What’s next for China?

The Xinjiang effect isn't expected to go away anytime soon. Credit: Shutterstock.

The China National Garment Association (CNGA) in a briefing on China’s clothing industry economic operations for H1 2023 warned China’s clothing industry is under serious pressure.  

Insufficient post-Covid demand recovery in international markets due to inflation and central banks’ tight monetary policies have been exacerbated by overseas customers transferring orders to other countries.  

The CNGA partly attributed this situation to the late-2021 implementation of the US’s Xinjiang-related Uyghur Forced Labor Prevention Act, which, the CNGA said, not only seriously affects China’s export of cotton products to the US, but also has delivered a negative chain effect on other major markets.  

According to China Customs, in H1 2023, China’s exports of cotton clothing to the US were worth USD5.54bn, down 39.3% year-on-year; exports of cotton clothing to the European Union (EU) were USD4.47bn, down 32.2% year-on-year; and exports of cotton clothing to Japan were $2.09bn, down 15.9% year-on-year. 

A proposed EU regulation banning the sale of goods made with forced labour could lead to EU regulators restricting imports of clothes and textiles made with Xinjiang cotton.  

In any case, existing trade declines in such lines are already significant and these trends have depressed China’s share in developed economies and major clothing consumer markets. According to separate data from the China Chamber of Commerce for Import and Export of Textiles (CCCT), in the first two months of 2023, China’s market share in the US, the European Union (EU), Japan, the UK, South Korea, Australia and Canada, dropped by 5%, 3.7%, 7.4%, 3.4%, 0.9%, 5.4% and 1.3% year-on-year respectively.   

Leaving little doubt that the Xinjiang effect is not going away anytime soon, Chinese-language Xinjiang Daily newspaper in late August 2023 reported that despite the regulatory controls impeding the use of the region’s cotton in western brands, since the beginning of this year, Xinjiang has accelerated the construction of cotton and textile and clothing industry clusters. In the first half of this year, the added value of Xinjiang's textile industry increased by 7% year-on-year, with cotton serving both the Chinese market and overseas markets unaffected by current western restrictions. Xinjiang production of cotton yarn in H1 2023 was 1.167 million tonnes, a year-on-year increase of 9.8%, while production of cotton fabric was up by 27.6%, to 558 million metres, said the state-run newspaper report. Meanwhile, Xinjiang is also boosting its chemical fibre output, making full use of the existing production capacity of inputs p-xylene (PX) and refined terephthalic acid (PTA), the Xinjiang Daily reported.   

“The price increases of the past decade made it very clear that China is no longer a ‘low-cost provider’,” said a spokeswoman for GermanFashion Modeverband Deutschland, Germany’s fashion industry association.   

Some foreign buyers are very careful and want to avoid it [Xinjiang cotton],” said Renaud Anjoran, a Hong Kong-based manufacturing consultant.   

“It means it’s sold more domestically and to countries that don’t have a strong policy about it.” She added that “now, however, increased political risks, especially through human rights violations against ethnic minorities, Russia’s support in the Ukraine war and, last but not least, the military threat to Taiwan, are increasingly aggravating the situation.”   

Research from the Hong Kong Polytechnic University’s School of Fashion and Textiles confirms that there has been a diversification of clothing sourcing away from China by firms from developed nations. Its research, which sampled 340 buyer-supplier partnerships, indicated a 21.54% decrease in the transaction value between Chinese suppliers and US buyers in 2019 compared to 2017, suggesting that the US-China trade war launched by former President Donald Trump had a significant impact. Further, the trend has continued after the pandemic, with current President Joe Biden leaving many of the import tariffs on Chinese exports erected by Trump in place. The researchers cited a 6.8% year-over-year reduction in the first quarter of 2023 observed in Chinese textile and clothing export value.  

“To mitigate the risk of political trade conflict uncertainty, buyers have diversified towards southeast Asia, due to the region’s cost advantage for sourcing, while several Chinese textile and clothing manufacturers have expanded part of their production base to southeast Asia to leverage this emerging opportunity,” said Fan Di, discipline leader and Assistant Professor, business division, at the polytechnic’s School of Fashion and Textiles.   

Speaking to Just Style, he added that “this allowed them to capitalise on the cost benefits of production and gain policy advantages offered by developed nations to southeast Asia regions.”  

Fan pointed out, however, that some sourcing in China remains strong due to factors that make relocation unfeasible, such as high-level production requiring advanced technology, superior quality and swift responses.   

“The country’s textile and clothing manufacturing industry still provides unmatched advantages in terms of infrastructure, expertise and technology adoption,” said Fan.  

Meanwhile, as the CNGA pointed out in its briefing, since the start of this year, China’s macro-economy has recovered somewhat, with the International Monetary Fund (IMF) forecasting growth of 5.2% this year (2023) and 4.5% next year. This means Chinese consumers’ income has grown steadily, aided by policies to expand domestic demand and promote consumption, in turn boosting China production for the domestic market.   

According to the National Bureau of Statistics of China, from January to June (2023), domestic retail sales of clothing goods increased 15.5% year-on-year, easily outpacing overall retail sales growth of 8.2%.  

Fan confirmed that there has indeed been a trend among Chinese clothing manufacturers to concentrate on the domestic market: “Firstly, the rise of local fashion brands highlighting Chinese identity has led these brands to prefer the complete supply chain [to be] within China, leveraging local suppliers and manufacturers, supporting and strengthening domestic manufacturing,” Fan explained.  

“Secondly, the emergence of the 'China-chic' trend, which involves incorporating traditional Chinese symbolism and special knowhow, has further fuelled this focus. These styles require expertise and craftsmanship that local manufacturers are uniquely positioned to fulfil, warranting increased reliance on domestic production,” he added.  

Nevertheless, the CNGA, for its part, advises China’s clothing sector to explore the Asian and Eurasian markets of countries being opened by the Belt and Road Initiative (BRI) and the 15-country Regional Comprehensive Economic Partnership (RCEP) trade deal to offset strengthening headwinds in developed markets. It noted that in the first half of 2023, clothing shipments to emerging countries in southeast Asia and in the BRI-related regions grew by 9.6% year on year, with Russia-bound exports surging by 42.7%.   

“China’s clothing foreign trade enterprises can actively explore the markets of countries along the Belt and Road, seize the effective implementation opportunities of RCEP and deeply tap the trade growth potential of diversified markets” the CNGA wrote.

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While China’s rare earth production remains orders of magnitude greater than Australia’s, large-scale and well-established projects such as the Mountt Weld facility could be Australia’s best chance to threaten Chinese rare earth production on a large scale.