It's impossible to predict how China's competitiveness will emerge from the four key forces of wage inflation, raw material scarcity, currency fluctuations and growing compliance needs. But it's hard to see any evidence of mass bankruptcies, as local media claims, according to Mike Flanagan.

It has suddenly become the fashion in western media to announce that Chinese dominance of low-cost assembly businesses - like garment manufacturing - is about to collapse. Many businesses in China and Hong Kong agree.

Half of China's garment and textile business will go bankrupt if the Chinese yuan appreciates 5%, Gao Yong, vice-president of the China National Textile and Apparel Council, was reported to have said.

And that, I believe, is the first symptom of a new Chinese SAORS (Seriously Absurd Over-reaction Syndrome) outbreak.

"Half of China's factories will go bust" has to be, even by the standards for exaggeration traditionally set by the world textile industry, the most unbelievable forecast of gloom on record.

The yuan has appreciated before - by a great deal more than 5% - and hardly anyone has gone bankrupt.

India' garment exporters have recently been dealing with a currency rise of far more than 5% - and yes, they're moaning too, but no-one's claimed that half the country's clothing and textile businesses are about to go bust.

So why are Chinese garment makers coming out with such twaddle? Two reasons.

First: an insular obsession with victimisation
Many businesses are so insular they believe the pressures on their costs - from growing wages, appreciating currency and the delusion that China is uniquely hurt by western protectionism - are hurting China more than Indonesia, Bangladesh or Central America.

All nonsense. Let's take it bit by bit.

• Wage costs. Wages are under pressure in China – as they are almost everywhere that clothes are made. This year’s minimum wage increase in Delhi has been higher than anywhere we can find in China; and government ministers in Bangladesh have assured workers that minimum wages will be trebled by August.

I doubt that'll happen - but unrest over wages, or higher wages, is simply going to be part of the background for garment buyers almost anywhere.

Except, possibly, in Burma, where the government has just announced anyone trying to form a union will be prosecuted. Even there, though, the absence of a union doesn't mean smooth labour relations: between February and May this year there have been demonstrations outside at least 20 Rangoon-area garment factories. Many believe unrest in Burma (just like Bangladesh) is partly the result of there being no unions. Unrest is universal.

• Raw material costs. Raw material costs - especially cotton - are going up everywhere. Bizarrely, China's unusual protectionism over cotton supplies means costs will inflate LESS in China than elsewhere.

China imposes limits on the amount of cotton that can be imported - and then slaps a variable import duty on much of the cotton that it does import. Those limits, and the incidence of duty, vary a lot from year to year, but they often mean Chinese garment makers pay more than they need to for cotton.

Though things often change, the regular cost comparison survey last carried out by the International Textile Manufacturers' Federation in 2008 showed raw cotton costing more in China than in any other major textile producing country. Chinese manufacturers were paying 27% more than their Turkish competitors for cotton and 17% more than businesses in India.

This year, China's producing 30% less cotton than it needs, so it will be importing a great deal more: probably around 3m tonnes. It's possible that a greater amount of imports in the mix will mean Chinese cotton inflation will be lower than in its competitors. Especially because of:

• Currency appreciation. There has been a lot of hot air about Chinese currency shifts. Lots of legislators around the world want the yuan to appreciate: most foreign exchange specialists think it'll appreciate 2-4% against the US dollar over the next year. That means prices in dollars or euros will be in danger of going up.
Possibly.

But the yuan has appreciated 20% against the euro over the past year, and Europeans aren't paying 20% more. Chinese factories have sharpened their prices to keep business, and it's uncertain whether they'll do the same thing as their currency appreciates against the US dollar, just as they did in 2008.

A more valuable yuan doesn't just mean higher prices, of course. Cotton imports get cheaper for Chinese garment makers; an advantage China's competitors won't benefit from. Imported oil gets cheaper too. To make many garments, the Chinese actually pay more in dollars than in yuan.

• Protectionism. Many manufacturers are convinced European and American concerns about pollution, child labour and the like are a form of trade protection.

