Fibre substitution in the Chinese textile industry

Abstract

This thesis examines the dramatic changes that have taken place in fibre substitution trends in China's rapidly growing textile industry. It presents a systematic analysis of a wide range of factors that may have affected textile mills' choice of fibre inputs. The empirical study is greatly faciUtated by a survey of Chinese textile manufacturers conducted by the author in 1992. Mills' demand for fibres is derived from domestic and foreign demand for textile and clothing products. The thesis uses both descriptive and statistical tools to define the fibre substitution path at end-use level as the Chinese economy grows. It is shown that demand for wool products, especially in the textile and clothing markets, is highly responsive to income growth, and that the changes that have taken place in the fibre composition of exported products conform closely with the relative strength of comparative advantage developed by China since the adoption of an open door policy. Technological change affects fibre substitution mainly through diffusion. Application of the standard logistic diffusion model to data on aggregate wool and cotton shares indicates that chemical fibres have already gained most of their potential market share in the wool sector, while cotton may be subject to tougher competition from synthetics in the years ahead. Once the impact of technological diffusion loses its momentum, price competition becomes important, especially as Chinese firms have indeed become more profit- and market-oriented as a resuh of economic reform. With behavioural change in state firms, the development of fibre markets and the hardening of firms' budget constraint, neoclassical demand models can be applied to the measurement of price responsiveness and competition between fibres in the Chinese textile industry. A dynamic translog cost model is applied to mills' consumpfion data to analyse price-induced fibre substitution in the Chinese wool textile industry. The results indicate that mills' demand for wool is responsive to a change in prices. The price elasticity of demand for wool is found to be -0.2 in the short run, but higher in the long run (-0.52). There is also heavy price compefition between wool and chemical fibres, with cross-price elasticity of demand for chemical fibres estimated at 0.53 in the short run and 1.37 in the long run. Attention is also given to the impact of policy on fibre demand and substitution. The focus is on the fibre self-sufficiency policy, from which many other policies are derived. Analysis has shown that fibre self-sufficiency inevitably falls as an economy grows in the case of a resource-poor and/or densely populated country such as China. The faster decline in China's wool than cotton self-sufficiency increased the government's determination to impose a fibre substitution policy on the wool textile industry, thereby contributing to a heavier substitution of chemical fibres into wool than cotton. The study also shows that the relative importance of various trade and foreign exchange restrictions has varied over time and that wool has bome the brunt of these restrictions. In an attempt to gain a fuller understanding of fibre substitution in the Chinese textile industry, the dissertation takes a further step: identifying all the factors that could possibly be considered influential in manufacturers' choice of fibres. This is achieved mainly through a survey of selected Chinese textile manufacturers. Although some of the survey results merely confirm previous empirical findings, others provide fresh information of value to foreign supplying countries. Some important strategic implications can be drawn from the study for fibre supplying countries, and especially for Austraha as a major wool supplier. Both challenges and opportunities exist. If appropriate action is taken at this critical time, it may be possible for wool to realise its market potential in China.