China’s apparel exports sustain growth and US share – but for how long?

For several years now, we have been explaining how US importers in particular seem no less prepared to buy their clothes from China these days than in the past. How long can the real world continue to behave differently from how most commentators are convinced it really ought to?

China accounted for 38.3% by volume of US apparel imports in May 2013 –practically unchanged on May 2012, up on 2011 and fractionally down on its record 40.1% May share it achieved in 2010. Most other exporting countries keep telling everyone how they’re just about to reap the bonanza that importer dissatisfaction with China is going to bring – and no doubt if they keep saying that for long enough, they’ll be right for a minute or two. But that bonanza just isn’t showing up anywhere. And, if anything, Chinese prices to the US have been falling slightly faster over the past two years than prices from elsewhere

The touching belief in China gets surreal from time to time: the Sri Lankan garment industry is getting excited about selling $15 mn worth of clothing to it in 2012, compared to the $3.6 bn worth of garments it exports to the US and EU. Bangladeshi garment makers flatly told Europeans last year they weren’t going to increase wages, and didn’t have to because they were about to be overwhelmed by Chinese investors who didn’t hold with all this ethical compliance nonsense. In fact the biggest overseas investment by a Chinese garment manufacturer we can trace since the beginning of 2012 has been by Bosideng in one London store – where the $53 mn it’s invested is actually greater than all garment making investments combined by Chinese businesses in any overseas country during 2012.

Though there are a number of Chinese manufacturers setting up around Asia, taken together they amount to almost nothing: Chinese wages are no longer going up much faster than in nearby countries, and most Chinese garment makers have concentrated since 2008 in improving their productivity – whether by internal relocation or through better equipment and planning. Though they squeal if ever their currency shows signs of strengthening, their government has kept it practically unchanged against the US dollar, against which it’s appreciated just 5% in the past two years

Some of that may be changing – but there’s little sign of it affecting China’s competitiveness yet: China’s prices to Europe, for example, fell 11% in the first three months of 2013.

Common sense says China’s competitiveness should be getting hit by the artificially high prices in China for raw cotton: but that seems to be hitting the spinners, while garment makers and weavers just import cotton yarn from elsewhere. The really big threat, to my mind, comes from the sharp tightening of credit in China, and I think credit has been China’s secret weapon over the past few years.

In Mexico’s complaint to the WTO about Chinese trading practices in garments and textiles, there’s a lot about easy credit, but estimating the benefit is tricky.

Look up any official source or banking data, and you’ll be told that lending rates are a bit higher in China than in the West. But that’s not the real point. Cashflow in garment making is horrible: the factory pays a fortune for fabric and trim, and adds very little value itself. A huge part of a factory owner’s job is negotiating for more favourable payment terms from suppliers, and borrowing cash to run the business if a consignment’s a bit late. More often than not, the sources he uses for cash top tide him over don’t show up in official statistics: they’re often little more than loan sharks – and the things Mexico complained about are a myriad of different techniques China has developed for smallish businesses to get by without resorting too much to loan sharks.

These are precisely the sources China’s current credit crackdown is trying to dry up. If China doesn’t handle that with great sensitivity, there’s a real risk a lot of garment makers might run out of cash at just the wrong time.

Tough to predict. But if we ever see an end to China’s extraordinary skill in keeping hold of its world garment market share in spite of so many predictions it won’t, that end won’t be due to rising wages. It’ll be because more and more factories just find themselves unable to pay their wage bill