Quota-less firms face threadbare future

Despite positive sentiment following last week's Sino-United States textile treaty, there is a downside - mainland factories without US and European Union quotas will be forced to shut their doors over the next few years.

Before the signing of the Sino-US textile agreement on November 8, China's bra wars with the US and EU had taken a brutal toll.

According to the China Chamber of Commerce for Import & Export of Textiles, Guangdong's garment exports to the EU were US$93.4 million last month, 61.8 per cent lower than in June, when the Sino-EU textile agreement was signed placing quotas on 10 categories of textiles till the end of 2007.

Guangdong's textile exports to the EU fell to US$160 million last month, 20 per cent lower than June, while the province's garment exports to the US plunged to US$230 million in October from US$300 million in June, according to the chamber.

Hong Kong companies bore the brunt of this export drop, as they own more than 70 per cent of the garment factories in Guangdong, said Felix Chung, the chairman of the Hong Kong Apparel Society.

The Sino-US and Sino-EU agreements imposed quotas on Chinese textiles and garments in response to the huge surge of Chinese exports after the decades-old global textile quota system was scrapped on January 1.

With the agreements in place, Mr Chung says the rag trade has become more predictable. "The prospects for Hong Kong's garment industry will be good in the next three years because we know the rules of the game. I'm optimistic Hong Kong's garment exports will grow."

The US and EU quotas for Chinese garments next year will be about five times more than last year, Mr Chung said.

The Sino-US agreement imposed quotas on 34 categories of Chinese textiles and garments for three years, with annual quota growth rates ranging from 10 per cent to 17 per cent.

"The growth rates are very low, when China can easily export 60 per cent more every year," said Neeraj Sawhney, a director of Topnet International.

Overcapacity will eliminate Chinese factories in future but the effect will be less severe than this year with a predictable trading environment provided by the agreements, Mr Sawhney said. In the past six months, 15 per cent to 20 per cent of Chinese factories have cut back, while 5 per cent to 10 per cent have closed, he estimated.

Exports of raw material by Topnet, a Hong Kong trading firm, to Chinese garment factories have fallen 30 per cent since March, he said. "Some factories we work with have cut business with us completely and probably closed down."

To avoid a repeat of mountains of Chinese garments piled up at EU customs because quotas had been filled by September, buyers will place orders with China only in the first half of each year for the duration of the agreements and source from other countries in the second half, said Douglas Sheridan, owner of BKMS Trading. "It's going to harm Chinese factories because in the second half, they will not be able to ship anything."

The net effect would be an elimination of the smaller Chinese factories that cannot obtain quotas, he said. In the past six months, 25 per cent of Chinese factories selling to international brands went out of business or restructured, Mr Sheridan estimated. "I predict a similar weeding out next year."

The Ministry of Commerce will allocate 70 per cent of US and EU quotas to mainland and Hong Kong firms, based on their record of exports. Most Hong Kong textile and garment firms lack such a track record, because exports to the EU and US were recorded from third countries, not China, wrote Deutsche Bank analyst Anne Ling in a report.

As a result, most Hong Kong firms will not get quotas but must buy them at an auction of the remaining 30 per cent of the US and EU quotas by the Ministry of Commerce, Ms Ling said.

Mr Sheridan had other fears. "The biggest problem with the Sino-US agreement is the timing."

There will be the US congressional elections next year and US presidential elections in 2008, the final year of the Sino-US agreement.

"There will be political pressure in the US to clamp down on Chinese imports during those periods," Mr Sheridan warned.