China Throwing Factories a Bone??

I almost fell out of my chair this morning when I saw a report from the China Securities Journal that the Chinese government may raise tax rebates for apparel exports from 11% to 15%. Definitely a positive gesture, and one I need to consider as it relates to my 'sourcing margin squeeze' thesis. But the bottom line is that this does not come close to moving the needle.

Aside from the narrowing trade gap, the impetus for this move appears to be that Premier Wen Jiabao and his top economic leaders visited major exporting provinces over the weekend, and saw first hand the impact of regional business challenges (quake, floods) as well as rising wage and raw material costs.

Do you think that maybe they should have thought of this before cutting the VAT tax rebate, and then subsequently mandating earlier this year that factories in key regions pay employees back-pay for vacations?

Remember that there were about 4,750 footwear factories in the Guangdong province earlier this year, and that 2,331 of them have closed due to these cost pressures. Perhaps they're showing some regret for the number of factories they put out of business.

Unfortunately, footwear gets no relief here, as these tax rebates in question apply to apparel only.

But even for apparel, we need to do some math. The cash freed up in the supply chain due to these changes equates to about $0.45 on a $100 garment. We need to see 3-4% pricing power to offset cost pressures. Aside from the fact that China accounts for just short of 40% of our apparel imports (vs. 85% for footwear), this is simply not enough to move the needle.

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