Summer Sizzles, Winter Frosts?

The cut-down is by all means a blow toits apparel industry, making this summer asuffering hot. When winter comes, the exportimpact begins to appear, if the RMB's valuecontinues to rise, this would " adding frost tosnow", a Chinese saying for an even worsesituation in an already biting-cold weather.

This oppressive summer sizzleswith another hot wave in the alreadyhumid weather of Chinese textile &apparel industry. Last September,Chinese government issued a policy toreduce its export rebate rate from 13%to 11% for textiles, leaving the apparelexport payback rate unchanged, for thegovernment is hesitant or not assured ofwhat would happen if the labor-intensiveclothing industry could be faltered with afurther VATs reduction in export.

Amid pressure of its currency valuerise, and growing price in raw materials,energy and labor costs, the clothingindustry in China, which used to beproudly called " big bread earner" for itsamazingly contributive share of nationalexport, seems now to fall from princessto "Cinderellar" as the government nolonger takes pride in who's exportingmost.

The drop of export rebate from13% to 11% for the clothing industry,a policy already discussed and worriedby the industry for the past few monthscame out as a no surprise as the Ministryof Finance announced its decision onJune 16th in a circular to announce thefurther cut-down of export rebates forsome products, from 13% to 11% for theapparel, and unexpectedly from 11% to5% for viscose fiber.

Export Rebates orExport Subsidies?

There has long been debated on thedefinition of the export rebate that is,more often than not, regarded by some asa sort of export subsidy that is universallyreferred to as "unfair trade practice". Thefact is that the export rebate is not exportsubsidy. The reduction of export rebatefurther weakens export power enginesrather than fuels its strength. Chinastarted to reduce its export payback ratelong time ago from 17% to 13% forits textile industry on the eve of quotatermination and went further down from13% to 11% for textiles export last year,keeping its clothing export rebate rateuntouched in fear of strong negativeimpact on the employment in this labor-intensive and internationally-competitiveindustrial sector.

"Export rebating is a normalinternational practice for exportpromotion, which is very different fromexport subsidy, the former is in line withinternational recognition and acceptance,while the latter is strongly opposed to.China started to practice export rebatingin the late 80s last century. To slow downexport speed, China went to cut down itsVATs rebating rate from what it shouldusually have maintained at 17% to11% now both for textiles and apparels.This would increase costs for exportersto alleviate the fear of "surging exportgrowth" when its textile agreements with

EU and with USA will come to an endrespectively for this year and next year. Inspite of the negative impact on the textilesand apparel export, this is a positiveand proactive step taken by Chinesegovernment to encourage a structuralchange both in its economic and exportgrowth." Said Zhao Hong, D. Directorof International Trade Office of ChinaNational Textile and Apparel Council.

Impact on ClothingIndustry

For Chinese clothing industry, theimpact hits hard. Based on the exportvalue from January to April, twopercentage point down from 13% to 11%means $380 million loss (equivalentto 2887 million RMB), making it evenmore difficult for small manufacturersand exporters to continue theirexport business due to the increasedmanagement costs resulting from thisexport rebate change.

Impact on ViscoseFiber Industry

It comes as an insurmountablesurprise to the viscose fiber industrywhen the rebate drop plunged from 11%to 5%, a six point percentage down forits export payback.

From January to April, the export ofviscose staple fiber totaled 34,459 tons,173.02% up as opposed to the sameperiod of last year to reach $63.2978million, up by 235.8% while viscosefilament shipped out 26,766 tons (7027.19tons more than that of last year), up by35.6% to arrive at $99.3798 million , upby 54.73%.

When asked about its tangible impacton this sector, Mr. Zheng Junlin, D.Secretary General of China Man-madeFiber Association, explained "If we seethe general trade accounts for about 80%,the six point percentage sharp downfrom its previous 11% to 5% in exportrebate means a heavy loss to this viscosefiber sector. From January to April, thetotal production of viscose fiber, takingstaple and filament together, came up to558,600 tons, the sales income averagedagainst the total production is ￥19,193/ton, the direct loss out of this rebate dropis ￥106.24/ton in sales income. Thetotal profit loss is expected to fall by 0.5percentage point for the entire viscosefiber industrial sector."

Impact on the WholeTextile Industry

In the 2006, the whole year witnesseda profit of ￥88.294 billion for the entiretextile industry. If calculated on thegrowth of 15% as compared with thesame period of last year, the four monthsfrom January to April in 2007 wouldadd up to ￥33.846 billion. As the rebatereduction for clothing slims its profit for~2887 million and shrinks ￥59.3448 inthe profit of viscose fiber industry, thewhole textile industry will encounteran eight percentage point down in itsprofit. This is a lot! For the profit ratein 2006 was merely 3.65%. This policywill take effect from July 1st, meaningthe rest of the year is expected to beinflicted with the impact, for as usual,the export performs more strongly inthe second half.

Referring to the impact on the textileindustry as a whole, Mr. Gao Yong, Vice

President of China National Textile andApparel Council, said:" This policyapplies to all the products listed inChapter 61 and 62 in HS Code, affecting63% of the textile and apparel values.As the export in the second half of theyear is usually larger than that in thefirst half, the impact assumes strongly inthe coming months. We are now gettingexperts from man-made fiber industryto calculate how much it is inflictedwith the sharp down from 11% to 5% inVATs export rebating in the viscose fibersector. I would say the impact is severe."

Gao went on to say "our export inMarch and April assumed 13% and 14%growth respectively, an obvious drop ascompared with the same period last year.The new policy for further reduction ofapparel expert rebate takes effect on July1~, the government's goal to cut downthe Wade surplus in international marketseems to come in sight."

Indeed, the ballooning trade surpluswith its major markets puts China onthe horns of a dilemma. The Sino-USStrategic Economic Dialogue (SED) thatrounded off in the late May seemed tocement US determination to press Chinafor further revaluation in its currencyYuan that is reported to have beenmanipulated and undervalued for itsproducts, especially textiles and apparels,to compete at an unfair price.

China is aware of the problemsand has been trying not to fuel itsalready fast-running export engines byimplementing a series of policies toslow down the outbound shipment tonarrow the trade balance gap. Ministryof Commerce in China vows to take thereduction of trade surplus as priority, afocused work in 2007. The export rebatereduction for apparel, and also for theother products concerning the otherindustrial regimes, could be seen asChinese proactive step to reach that goal.

But that is not all! For many, this stepis seen as one of Chinese measures to givea "push" to the structural change, industrialupgrading and a strategic shift to a newprofile of economic growth to sustain itscompetitive strength in a new horizon.