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Abolition of China's textile quotas provokes a whimper rather than a bang, according to UBS

| Media Releases APAC

The abolition of the textile quota system should have been a big bang for China's textile industry but is turning out to be more of a whimper, according to Erica Poon WERKUN, a member of the Asian Small Cap research team at UBS Investment Bank. Although textile quotas were lifted almost five months ago, there has been little change in the way Chinese manufacturers and US buyers carry out their operations resulting, to a large degree, in 'business as usual'.

Import data from the US suggest a surge in textile imports from China in the first quarter of this year prompting the US government, through the Committee for the Implementation of Textile Agreements (CITA), to announce safeguard restrictions against China on seven product types (covering 13 categories) of textile/apparel products including trousers, shirts/blouses, underwear and cotton yarn.

"While the safeguards, which limit export volume growth to 7.5% in 2005, will put pressure on China's textile stocks in the near term, they will have little impact on investment decisions as most manufacturers had already anticipated them and adopted a cautious stance," said Werkun.

"2005 will be a year of adjustment and recovery for China's textile industry and the sector is unlikely to experience significant growth until it removes from the shadow of trade remedies. Nevertheless, safeguard decisions will serve to provide clarity and a set of new rules that allow manufacturers and buyers to resume investment decisions accordingly," she said.

"We expect further safeguards to be announced by the US in the near future to slow China's gain in market share. However, over the long-term China has the potential to dominate the textile food chain with a global market share of between 60% and 70%. But in light of political pressure and trade remedies, this is likely to take time.

"To ensure success, manufacturers need to adapt to the new rules. Access to quotas is no longer relevant, while flexibility, scale, customer relationships and product skills remain key strengths. As a result, we favour those companies that are well positioned for top-line growth and have the ability to sustain margins," she added.

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Hong Kong, 25 May 2005
UBS