The textile industry typically requires relatively low investment in fixed assets and maintains a low debt ratio. As such, a 0.25 percentage point increase in interest rates is generally not expected to have a significant impact on this non-capital-intensive sector. However, several textile and apparel companies interviewed by the author expressed concerns that rising costs of raw materials, labor, and other operational expenses have already placed considerable pressure on their margins. For them, an interest rate hike is likely to worsen an already challenging situation.
Bao Song, general manager of Ningbo Tianhui Textile Co., Ltd., noted that even though the number of affected companies may be limited, the rise in interest rates will still add to their overall cost burden. This could make it more difficult for the company to secure orders at the upcoming 108th Canton Fair, which starts on October 31st. Bao mentioned that the rising price of raw materials, along with exchange rate fluctuations, has made current order prices increasingly unmanageable. The company is considering raising prices across the fair, but the timing and extent of such increases are being carefully evaluated.
“Throughout the year, we’ve had to adjust our pricing frequently due to rising raw material costs,†Bao said. “Customers have started to complain that if unit prices keep going up, they might shift orders to Bangladesh, India, or Vietnam. It’s no longer necessary for Chinese factories to produce these goods. Our price competitiveness is weakening, and further price hikes are risky.â€
This year has been a mixed one for China’s textile and clothing companies. On one hand, both domestic and international markets have shown signs of growth. On the other hand, the rapid increase in raw material prices has squeezed profit margins despite rising order volumes. Many firms are struggling to maintain profitability.
Cotton, one of the key raw materials in the textile industry, has seen a sharp price surge. According to the China Cotton Price Index, cotton prices hit a new peak in September. On September 1st, the price was 18,002 yuan per ton, and by September 30th, it had soared to 22,684 yuan per ton — an increase of nearly 5,000 yuan. In just five days after National Day, the price rose another 13%. By October 19th, it had reached 24,526 yuan per ton. Prices of other materials like polyester, chemical fiber, rayon, and wool have also risen significantly, with viscose staple fiber recently breaking through the historical high of 22,000 yuan per ton.
Wang Yisheng, head of Lotte Children's Wear, explained that over the past few months, raw material prices have increased by more than 30%, but the price increases passed on to customers have only been around 10%. Most of the additional costs are absorbed internally. Currently, both domestic and foreign markets are difficult to raise prices for customers, and products like jeans are barely profitable. The interest rate hike will only add to operating costs, further eroding the already slim profits of textile and apparel companies.
The effects of higher interest rates go beyond just increased costs. Xu Yuping, general manager of Shenzhen Guller Fashion Co., Ltd., pointed out that the impact is two-fold. First, higher interest rates lead to increased financial costs, which reduce profit margins, especially for companies with long-term contracts. Labor costs in the Pearl River Delta have risen by 20% to 30% this year, while raw material prices have skyrocketed, causing the textile and apparel industry's profits to shrink. Second, higher interest rates increase pressure on domestic mortgages, which may reduce consumer spending on clothing and drag down the domestic apparel market.
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