A report released earlier this month by the Chinese Ministry of Commerce suggests that domestic demand for textile products, home appliances and shoes have decreased and oversupply worsened during the first five months of 2005.

According to the governmental report, supply for 80 percent of textile products had already exceeded demand due to overproduction of middle and low end products. The end result fierce competition and price wars.

The oversupply problem has become a legitimate concern for the Chinese government as it faces an on-going trade row with the European Union and the United States, increased export taxes and a declining entrepot trade. Faced with stricter limitations of textile exports, China will have to rely on its own domestic market to sell textile goods in the near future, a situation the government fears will cause a worsening of oversupply in the latter half of this year.

In response the Chinese government has suggested a series of reforms to help increase domestic demand and build a stronger internal market including promoting urban and rural income growth, boosting employment and social security, improving circulation of goods and consumer choice and quickening the pace of the service's sector in order to strengthen consumption's role as a market force.

But with daily media reports about the millions of trousers, pullovers and T-shirts stranded at EU customs warehouses, the Chinese government has been orchestrating a strong public relations campaign to assuage the fears of Chinese textile producers.

"Exports of textile products turned better, which was closely related to the signing of the Memorandum of Understanding of China-EU Textile Trade," said a spokesman of the Ministry of Commerce, Department of Foreign Trade Affairs, during a press conference on Friday. "It should be said that the general export environment of textile products would keep steady and fast development."

According to the spokesman, total Chinese exports of textile products amounted to $61.5 billion since the 30-year old quota system expired on Jan. 1. Additionally, exports in June were up by 27 percent and in July by 23.2 percent, breaking the $10 billion barrier. Exports to the European Union totaled $8.65 billion in June up by 85 percent from the previous month.

During the briefing, the commerce ministry explained that the reasons for the blocked Chinese textile shipments was due to both traders from China and the EU rushing transportations of sweaters, trousers and women's shirt to avoid quantity control before the EU-China textile agreement was implemented on July 20, causing an "abnormal" surge of exports.

Quotas on Chinese clothing products were introduced on June 11 to limit the surge of exports after the 30-year old quota system expired at the beginning of this year. Under the new agreement, 10 categories of Chinese products face limits, capping Chinese annual exports in order to avoid further market disruption.

However quotas on six of the 10 categories have already hit their target raising strong concern among European retailers who fear that their shelves will be empty this fall and winter.

While China has been publicly supportive of the agreement, claiming that despite limits on exports, the agreement would allow for a steady trade environment in China, it also argued that there were discrepancies between EU and China statistics.

According to statistics by the Chinese government, China exported 55.14 million pieces of sports trousers to the EU between June 11 and August 7, accounting for 53 percent of the agreed quantity. But EU statistics show that the number of import licenses was 100 million pieces, hitting the quota's target.

The reason for the difference was that Chinese statistics did not include entrepot trade through a third country, the time difference between exports and imports and incomplete published import and exports licenses by the EU.

The pressure by retailers on EU trade commissioner Peter Mandelson to unblock the millions of clothing products stranded in warehouses prompted talks with the Chinese government to resolve the issue, which officially began Thursday.

Despite the onslaught of criticism against Mandelson, the trade commissioner has argued that exceeded quotas were due to flaws in timing and the execution of new restrictions. While no solution has been agreed upon to treat imports piled in warehouses, he has promised to unblock 70 million items from EU ports.

Mandelson has already proposed three-prong solution to the problem which would include excluding blocked goods from this year's quotas, transferring some oversubscribed goods like sweaters and bras to undersubscribed quotas like cotton fabrics and deducting blocked goods from next year's Chinese quota in 2006.

While the Chinese government has been opposed to the third option arguing that it would lead to substantially less growth for Chinese textile manufactures in 2006, it has said that the exports to the EU would be engaged in "a steadier environment" next year.

"I believed that the phenomena of rush-transport and holding-up would never happen again," said the spokesman for the Ministry of Commerce.

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