchange, while the profit margin is very small. This makes the industry most fragile to renminbi appreciation," said Sun Huaibin.

The U.S. subprime mortgage crisis also hit hard Chinese exports. The European Union (EU), the United States and Japan are the top three textile and apparel export destinations for Chinese exporters. In the first few months this year, EU imports from China grew to some extent because it canceled the Chinese textile import quota, whereas China's textile exports to the latter three destinations all dropped.

The General Administration of Customs of China revealed that in the first two months of this year, China exported $5.99 billion worth of textile products to the EU--a significant rise of 27 percent--accounting for 23.4 percent of the country's total textile exports. Exports to the United States were down 7.5 percent to $3.46 billion; exports to Japan dropped slightly by 0.8 percent to $2.95 billion.

Sun said another factor dragging down China's textile exports was the reduction of tax rebates on textile exports.

In 1999, the tax rebates on textile exports were 15 percent. They were cut to 13 percent in 2004 and down to 11 percent in 2006. The CNTAC calculated that the 2-percentage-point drop in tax rebates directly caused $360 million in losses for the Chinese textile industry.

Raw material and human resource costs have kept rising in recent years.

Sun Huaibin said China had to import 4.5 million tons of cotton to satisfy the needs of domestic textile companies. But the cotton import quota was only 900,000 tons and subject to 1-percent import tax. The rest of the imports must be taxed a sliding duty at 5-40 percent. Therefore, the cost for cotton imports rose about 2,000 yuan ($286) per ton on average last year.

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The human resource factor posed a bigger cost factor for textile companies. After the Spring Festival (February 6-13) this year, small and medium-sized textile, printing and dyeing factories in Zhejiang and Fujian provinces suffered from a human resource drain. As the mobility of skilled workers has kept increasing, some companies have difficulties because of the lack of skilled workers who leave their companies for better paychecks elsewhere.

Du Yuzhou, President of CNTAC, noted that the average salary of a mediocre worker rose 20 percent in east coastal areas, and further salary rises are expected this year.

Cao Xinyu, Vice President of China Chamber of Commerce for Imports & Exports of Textiles, said that since last year, the average costs for domestic textile and other light industries grew about 10 percent.

Finding a way out

Song Lihong, an official with the Ministry of Commerce, praised the measures of some companies to cope with the export challenges. Song visited Jiangsu Province in March to research the situation within the textile industry.

He said in this time of difficulty, some of the companies have increased investment in R&D, begun innovative production and upgraded their products in an effort to grasp future market share.

The sales revenue from exports of Wujiang Chenlong Xinsheng Textiles Co. Ltd. was less than $3 million last year, but the company had set a target of $5 million for this year. Song said the company was cooperating with Japanese and American companies to produce a new type of fabric for sportswear. The company has also bought advanced equipment. On average, a worker can watch 16 machines, which greatly reduces the number of workers and cuts labor cost.

Wujiang Fuhua Weaving Co. Ltd. has invested tens of millions of yuan in R&D, or one fourth of the total profits made last year. To date, the company has developed over 300 new products, with over 80 independently owned by the company.

Many more companies have switched from their dependence on foreign markets to targeting domestic markets.

For instance, Septwolves Industry Co. Ltd. stated in its 2007 annual report that it had expanded domestic marketing channels and brand awareness, actively developing in second- and third-tier cities. Its net profit in the domestic market grew 77.22 percent last year, while its export profit dropped.

Surging labor costs have also forced some textile companies to set up factories in Southeast Asia. Song said over 400 Chinese textile companies have established factories in Cambodia and about 100 have gone to Bangladesh.

But Song believed establishing factories in Southeast Asia would not be a major trend. Although the labor cost is low, the supporting facilities and industrial chain there lag far behind the same structures in China.

Experts suggest

The labor-intensive textile industry provides a large number of employment opportunities. At present, there are over 20 million workers in the textile industry, 80 percent of whom come from rural areas. Du Yuzhou said the rapid development of the Chinese textile industry in the past few years was partly due to the employment opportunities it created. Therefore, Du argued the government should avoid the large-scale bankruptcy of textile enterprises, so as to protect the migrant workers' employment opportunities and maintain social stability.

Du said that in a bid to lift textile exporting companies out of current predicament, CNTAC had submitted a letter to the State Council, calling for tax reductions for textile exporting companies. It also urged the government to cut import duties on cotton.

Cotton is a major raw material for the textile industry, accounting for 70 percent of the cost for textile manufacturers. The price of cotton directly affects manufacturers' profits. According to China's WTO commitment, China has a quota on cotton imports to maintain domestic and foreign cotton prices at the same level and eventually protect farmers' interests. Du urged the government to cancel or reduce the sliding duty for cotton imports, because the price of imported cotton after being taxed is much higher than that of domestic cotton.

Zhou Shijian, standing council member of China Association of International Trade, estimated that the first six months this year would be the most difficult time for domestic exporting companies and that the situation might turn better next year. Zhou suggested textile companies expand their presence in South American countries or in the domestic market instead of their traditional exporting destinations.