The summer of 2013 has brought a feast of downbeat data for skeptics about China’s economic prospects. GDP and profit growth in the world’s number two economy have slowed. Orders for manufactured goods have been weak. Worries about bad credit amid surplus capacity have been rife. And China’s main stock market indexes have trawled four-year lows, a bad omen for the future.
Such a slowdown has contributed to gathering gloom in other emerging economies in Asia and elsewhere, as easy financing that helped fuel their boom begins to tighten.
But in fact the China growth story remains strong in industries that have gotten relatively less government attention, where private entities have gained significant footholds. (Stock exchange indexes that disproportionately reflect doings at state-owned companies can be misleading.) The textile-and-apparel trade, long a Chinese mainstay but fragmented among many producers, is indicative. After initial gains from an end to quotas following China’s entry into the World Trade Organization in 2001, the industry slipped during the global financial crisis (when China also lost some wage-cost advantages), but now it has clawed its way back.
Production at Chinese textile companies “of scale” (meaning with sales in excess of $3.3 million) rose by 13.3% in the first six months of 2013 from a year earlier, to $488 billion, according to a national trade group. China’s exports of textiles and garments grew by 12% in the first half of the year to $127 billion, despite rising domestic wages and tepid global consumption. But demand and manufacturing at home is adding oomph: Overseas shipments that generated 37% of fabric and yarn sales in 2002 today account for only 16%.
Texhong Textile Group is a midsize exemplar of the trade. The Shanghai company’s net profit tripled in the first half from a year earlier to 447 million yuan, or $75 million, helping its Hong Kong-traded shares to gain fivefold in the past 12 months. And there’s no apparent credit problem here for now: The $1.2-billion-in-revenues company (it graduated from FORBES ASIA’s Best Under A Billion list) sold $200 million of U.S. dollar six-year debt at a modest 6.5% that will partly pay for new investments.
Texhong is making inroads in a cotton textile industry where once-heavy state influence has receded but where Hong Kong families that built global businesses before the start of China’s economic reforms still have clout. According to a ranking of China’s biggest cotton textile companies in 2012, two of the top four, Luthai and Esquel, hail from the former British colony. Texhong ranked number ten.
In a country where a murky boss can be a red flag for all kinds of governance risks, Texhong’s 2012 annual report bears a full-page photo of cheerful 45-year-old Chairman Hong Tianzhu, smartly dressed in a sky-blue suit in front of a bright orange background. Why be shy? After the recent run-up in Texhong’s shares, Hong’s stake is worth a good $800 million.
With Texhong’s $56 million acquisition this year of a smaller domestic maker, Hong sees more potential in China through consolidation. “The superior will survive, and the inferior will be squeezed out,” he says of the country’s 10,000 yarn and fabric makers. And of China’s textile industry as a whole, “The lack of big companies in the industry is an opportunity.” Hong estimates Texhong’s market share is only 1%.
Yet he has looked beyond China, too, and that is paying dividends. Texhong was a relatively early mainland investor in Vietnam for a plant there in 2006. One key benefit on top of cheaper wages: Texhong can buy cotton at international prices that are currently 45% below the going rate in China’s protected cotton market, giving Hong an advantage when he sells his yarn back home. Vietnam–and Texhong–also stand to benefit from the U.S.-supported Trans-Pacific Partnership trade agreement and from efforts by members of ASEAN countries to lower trade barriers among themselves.
Credit Suisse said in a June report that China’s policy of keeping cotton prices high to benefit local growers may not last. “We doubt the sustainability of the government policy in the long run as it significantly distorted the market supply/demand,” it warned.
But Texhong isn’t waiting for that. Vietnam, also with a history of state-run textile plants, currently accounts for 40% of the company’s production. “We are producing in a country that has a depreciating currency and selling in a country [China] that has an appreciating currency,” Hong says.
And Texhong, which employs 20,000 people globally, is looking beyond Vietnam. The company is also investing in Turkey and Uruguay in a bid to double its overall capacity by 2014. The U.S. is also in Hong’s sights.
The globalization of Texhong’s manufacturing “will not just allow [it] to enter previously untapped markets but also increase its response time to local markets as well as take advantage of preferential tariffs outside of Asia,” analyst Larry Cho of brokerage CIMB wrote in a recent report.
Texhong was born in 1997 when Hong, a small-scale trader, rented space in a struggling state-owned factory in Jiangsu Province and went into manufacturing. He subsequently acquired the assets of that and three other state companies facing liquidation. “Everyone thought taking on the workers was a liability,” Hong says. In fact, “There were a lot of experienced people. The problem was with the system.” Three of the four executive directors at Texhong today are former executives at SOEs.
Of many government backed-companies, Hong says, “It is hard to believe that they are still there.” (Among the largest in the industry today is Shandong Demian Group.) But the nascent tycoon is happy to swallow up private concerns as well, as in his most recent purchase. He says, “There shouldn’t be so many small companies. It’s not good for the integration of resources.”
If he–and his rivals–have to continue paying rising wages in China, Hong says he will compete with international production while enjoying the rising purchasing power in his home market.
That could be a recipe not just for his industry’s next wave of growth but also for other Chinese producers.