Zhu Qingtao: The Appreciation of *** Caused a Great Impact on Textile and Garment

*** Appreciation is the trend this year. China's textile and garment industry is highly dependent on foreign countries and is very sensitive to changes in exchange rates. How will the appreciation of this round will affect the textile and clothing industry? How should companies in the textile and clothing industry respond? We asked Mr. Zhu Qingzhao, a light industrial researcher of China Investment Advisors, to analyze for us.

On April 29, the central parity rate of the US dollar against the *** exchange rate broke 6.5 to 6.499, a record high since the exchange rate reform. Since August, the appreciation of *** has accelerated. On August 19, the central parity rate of the US dollar against the exchange rate reached 6.3925, a new high since the exchange reform.

Q: In the recent past, the appreciation of the *** has been relatively large, and the exchange rate of the *** has reached a record high. In your opinion, what are the negative effects of the appreciation of *** on the textile and clothing industry?

Zhu Qinghao: I would like to talk about the negative effects of the textile industry and the apparel industry respectively.

For the textile industry, first of all, the appreciation of *** will lead to an increase in the export prices of Chinese textile products, leading to a decline in the competitiveness of products in the international market.

Second, the exchange rate adjustment will have the greatest impact on large- and low-grade textile exports, and its export scale will be suppressed. In fact, for every 1% increase in the value of ***, the sales margin of the textile industry will drop by 2%-6%. *** Appreciation increases corporate production costs, which include rising labor costs and raw material costs caused mainly by raw materials purchased from domestic sources, and the increase in costs will push up product prices. However, the end product's price sensitivity is relatively high, and there is little room for price increase. This will inevitably reduce corporate profits and some sales, leading to a decline in the industry's sales profitability.

Finally, the appreciation of the *** will increase the labor costs of textile companies and force companies to relocate to inland areas where labor costs are lower. This will break the existing industry supporting structure and increase the difficulty of the company's survival.

*** The negative impact of appreciation on the apparel industry is reflected in the following aspects: On the one hand, due to the low added value of apparel products in China (in the international market, the added value of China's apparel products is only a few tens of thousands of foreign advanced countries a) The lack of internationally-recognized outstanding apparel designers in the industry has resulted in a lack of product innovation capabilities. Therefore, the ability to resist the appreciation of *** is weak. On the other hand, the lack of independent brands is a long-standing problem in China's clothing industry. By imitating the production of branded apparel of large companies, it lacks its own brand and influence, resulting in a small profit margin for its products. The appreciation of *** will directly reduce this situation of gaining market share with price advantage, and giving small and medium-sized garment enterprises Big impact.

Q: In your opinion, what positive impact does the appreciation of the *** have on the textile and clothing industry?

Zhu Qingyi: First of all, the appreciation of *** is conducive to promoting industrial integration and accelerating the survival of the fittest in the industry. At present, there are a large number of small and medium-sized enterprises in China's textile and clothing industry, and they have many, small, and mixed features. After the financial crisis in 2008, some small and medium-sized enterprises were eliminated in the industry, and the industry concentration began to increase.

This year, the challenges facing textile and garment companies are even more severe. This will speed up the elimination of companies with backward production capacity and lack of competitiveness. The market share given by this group of enterprises will be seized by large-scale enterprises. Leading companies in the industry will obtain higher growth rates based on their capital, scale, customer resources, and risk-resisting capabilities. This will lead to several leading companies occupying most of the market share, while small enterprises will gradually withdraw from the market competition.

Secondly, the appreciation of the renminbi will ease the pressure of imported inflation and the depreciation of the currency pair, which will help alleviate the cost pressures of textile and garment companies that are mainly domestically-owned. At the same time, for companies that require a large amount of raw materials to import, but products are mainly sold domestically, they can effectively reduce business costs and have a positive driving effect.

Finally, the appreciation of the *** can, to a certain extent, promote the settlement of Sino-US trade frictions. The textile industry is the United States' "sunset" industry, but it is an important industry that supports China's economic development. With its inherent labor cost advantage, China's textiles have a stronger competitive edge in the international market. After decades of development, China’s trade volume in China-US textile trade expanded from only US$1.2 billion in 1981 to US$ 11.8 billion in 2008. However, for the rapid development of China's textile industry, the US Department of Commerce has taken a series of measures since 2005 to restrict the import of some commodities in China, and this has also led other countries to implement special protection measures for China's textile trade. Sino-US textile trade has long been a sensitive issue in Sino-U.S. trade and even in the political sphere.

Q: From the mid-term report released by listed companies in the textile and apparel industry, what do you think of the impact of the renminbi appreciation in the first half of the year on their performance?

Zhu Qingtao: In the first half of the year, the textile and apparel segment fell by 4.9%; the apparel segment performed poorly, falling by 9.02%. This is mainly due to the appreciation of the ***, resulting in weakened export pull. Despite the increase in product prices, its limited sales limit overall sales growth.

In fact, the degree of differentiation in the textile and apparel sector is intensifying. Some listed companies with a good market foundation and brand passed certain cost pressures, channel expansion, new brand strategy, and other cost pressures, and they still achieved certain development. For example, Meibang Apparel reported that its quarterly net profit amounted to 202.97.9 million yuan, a year-on-year increase of 1222.70. %, while the other part of the production-oriented listed companies are highly sensitive to costs, and their bargaining power is limited, which is greatly affected by the appreciation of ***. For example, Jinfei Da, which specializes in apparel accessories and woven knitted fabrics, saw a year-on-year decline in operating income. At 14.31%, net profit attributable to shareholders of listed companies fell sharply by 78.08%.

Q: What kind of advice do you have for listed companies in the textile and clothing industry to respond to the current international economic environment?

Zhu Qingyu: In terms of products, textile and garment companies need to speed up the adjustment of product structure, focus on increasing the added value of products, establish their own brands, and actively promote the development of processing trade toward deep processing and high value-added. China's textile and garment industry has a long-term competitive advantage in the international market with its cost advantage. However, the quality and grade of its products are at a medium to low level. The technical content of products is relatively low, and there are few industrial-use functional textiles with high added value, which are mainly middle- and low-grade products for mass consumption. Therefore, it is necessary to increase the production level of fabrics. In addition, the awareness of brand development in China's apparel companies is not strong, leading to the design and development of self-products and low brand awareness. Exports are mainly based on licensing and processing. Therefore, we must create an independent brand by focusing on facing international market competition.

In the aspect of market distribution, it is necessary to accelerate the implementation of the “going out” strategy, bypassing trade barriers through direct investment, setting up factories abroad, and jointly establishing factories to complete the development and layout of the international market. The most successful example in this regard is the internationalization of Jiumu Wang. After Jiumu Wang relocated the company's headquarters to Xiamen, it settled supply chain problems through alliance with IBM. Subsequently, it bought a 51% stake in a European clothing brand in an acquisition-and-control manner, and sent it to Taiwan, Hong Kong, Southeast Asia and other countries and regions. Implement the "go global" strategy one by one.

In terms of risk control, companies can use **financial tools to effectively circumvent risk and improve their risk resilience. For example, in the international settlement process, the use of forward sales and sales of foreign exchange products, lock in the cost of foreign exchange payments, or the use of swap trading products to achieve the rational use of foreign currency funds.

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