Chinese honeymoon over as fashion quotas dry up

Fashion retailer H&M could shift its sourcing of key clothing categories out of China following the introduction of EU export limits.

Other UK fashion chains may be forced to follow suit because export quotas on 10 important textile categories are close to running out for this year.

A sourcing withdrawal from China could spell a slowdown in the cut-throat high street pricing war, according to Credit Suisse First Boston analyst Tony Shiret. He said: 'The potential deflation effects of [Chinese sourcing] are much reduced by stabilisation of the system.'

Since Chinese trade quotas were originally lifted in January, aggressive pricing from the likes of H&M and others has put even more pressure on high street competitors such as Marks & Spencer, which has been forced to rethink its own sourcing strategy.

The Chinese government and the EU agreed last month to limit textile exports to the EU from June 11 until the end of 2008. On Wednesday, factories in China learnt from the Chinese Ministry of Commerce whether they were eligible to export to the EU and the quantities allowed.

Arcadia and Bhs owner Philip Green said: 'We have been moving our sourcing around prior to this. There are commercial reasons, which I will not go into, why we have not put everything into China anyway.'

The US issued similar restrictions on eight categories of Chinese imports earlier this year. Five of these have now reached their annual cap, with two more about to run out. As a consequence, H&M has moved the production of T-shirts and cotton trousers for its US stores out of China to elsewhere in Asia. It now fears a parallel situation could occur with EU imports. An H&M spokeswoman said: 'We have to wait one or two weeks before we have the whole picture.'

Chinese customs data shows that as of July 13, 71 per cent of this year's EU quota for pullovers and 63 per cent of the quota for flax yarn had been used.

Retailers are transferring some of the high street heat to suppliers. Department store chains are said to be requesting extended payment terms from suppliers and are also seeking to renege on contracts already signed.

'It makes cash flow all the more difficult for us,' said one supplier. 'Retailers are really putting the squeeze on at the moment, with some looking to renegotiate after production has begun.'