VZCZCXRO0048
RR RUEHCN RUEHVC
DE RUEHGH #0029/01 0241119
ZNR UUUUU ZZH
R 241119Z JAN 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6623
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEHHI/AMEMBASSY HANOI 0011
RUEHML/AMEMBASSY MANILA 0033
RUEHPF/AMEMBASSY PHNOM PENH 0003
RUEHKA/AMEMBASSY DHAKA 0001
RUEHGH/AMCONSUL SHANGHAI 7154

UNCLAS SECTION 01 OF 04 SHANGHAI 000029 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL RESERVE BOARD FOR GOVERNOR WARSH/AHMED/JOHNSON/SCHINDLER; SAN FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/READE AND CMILLER 
STATE PASS ELECTRONICALLY TO USDA FAS WASHDC FOR ITP/SHEIKH 
USDOC FOR 4420 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND MCQUEEN 
TREASURY FOR EXEC - TSMITH, OASIA/ISA -DOHNER/BAKER/CUSHMAN 
TREASURY FOR WRIGHT AND AMB HOLMER 
TREASURY FOR SOBEL AND MOGHTADER 
NSC FOR MCCORMICK AND TONG 
 
E.O. 12958: N/A 
TAGS: KTEX EFIN ETRD EAGR PGOV ELAB SENV CH
SUBJECT: YANGTZE RIVER DELTA TEXTILE MAKERS FEAR RMB APPRECIATION 
 
REF: A. 05 SHANGHAI 798 
     ¶B. 07 SHANGHAI 813 
     ¶C. 07 BEIJING 7554 and previous 
     ¶D. 07 BEIJING 7652 
 
SHANGHAI 00000029  001.2 OF 004 
 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels or via 
the internet. 
 
¶1. (SBU) Summary: Chinese textile manufacturers in the Yangtze 
River Delta (YRD) say that they face significant challenges that 
threaten their businesses in the coming year.  Their main 
concern is the ongoing renminbi (RMB) appreciation that makes 
their exports more expensive and less competitive.  New 
environmental standards and increased government concern about 
pollution mean that textile factories must implement costly 
mitigation plans.  At the same time, Chinese textile 
manufacturers must cope with increased work-force costs 
associated with inflation and a new labor contract law.  In 2008 
and 2009, as much as 20 percent of the YRD's textile production 
capacity will be forced to close, according to a successful YRD 
textile company's estimate.  These cuts will negatively impact 
the economic livelihood of the tens of millions of low-wage 
workers and farmers who work directly and indirectly in China's 
textile industry.  End summary. 
 
¶2. (SBU) Econoff met separately with three major textile 
manufacturers in the Yangtze River Delta (YRD), one of China's 
main textile producing and exporting regions.  These companies 
included Wuxi Jinmao Ltd. General Manager Yang Nan on January 
17; and, Chenfeng Group Ltd. President Yin Guoxin and Orient 
International Holding Company Vice President Zhong Weimin on 
January 18.  Econoff also met with Donghua University Institute 
of Textile Economics Professor Gu Qingliang on January 15. 
Donghua University was founded in 1951 as the China Textile 
University and describes itself as the largest textile 
university in the world.  Accompanying Econoff to these meetings 
was a two-member United States International Trade Commission 
delegation. 
 
--------------------------------------------- ----------- 
"RMB Appreciation to Close 20 Percent of Textile Output" 
--------------------------------------------- ----------- 
 
¶3. (SBU) Donghua University's Gu noted that due to fierce 
competition within China, China's textile industry has engaged 
in a race to the bottom in terms of price.  As China's textile 
industry is dominated by companies engaged in the processing 
trade and exports, it is especially vulnerable to currency 
valuation changes. 
 
¶4. (SBU) Each textile manufacturer with whom Econoff met said 
that the rate and pace of RMB appreciation is their biggest 
concern.  (Note: The RMB has appreciated more than 14 percent 
against the dollar since July 2005.  In the past three months 
the pace of RMB appreciation has picked up dramatically, and is 
now appreciating at an annualized rate of more than 10.  End 
note.)  Wuxi Jinmao's Yang said he closely follows RMB 
appreciation predictions and he expects at least 10 percent 
appreciation in 2008.  "Frankly speaking, no textile company in 
China has ten percent margin left to give," he said.  Yang 
expects that by 2009, China's textile production capacity will 
be reduced by 20 percent as individual factories and 
manufacturers close due to pressure from RMB appreciation on 
their bottom lines.  Only those that can create new products and 
innovate will survive. 
 
¶5. (SBU) Chenfeng's Yin separately agreed with Yang's gloomy 
outlook for Chinese textile manufacturers in 2008.  "This year 
will be a pressure year," he said.  On average, Chinese textile 
exporters had profit margins that were less than 3 percent in 
¶2007.  "How can we survive a more expensive RMB?" he asked. 
"There will be real problems in 2008." 
 
