Some Thoughts on Current Market Environment in China

Cotton and VSF price kept hiking this year and hit historical high. Unlike previous years, downstream mills did not show much resistance to the price hikes of raw materials as the prices of their products including yarns and fabrics also created historical high. The dull season was no longer that bleak. The old ways are no longer that effective to analyze the market when textile market experiencing great changes.

1. Financialization of feedstock market. Since cotton and PTA futures appear on stock market, two major raw materials are pushed to the frontier of financial market. We have to admit that price comparison effect of financial market is sometime far ahead or even disentangled from the fundamentals of the industry. When its scale reaches certain degree, it will act on the fundamentals---just like reflection theory put forward by Soros. Many traditional plants may have a difficult time under the new rule.



2. Labor force cost of textile wasn’t cheap any more. As food price, housing price and education cost climbed up, labor cost was pulled up as well. Opportunity cost of migrant workers moved up, moreover, the new generation of migrant workers ( born after 1980) had higher request on employment choosing, working condition and job safety, in stead of low salary in severe environment. As to the labor-intensive enterprises, textile industry may face increasing cost and price in the future.

3. Excess liquidity in China. Although China Central Bank has adopted austerity policies recently such as increasing deposit reserve rates and deposit interest rates, the problem of excess liquidity remains severe and may not be solved in short term. Besides, with regulation on real estate strengthening, large amount of capital flowed out from this industry and seek new investment targets. As the capacities are excessive in real economy, a great amount of funds flowed into capital market, which well explained why SSE Composite closed high on Oct 19.
4. The effect of global excess liquidity. Sometimes the government can do little faced with imported inflation, especially the textile industry. Raw materials like PX, wood pulp and cotton all depend highly on imports; China has little power in determining these prices. Meanwhile, western countries always resort to monetary stimulus in dealing with sluggish economy.

At the Revisiting Monetary Policy in a Low-Inflation Environment Conference of Federal Reserve Bank of Boston on October 15, Ben Bernanke delivered the speech ‘Monetary Policy Objectives and Tools in a Low-Inflation Environment’ in which he mentioned ‘Given the Committee's objectives, there would appear--all else being equal--to be a case for further action.’ Indicators of longer-term inflation expectations have generally been stable in the wake of the financial crisis. For example, in the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters, the median projection for the annual average inflation rate for personal consumption expenditures over the next 10 years has remained close to 2 percent.

In conclusion, under current market background of excess liquidity and rise in labor costs, we can not simply analyze the market trend through traditional seasonal factors and supply and demand situation. With a lot of money withdrawal from real estate, the impact of excess liquidity will become increasingly evident, especially in the capital market. The stock market or commodity market probably will be the main force of the market in the future.
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