Keep a close eye on exports to Pakistan rather than to Turkey

At 11:28pm on February 11, the official website of the Ministry of Foreign Affairs issued a reminder that Chinese citizens should be cautious about traveling to Pakistan recently.

China ranks Pakistan as its only "all-weather strategic partner" under the highest level of China's diplomatic relations. The Ministry of Foreign Affairs' reminder clearly mentioned that "Pakistan's security situation is severe and complex", so we can imagine that the current situation in the country is already very serious.

CCTV news client reported on February 3 that Pakistan's foreign exchange reserves have been exhausted to an extremely low level of 3.09 billion US dollars, which can only meet the import demand for 18 days. Before March, Pakistan still needs to repay 6.4 billion US dollars in debt. Since 2021, the Pakistani rupee has depreciated by more than 40% against the US dollar.

Source: sinafinance

In January 2022, Pakistan's CPI rose by as much as 27.55% year-on-year, which is largely related to its high dependency on import of food and energy. In addition, Pakistan is also facing many problems in domestic market, but the political impact on the textile industry is not clear for the time being.

Textile is Pakistan's largest industry, which has created 67% of Pakistan's foreign exchange income and 40% of direct or indirect jobs, so it is indisputably the largest pillar industry of the country. According to CCFGroup's statistics, Pakistan had more than 15 million spindles of spun yarn capacities in 2019 and an annual yarn output of more than 3 million tons, with larger scale than that of Turkey.

Pakistan has a large cotton planting area, and its output is similar to that of Turkey. The chart below shows cotton output of the two countries in the past two years. In 2022/23 crop year, about 1/3 of the land in Pakistan is affected by catastrophic floods. Among them, cotton production has decreased by more than 30%, close to a reduction of 500kt. At the same time, the output of various food crops decreased significantly, which is another important reason for the substantial inflation in the country.

Pakistan has a large scale of textile industry, but weak foundation of chemical fiber industry, so its raw materials are mainly dependent on imports. Considering whether political relations or geographical location, China is the best source of raw materials for Pakistan. In 2022, Pakistan is the second largest destination for China's VSF and PSF exports. In the export of other chemical fiber products, Pakistan is also basically at the forefront.

Unlike Turkey, although the earthquake disaster is horrifying and has caused greater loss of life and property, it is regional and limited to a country's industry. In the article "Will Turkey's earthquake hit cellulose fiber industry?", we have analyzed that the textile industry in the quake-stricken areas of Turkey accounts for only about 6% of the country, but the currency crisis in Pakistan will inevitably affect the national industry. At present, Pakistan is actively seeking loans from the institutions such as IMF to overcome the crisis, but the IMF has high requirements for the country in areas such as anti-corruption. If Pakistan cannot meet the specific requirements of the IMF, then its foreign exchange reserves will dry up.

The depletion of foreign exchange reserves will lead to further deterioration of the international balance of payment, making it more difficult for foreign exchange earnings. It is opposite for the payment of foreign exchange as some credit instruments will be temporarily excluded from the international trade system, which is likely to make Pakistan unable to pay imported textile raw materials, and even lead to food shortages or out of control of prices. Coupled with the complicated political situation in the country, it may become the next Sri Lanka.

For China's fiber and textile industry, when exporting fiber to Pakistan, the safety of funds should be given top priority, and relevant insurance must be in place. It is not recommended to export to Pakistan without guarantee. At the same time, Chinese yarn and textile enterprises can pay attention to the transfer of international orders, accepting orders that may be transferred from Pakistan and Turkey.