SHANGHAI 00000029  002.2 OF 004 
 
 
 
¶6. (SBU) Orient International's Zhong also expected that there 
would be a significant reduction in Chinese exports of textiles 
in 2008.  RMB appreciation accounts for more than 50 percent of 
increased textile costs in China.  "No one will stay in a 
no-profit business," he said.  Chinese textile manufacturers do 
not take advantage of the limited financial product choices they 
have to help them hedge against currency unpredictability. 
"These types of products cost money and we Chinese love to 
gamble," said Zhong.  "We would rather gamble that the price is 
lower in 90 days than pay someone else to accept that risk." 
 
--------------------------------------------- -- 
More Expensive Clothes?  Blame Both Governments 
--------------------------------------------- -- 
 
¶7. (SBU) When United State retailers come to his office to 
bargain for a cheaper price, Wuxi Jinmao's Yang tells them that 
they should be negotiating with their own government in 
Washington, which Yang blames for driving up the exchange rate 
and hence cost of his textiles.  Yang said that he sees a 
conflict between the needs of U.S. consumers for inexpensive 
clothes and a U.S. policy that he believes makes imported 
clothes more expensive for Americans. 
 
¶8. (SBU) Chenfeng's Yin, on the other hand, blames the Chinese 
Government.  Where ten years ago, Chinese export policies 
"really supported textile exporters," now, due to trade friction 
from Europe and the United States, "it seems that the government 
does not support us."  In fact, the government has gone from 
supporting China's textile exporters to actively opposing them. 
Yin noted that this lack of support is apparent at every level 
of interaction with the government.  He cited recent examples of 
hassles with Chinese Customs during the export process that he 
insists would never have happened ten years ago.  Chinese RMB 
appreciation is another policy that is severely hurting his 
industry, but the Chinese Government "doesn't care." 
 
¶9. (SBU) Orient International's Zhong separately noted that 
Chinese textile manufacturers had "gotten very accustomed to the 
17 percent value added tax rebate on exports."  With its 
elimination last year by the Chinese Government, textile 
manufacturers are really struggling. 
 
--------------------------------------------- --- 
Seeking Price Stability by Importing U.S. Cotton 
--------------------------------------------- --- 
 
¶10. (SBU) Wuxi Jinmao's Yang said that his company exported 
about USD 90 million worth of fabric and apparel to the United 
States in 2007.  Since the bulk of his export earnings are 
priced in dollars, one way that his company has attempted to 
lend a measure of price stability and predictability to their 
input costs is to import cotton, priced in USD, from the United 
States.  In 2007 they imported about USD 20 million worth of 
American cotton and anticipate they will import at least that 
much in 2008.  This was a change from the past when they used 
mainly domestically-sourced cotton to avoid dealing with what 
Yang called cumbersome foreign exchange transaction processes 
requiring governmental approvals. 
 
----------------------------------- 
...And By Moving Factories Overseas 
----------------------------------- 
 
¶11. (SBU) Each of the three textile manufacturers said that they 
were also moving some of their factory production to lower cost 
countries in Asia.  They specifically noted Cambodia, Vietnam, 
the Philippines, and Bangladesh as countries where they are 
expanding operations.  In these cases, the Chinese parent 
company would assemble all of the material for a single order 
(fabric, thread, buttons, accessories, etc.) and package them in 
 
SHANGHAI 00000029  003.2 OF 004 
 
 
a container to be shipped out of China.  This order would then 
be assembled by garment workers in the factory abroad.  Wuxi 
Jinmao's Yang noted that despite the lower labor cost available 
in countries like Vietnam and Cambodia, China's higher 
productivity and speed of delivery to customers means that it is 
still usually cheaper to produce in China. 
 
--------------------------------------------- 
Higher Environmental Standards = Higher Costs 
--------------------------------------------- 
 
¶12. (SBU) China's environmental protection requirements have 
become stricter and this is raising textile manufacturer's 
raising costs.  The Central Government is increasingly concerned 
with the effects of pollution on China's water supply and that 
so much of China's water supply is no longer potable, said 
Chengfeng's Yin.  Wuxi Jinmao's Yang said that prior to 2007, 
the old standard for discharged waste was 500 biochemical oxygen 
demand (BOD).  In the wake of the 2007 Lake Tai pollution crisis 
(Ref B), factories in Jiangsu Province are now required to 
conform to a 300 BOD standard. 
 
