RMB Devaluation Brings New Vitality To China'S Garment And Textile Industry.

The trend of RMB depreciation is giving Chinese clothing in trouble.

And other industries bring new vitality.

On the basis of FOB, the value of the RMB has depreciated by 7.51% against the US dollar since August 7, 2015.

After the global financial crisis in 2008, China's clothing and textile industry was bogged down in two major quagmire.

Garment and textile industry has long been a traditional manufacturing industry.

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Such a revenue structure makes enterprises vulnerable to fluctuations in the RMB exchange rate.

Since May 2010, under the pressure of monetary and fiscal policies in the United States, the exchange rate of RMB against the US dollar has undergone a sharp unilateral appreciation.

In the calculation of the central parity of RMB against the US dollar, from May 2010 to early 2014, the RMB appreciated against the US dollar by 10.54%, with an average appreciation of nearly 3%.

According to the strategy of the China Textile Industry Association in 2013, if the value of RMB rises by 1%, the operating profit of the cotton textile industry will drop by about 12%, and the wool textile industry will drop by 8%, and the garment industry will drop by 13%.

Another major predicament of the clothing and textile industry is the rise in labor costs.

Since 2008, the total cost of labor in China has risen sharply.

The cost of labour has risen by more than 100% since 2008.

As a labor-intensive industry, garment and textile industry has suffered from this unfavorable change to a greater extent.

RMB exchange rate appreciation and labor costs rise, the original export price advantage no longer exists, exports decline.

Take cotton yarn as an example, export volume is declining year by year.

The appreciation of the RMB exchange rate and the increase in labor costs have led to a decline in the profitability of the industry.

Take the clothing industry as an example, since 2005, the interest rate of industry sales has been declining year by year.

Although the gross profit of the wool textile industry and cotton textile industry has gradually stabilized, it is difficult to restore the past glory.

Industry profits declined and investment declined.

Many textile and garment enterprises shutting down shop become inevitable.

Take Lining, a more famous company in China (2331.HK), for example, the number of stores has dropped from 8255 in the peak period to 5745 in June this year, a decline of more than 30%.

A direct result of changes in the industry is employment.

Leading in the domestic industry

The company, Changshan shares (000158.SZ), 600137.SH and so on, for example, the number of employees showed a general downward trend since 2010.

Although this trend of change involves the substitution of machine for labor, it is difficult for many middle and low end enterprises to overcome the negative impact of rising labor costs and exchange rate appreciation from the perspective of the whole industry.

Now, with the downward pressure on China's economy, the economic fundamentals are hard to sustain the higher exchange rate.

As the International Monetary Fund announced in November 30, 2015 that the Renminbi should be included in the SDR, the Central Bank of China has further liberalized the RMB exchange rate control, and the depreciation of the RMB against the US dollar is logical.

Previously, investment banks including Goldman Sachs generally believed that the renminbi would probably depreciate to around 6.7 after the US dollar.

The depreciation of the RMB exchange rate will enhance the profitability of the textile industry and stabilize employment.

Take cotton yarn as an example, in 2014, China's exports amounted to US $2 billion 63 million.

The depreciation rate of the RMB exchange rate has reached 5%. Even under the background of static calculation, it can raise the profit margin for the industry by US $100 million.

Considering the export advantage brought about by the depreciation of the RMB, this amount will be greater.

The devaluation of the renminbi will also delay the trend of some enterprises moving to the neighboring countries.

In view of the lower labor costs of neighboring countries, including Vietnam, Pakistan and India, many garment enterprises plan or have moved their factories out.

Such a trend is obviously unfavorable for stable employment.

The Chinese government is currently working hard to push forward the supply side reform and efforts to resolve excess capacity, which means that there is a greater employment pressure in 2016.

The devaluation of RMB will also bring new vitality to some industries including textiles and garments, and stabilize employment.