Chinese textile firms may go bankrupt if yuan goes up

Half of China's textile mills may go bankrupt if the yuan appreciates by five per cent against the dollar as it would badly dent their thin margins, a top industrial body said today amid increasing world pressure on the country to revalue its currency.

"Textile units are surviving on knife-edge due to thin profit margins of around three to five per cent," said Gao Yong, vice-president of the China National Textile and Apparel Council, the lobby group of the industry.

"If the yuan actually appreciates five per cent against the US dollar, over half of China's textile companies will go bankrupt," he told the official China Daily on Tuesday.

A yuan stress test conducted by the government in March this year, showed profit margins of labour-intensive textile companies would drop by one percentage points if the it appreciates by one per cent, the daily said.

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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 lobby group said.

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

The yuan rose 21 per cent against the US dollar from 2005 to 2008 and recently China lifted the restrictions on its appreciation as a result of which it appreciated from about 6.80 to 6.76 against the dollar.

"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.

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"Since Chinese textile companies are facing rising labour costs after labour 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 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 said.