They're wrong, of course. Growing western concern about compliance issues applies equally to all exporting countries; it doesn't freeze out foreign suppliers (after all, Europe and the US have next to no apparel industry to switch orders to), but it does favour suppliers able to respond credibly to these concerns.

And China is increasingly emerging as a supply base that's better able to respond to these concerns than many of its competitors.

While China's far from perfect, there's a huge difference, for example, between how it's reacting to Europe's REACH programme of record-keeping for chemical use, and reactions in India. China's encouraging its factories to be REACH-compliant, and has the testing infrastructure to help.

But India, according to Sanoj Kumar Jha, deputy secretary at the country's ministry of commerce, is going to "strive for the total abrogation of REACH" by having it declared illegal at the WTO.

India will get nowhere with this, but its government's attempt to hold back progress will discourage its exporters from setting up the monitoring and record-keeping necessary for continued access to European markets.

So why the moaning?
It's impossible to predict how China's competitiveness will emerge from the four key forces of wage inflation, raw material scarcity, currency fluctuations and growing compliance needs. But it's hard to see any evidence of mass bankruptcies.

So why the moans? We need to look at reason number two.

Second: China's internal politics
Many Westerners think someone in China decides what's right, then imposes this on its 1.5bn inhabitants. Just not true: its rulers argue about policy just as much as any western parliament or congress. They just don't see the point of telling the media (or their 1.5bn subjects) until they've decided.

Right now, there's a huge argument going on about China's economy. Some argue low-cost production is tying up increasingly scarce workers, and producing unacceptable levels of pollution, for surprisingly little return. (Remember that the average person in China is poorer than the average person in Albania.)

Others argue that now is not the time to risk creating mass unemployment by slowing growth in textile, garment-making and other basic processing jobs.

The "slow things down" party is winning some significant victories. They've stopped their banks from giving low-cost exporters easy credit. They've ensured minimum wages, especially in the coastal provinces, increase. And in June they abolished tax rebates for exporters of polluting goods, like steel.

China's garment makers are beginning to worry that the clothing industry might become the next target. So they're lobbying behind the scenes for three things:

  • They want to preserve the high level of rebates on exports the government gave them during the 2008/9 recession.
  • They want China's protectionist restrictions on cotton imports to be abolished. Since the US taxpayer subsidises the price of exported cotton so much, why can't they benefit from Americans' generosity the way their competitors in Bangladesh and Vietnam do?
  • They want banks to keep on making credit easy and cheap.

Will the garment industry win its argument? No-one knows.

But its exaggerated threats are bound to feed a dose of wishful thinking among China's competitors.

Predictions
Western businesses will delude themselves into thinking production is going to move back to Europe or North America (it won't).

While businesses in developing countries might keep their morale up by assuming production will move to Indonesia or Pakistan. (It might, but that depends more on the Indonesians and Pakistanis upping their game than on whether the yuan appreciates 5% or 6%.)

There are three pretty firm predictions we can make, though:

  • China's competitiveness, compared to its neighbours, will ebb and flow a lot over the next few years. And it will evolve differently for some customers than for others. Most buyers are likely to find that China's not always the best place to buy every single item in their assortment, and will need a repertoire of alternatives to fall back on.
  • There will be no "new China": no location will emerge offering China's benefits across the whole range of garments for most customers. Existing competitors like Bangladesh, Indonesia or India, all have their strengths, but none offers the coverage China does. All, though, will occasionally be better for some of a buyer's needs.
  • Buyers won't be running away from China. The wiser will be developing good insurance policies - which, given the prevailing uncertainty, means keeping a range of suppliers in a number of countries as relative competitiveness changes.

Starting with the success of Clothesource's "Coming Garment Revolution" report, we will be spending this summer launching through just-style a range of research reports to help buyers decide the right insurance policy for them.

Success in the next few years won't involve buyers predicting the unpredictable - or believing other people's wishful thinking. It'll involve sensible contingency planning.

Because there's a really good antidote to SAORS. Hard data.