Third, rising costs of both raw materials and labor have further squeezed profit margins, pushing many small textile companies to the brink of bankruptcy.
Input costs continue to spiral, implying a spillover of price pressure from the food sector to other areas of the economy. The country's producer price inflation in February rose 6.6 percent year-on-year while consumer inflation reached 8.7 percent, the biggest jump in nearly 12 years. The former directly adds to the cost of textile companies, and the later propels workers to demand higher wages, which, on average, have climbed by more than 10 percent annually in recent years.
Besides, the country's adjustment of trade and tax policies to pursue stringent environmental and energy efficiency standards have also worked against most of the textile firms which are usually small, less efficient in energy use and environmental protection.
Obviously, the combination of all these domestic and international factors has caused trouble for many domestic textile manufacturers.
It is the obligation of the policymakers to understand the difficult times these exporters are facing. But they must resist the call to backpedal on rebalancing the country's economic growth.
Some people have asked the government to stop reducing tax rebates for textile exports. That sounds like an easy solution to the current predicament of the textile industry. But it will not only undermine the Chinese government's efforts to rein in trade surplus growth but also do nothing to improve the mix of the industry's exports.
Instead of offering a bailout for all, the government should come up with good incentives that can encourage textile companies to climb the value chain. The current difficulties are an opportunity to goad low-value-added exporters to abandon reliance on low wages, improve their use of energy and upgrade their environmental standards.
Under increasing pressure of costs, many textile manufacturers may have realized the necessity to find other ways to survive rather than engage in price wars. A helping hand from the government is more than needed at present to tilt the balance in favor of those companies who are willing undertake painful reform and restructuring to upgrade their products and growth models.
The government should help them survive, not only by incentives, but also on their ability to adapt to changes.
(China Daily April 2, 2008)