The competitiveness of the Chinese clothing industry is set to weaken over the next few years as costs rise. As a result, export growth could falter.
Rising costs in China are already forcing an increasing number of Western apparel brands and retailers to cut back on their sourcing from China and have their apparel manufactured elsewhere. In response, the Chinese government is pursuing a policy of encouraging growth in the domestic clothing market in order to take up slack in its manufacturing sector caused by this apparent loss in competitiveness.
The rise in costs in China stems in part from significant increases in fuel costs and shipping costs. Also, wage rates have risen to the point where they are higher than in many other Asian countries. Moreover, wage costs are set to increase further, given the Chinese government's commitment to raising minimum wage rates by an average of 13% per annum during 2011-15.
Early signs of a shift in apparel manufacture have been seen in EU and US clothing import trends. In 2013 China's share of EU clothing imports from all sources in value terms fell from 41.7% to 40.1%, having fallen sharply in the previous year. China's share of US clothing imports from all sources fell from 37.8% to 37.3%.
In most cases, the companies which are cutting back on having their apparel produced in China are relocating manufacturing processes to other low cost countries -- mostly in Asia.
In fact, the strongest growth in the EU clothing import in 2013 was in imports from Bangladesh, Cambodia and Pakistan, while the strongest growth in the US clothing import market was in imports from Bangladesh, Sri Lanka and Vietnam.
The potential for growth in China's domestic market is huge. Consumer expenditure per head on clothing in China is extremely small -- despite significant expansion in recent years. In 2012 it was only US$290 in urban areas and just US$63 in rural areas compared with an average of around US$1,400 in Germany, the UK and the USA.
If expenditure per head in China were to climb to US$1,400, then domestic demand for clothing would be US$1,560 bn per annum greater than it is at present.
This additional demand would more than compensate for any likely fall in exports, given that it equates to about nine times China's clothing exports to all destinations in 2013.
It is no surprise therefore, that a number of Western apparel brands and retailers are expanding their retail operations in China in order to capitalise on an expected upsurge in domestic demand.
One of the biggest opportunities in Chinese retailing, however, lies in e-commerce. This is expanding rapidly in the country in the same way that it is expandingin Western markets and Japan. Online stores have already been established in China by Burberry, Cherokee, Coach, Hugo Boss, Kering, Levi's, Neiman Marcus, Uniqlo and Zara, to name only a few.