This paper considers the cost structure, profitability and productivity of the Chinese textile industry and estimates the impacts of RMB appreciation on this industry. Using data for 1999–2006, we found that the industry has suffered from very low profit margins and returns on capital. Because input prices have been increasing, particularly since 2001, generating profits has become more difficult for the industry. Nevertheless, the industry achieved substantial productivity growth over the period examined. Although at an inadequate level, the profitability of the industry did show some signs of improvement. As long as this trend continues, the industry could obtain a decent level of profitability. Since 2005, however, the industry has faced a new challenge: the appreciation of the RMB. Based on 2006 data, we estimated the maximum rate of RMB appreciation that the industry would be able to sustain to be approximately 5 percent a year.
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