China – Under The Hood: Signs that China starting to lose its competitiveness?

It has been a very mad day / week if you are in China’s textile business.

Commodity price inflation is being sorely felt here on-the-ground in Hangzhou. For example, Cotton prices have shot up in the past few weeks. The China Cotton Index hit US$4,332 per ton, a rise of over 100% on the same time last year. My Italian colleague, who has been trading in textiles (garments, etc) for over 18 years hasn’t seen anything like this before.

“China is losing is competitiveness”, and he wonders how long China will stay at the helm of this industry.

Such is the severity of recent price increases, over the past few days his factory managers have been unable to secure any raw cotton, due to rampant speculation and hoarding by suppliers. Another friend in garment manufacturing described today’s attempts to secure cotton and other fabrics as “mayhem”.

Many export oriented textile manufacturers in and around Hangzhou and Zhejiang Province (the cradle of China’s textile business) are struggling to survive not only amid rising raw material costs, but also rising labour costs. Since January 2010, factory worker wages have increased by at least 30%.

And if these problems weren’t enough to handle, a severe labour shortage is forcing plants to stop production, all of which are leading to delivery delays.
China’s textile industry is facing competition from other Asian countries with an abundance of raw material, such as Pakistan, and low labour cost countries such as Laos and Cambodia who are in catch-up mode.

Last month the People’s Daily newspaper ran an article acclaiming the fact China exported US $ 149.8 billion of textile products in the first nine months of the year, an annual growth rate of 23.14 %. However, the numbers are misleading, according to my colleague, who argues the numbers are only growing because buyers are making bulk orders. While in the past buyers would purchase about one or 2 months demand, now, with one eye on price rises and delivery delays, buyers are purchasing up to 6 months of product in one order.

Over the next few days expect the Chinese Government to announce a policy response consisting of price intervention and allowing the Chinese RMB to appreciate faster against the US$ over the next year (5%).

1 Comment

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One response to “China – Under The Hood: Signs that China starting to lose its competitiveness?

  1. Comments:
    Keith F
    • My customer who is also in the textile business made a fortune some years ago hoarding cotton. Judging by the huge buildings being erected without any machine, looks like he’s doing the same thing again.

    Jerry D
    • Yes very thought proving Niall. I wonder when the industry will realize that to expand, even with internal domestic capacity, that it will require China enterprise to invest outside of the country. This in an of itself appears to be a solution but the barrier they face in terms of money transfers is a significant one (thus slowing the pace).

    Kieran P
    • Interesting article, tks Niall. The inflation in commodities is a result of the trillions of “stimulus” dollars that has been pumped into economies around the world. Lagging indicator. By the end of 2011 inflation will be very high in the US and elsewhere. Commentators have noted that the stimulus cash didn’t result in increased loans to business. The banks hoarded the cash. Actually, the financial sector invested the stimulus money in higher growth rate/interest rate economies such as China, India, Brazil etc and it went to stimulate the economies there. China had its own massive stimulus which combined with external investment is laying the grounds for hyper inflation.Shenzhen is getting more expensive at a breath-taking pace. Of course, China is not losing its competitiveness in all industries. The textile industry is relatively low tech so countries such as Pakistan and Indonesia can compete. This forces China to move up the food chain to more valued added products. Expect even more pressure on manufacturing/engineering/technology jobs in the West. However, it will also create opportunities if foreign companies are allowed to fairly compete in China. Big implications for Ireland.

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