Currency moves may imperil textile firms

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Half of China's textile companies risk going to the wall if the yuan appreciates 5 percent against the US dollar, an industry lobby group warned.

China National Textile and Apparel Council Vice-President Gao Yong attributed this knife-edge existence to the industry's thin profit margins of around 3 to 5 percent.

"If the yuan actually appreciates 5 percent against the US dollar, over half of China's textile companies will go bankrupt," Gao said.

The government's yuan stress test, conducted in March, showed that labor-intensive textile companies' profit margins would decline by 1 percentage point if the currency appreciates by 1 percent.

More than 20 million people are directly employed in China's textile industry, while a further 140 million are involved in cotton farming, according to the Ministry of Commerce. Therefore, a large upward revaluation of the yuan could cost millions of jobs.

The appreciation of the yuan, together with rising raw material and labor costs, has already squeezed profit margins in China's textile industry.

The yuan rose 21 percent against the US dollar from 2005 to 2008.

"This has made Chinese textile products more expensive, thus the price advantage has almost vanished compared with textile products from Vietnam, Indonesia and other Southeast Asia countries," said Zhang Bin, an analyst at Sinolink Securities.

"Since Chinese textile companies are facing rising labor costs after labor discontent at Foxconn, further appreciation of the yuan will make the situation even worse," he said.

However, analysts said yuan appreciation would also stimulate industry upgrading and integration in China's textile industry.

Qiu Yafu, secretary-general of China National Textile and Apparel Council and president of textile manufacturer Shandong Ruyi Group, said that the only textile companies who could survive the current "brutal" environment would be those that attach great importance to industry upgrading and technology innovation.

"Shandong Ruyi Group will stick to high-end lines and make every effort to improve the international competitiveness of its textile products," he added.

Ruan Gang, an analyst at GF Securities, said there are three ways Chinese textile companies can cope with yuan appreciation.

"First, all Chinese textile companies should vigorously promote industry upgrading and technological innovation to enhance product added value; Second, they could promote structural adjustment and rearrange the proportions of exported products and those for domestic market to further expand the domestic demand; Third, they could implement business diversification to reduce operational risks," said Ruan.

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