Over the past decade, Chinese textile and clothing companies have sought to supplement their revenues by investing in land and property. The boom in housing prices has contrasted in recent years with an increasingly challenging market climate for textiles and clothing, with rising production costs undermining profitability.
According to China Textile Council, 31 of the top 50 companies in the textiles and clothing sector since 2005 have derived a least a portion of their income from investment in land and property.
The boom in housing prices in recent years has been fuelled in part by banks, with ample capital gained through central bank support, investing (through shadow companies) in land and property.
However, central government has recently sought to tighten the flow of money into the economy, as highlighted by its refusal to intervene when overnight inter-bank lending rates soared to 30% earlier this month.
One effect of the policy change is to take some of the momentum out of the housing market, exposing the overreliance of some textile and clothing companies on revenue generated from this sideline business.
Youngor Group, China’s second largest textile and garment manufacturer (as measured by revenue), announced on June 21 a loss of 484 million yuan (US$78 million) on down payments to local government in the bidding process for land in Hangzhou, the capital of Zhejiang province.
According to Youngor Group, the company entered bids worth 2.42 billion yuan for two separate plots of land in 2010, at the height of the property boom, for which local government requires a deposit of 20% as a bond that the land will then be developed within a two-year period.
However, owing to the slowdown in the property market, Youngor Group will not be able to develop and sell housing on the land, without incurring huge losses. In an attempt to limit its losses, the company announced that it would be abandoning the projects and thereby sacrificing the deposit paid to local government.
The story of Youngor Group is not an isolated case, with many more textiles and clothing companies expected to experience severe losses on land development projects, at a time when revenues from their core businesses are also typically falling.