China's textile industry in crisis

The Chinese textile industry is facing crisis as current typical profit margin in the sector is lower than the cost of finance. During 2011, more than 30 percent of textile and clothing firms in Jiangsu and Zhejiang are reported to have gone out of business, according to China Business Daily.

Rising labour costs are cited most frequently as a cause of the industry's difficulties. Low technology, labour-intensive processes have increasingly been transferred to cheaper production sources in South East Asia, such as Cambodia and Vietnam, or to eastern European countries, such as Bulgaria and Poland.

Industry sources also comment that the corporate tax burden is excessive. The difference between sales tax on processed goods (17 percent) and the purchase tax payable on cotton (13 percent) cannot be recouped, for instance.

The decline in textile sector optimism is reflected by falling enthusiasm for cotton production, notwithstanding the recent announcement of the increased support purchasing price for next season. That increase, it is suggested, is insufficient to offset rising costs of production and bring an increase in farmers' incomes, hence a turn toward more lucrative crops. As previously reported, farmers in Dezhou, Shandong province, for instance, foresee a decline in cotton area this year of no less than 25 percent. Earlier this week, it will be recalled, a second survey by the farmers' branch of the China Cotton Association predicted a decline of 16.7 percent in plantings nationwide,

However, industry participants appear rather gloomy about prospects for the next several months, owing, in particular, to a poor outlook for demand from the euro-zone countries. The call for tax concessions appears thus to be increasing.

Yesterday, the National Bureau of Statistics reported that industry profitability in general (enterprises above a designated size) has declined sharply this year. Unlike the previous contraction (in 2009), which was a temporary phenomenon resulting from the financial crisis, rising costs of production, such as energy and labour, are this time proving to be more problematical. State price controls on consumer goods, it is noted, make it very difficult to recoup higher costs.