¶13. (SBU) Factories that do not meet this new standard can be 
shut down, and more than one thousand companies in the Lake Tai 
watershed were shut down last year, said Yang.  Textile 
factories must be fitted with waste-water treatment equipment 
and more modern production and dyeing technologies to meet these 
higher standards.  This further adds to increased unit costs for 
textile manufacturers. 
 
--------------------------------------------- ---------- 
Chinese Inflation and New Labor Law Also Increase Costs 
--------------------------------------------- ---------- 
 
¶14. (SBU) Chenfeng's Yin claimed that Chinese official 
statistics approximate that as many as 100 million Chinese are 
employed by the textile industry, including both up- and 
down-stream operations such as cotton farming and logistics. 
Most of these employees are from the less-educated and more 
marginalized peasant class and migrant workers.  China's 
increasing inflation rate (Ref C) hits these most vulnerable 
populations the hardest since so much of their income is used to 
pay for food and clothing, said Yin.  In the face of inflation, 
textile companies must increase wages for their employees and 
pay more for manufacturing inputs such as cotton and energy. 
 
¶15. (SBU) Yin also noted that his own company chose to lay off 
600 workers as a result of the new Labor Contract Law took 
effect on January 1, 2008 (Ref D).  Due to the provisions of 
this law, his company would have been forced to make these 600 
employees "permanent" employees since they had either worked at 
the company for ten years or had signed more than two contracts 
with the company.  Since a company's ability to dismiss 
permanent employees has become much more difficult under the 
Labor Contract Law, Chenfeng and other textile manufacturers 
felt compelled to release some of their longer-serving, more 
experienced workforce in order to contain future costs.  Even 
so, such workforce manipulation is not cost-free; Yin said that 
training new employees incurs costs and newly trained employees 
often are not as productive as the employees they have replaced. 
 (Comment: Press reports have also noted or alleged similar 
jettisoning of long-term employees in other types of Chinese 
industries in the run-up to the Labor Contract Law's entry into 
force on January 1.  End comment.) 
 
-------------------------------------------- 
Seeking Lower Costs By Moving West and North 
-------------------------------------------- 
 
¶16. (SBU) Rising costs and rising wages in the YRD is leading 
some textile manufacturers to move factories westward.  Wuxi 
Jinmao's Yang said that ten years ago all of his factories were 
 
SHANGHAI 00000029  004.2 OF 004 
 
 
in Wuxi, a city not far from Shanghai in the lower part of 
Jiangsu Province.  Five years ago Wuxi Jinmao opened factories 
in a poorer part of northern Jiangsu.  Now they are opening 
factories in neighboring (and even poorer) Anhui Province. 
However, due to the relative complexity of assembling garments 
-- a shirt has as many as 30 separate component parts -- Yang 
believes that management needs to be close by to insure high 
standards and quality control.  For his company, this means the 
factory must be within three hours drive of Wuxi.  Given the 
region's improving highway network, this geographic circle is 
widening, he added. 
 
¶17. (SBU) Another important factor in textile manufacturing is 
that it requires a relatively skilled labor force.  As migrant 
workers, who are often recruited from poorer geographic areas 
(first northern Jiangsu Province and now Anhui Province) learn 
the skills and return home, the textile company can then "follow 
the workers."  This is what Wuxi Jinmao did in establishing some 
of its newer plants. 
 
¶18. (SBU) However, Chenfeng's Yin noted that moving textile 
factories to the less-developed interior of China does not make 
much sense since benefits from lower labor and production costs 
are offset by increased logistics and transportation costs and 
reduced proximity to markets and company management. 
 
----------------------------------------- 
Comment: What is the Opposite of Subsidy? 
----------------------------------------- 
 
¶19. (SBU) Given the competitive nature of the global textile 
trade, it is not surprising that textile manufacturers in China 
are expressing concern about how hard it is to stay profitable. 
The challenges that textile manufacturers in the Yangtze River 
Delta currently face are exacerbated by the fact that much of 
the industry developed during a time of direct and indirect 
government support in the form of rebates of value-added taxes, 
multi-year corporate tax holidays and other investment 
inducements as localities sought new job creators, as well as a 
fixed, non-market based exchange-rate.  As Chinese textile 
production soared and competition drove profit margins down, the 
profitability of many textile companies became increasingly 
dependent upon VAT rebates and export competitiveness 
facilitated by the fixed exchange rate.  Mounting labor and 
environmental protection costs, higher RMB appreciation, and the 
removal of structural supports have had the effect of a 
"negative subsidy."  Stress in the textile industry will be 
transmitted directly to the millions of migrant workers and 
farmers who are employed by it.  Whether due to increased RMB 
appreciation, increased labor and input costs, or long-overdue 
attention to environmental protection, increased production 
costs for textiles in the Yangtze River Delta will likely be 
passed on to U.S. consumers clothes imported from China. 
JARRETT