Textile exports from China to the European Union will be closely monitored after the removal of trade curbs at the end of the year as both sides look to avoid major disputes and liberalize their trading relationship, officials and analysts said.

The expiration of growth caps on 10 categories of textiles and clothing was agreed in June 2005 by China and the EU - the world’s largest and second largest textile exporters, respectively - and confirmed by ministers Peter Mandelson and Bo Xilai after they met in June this year.

The June 2005 memorandum of understanding, signed in Shanghai, was aimed at cooling a surge in cheap Chinese exports following the lifting of quotas in international textile trade when the Multi-Fiber Arrangement came to an end on Jan 1, 2005.

Growth caps of 8-12.5 pct were placed on annual exports of products ranging from T-shirts and pullovers to bed, table and kitchen linen. The agreement covered 10 of the 35 categories of Chinese exports liberalized on Jan 1.

The lifting of caps at the end of this year marks the next step in liberalizing the trade relationship, and both sides said they will continue dialogue and cooperation on textiles in order to steadily develop bilateral trade. "Both parties are seeking measures to guarantee steady growth in the textile trade, without generating trade friction," said Wang Shouwen, director of the Ministry of Commerce’s foreign trade department.

But it remains unclear how both sides will control the textile trade once the quotas are lifted.

"Nobody said categorically there won’t be a flood of imports -- at this point it is actually very difficult to know for sure what will happen after Jan 1," an industry source said.

"(China) is obligated by the memorandum of understanding signed in 2005 to cooperate with the EU in ensuring a smooth transition next year to liberalized trade in textiles after the current import growth restrictions expire," the source said.

Wang Qianjin, an analyst with consultants Webtextile.com, added that China will continue to control its exports after restrictions are lifted.

"China’s industry associations and the Commerce Ministry are likely to issue more new rules before Jan 1, including specific quota limits and requirements for the Chinese side on exports to the EU," Wang told XFN-Asia.

Cao Xinyu, vice chairman of the China Chamber of Commerce for Import and Export of Textiles, agreed that Beijing will take measures to maintain stable export growth.

"Chinese textile producers are eager to expand exports after the quota is removed. However, the government will definitely take measures to control and maintain stable growth of exports," Cao said. But he also noted that it is difficult to predict what steps might be taken.

"It needs repeated discussion between China and the EU. Everything is still up in the air at the moment," he said.

Other sources said "a dual licensing system" could be put in place, whereby both sides monitor any major shift in trade volumes. Vivian Cheung, an analyst with Tai Fook Securities in Hong Kong, said the lifting of quotas is a welcome development, adding that textile exports from China to the EU have steadied over the past two years, with current quotas not even filled yet.

An exhaustion of the 2007 quotas would perhaps give EU industry grounds to call for new quotas in 2008, whereas the contrary could justify the system being put to rest.

"The removal of quotas is a good sign... it will benefit both sides," Cheung said.

"The quota for 2007 has not been used up yet, growth in textile exports is under control and it will be more stabilized now. It was previously high because it was gaining from a much lower base," she said.

According to the Ministry of Commerce’s Wang, China’s textile exports to the EU rose only 5.5 pct year-on-year from January to May.

Webtextile.com’s Wang said he expects a pick up in exports in the first half of 2008, but he added growth is likely to slow later in the year.

"For 2008, export growth will not be too high," he told XFN-Asia.

Cheung added that liberalization of the textile trade will benefit the stronger Chinese players and could lead to some restructuring in the industry.

"More technology is being used in producing garments and textiles, so as to eliminate unqualified goods. There will probably be some restructuring in the industry as smaller players with lower technology are edged out," Cheung said.

She added that Weiqiao Textile will benefit because of its size - it is the largest cotton fabric maker in Asia - and Pacific Textiles will also gain because it makes higher margin products.

According to the quasi-official China National Textile and Apparel Council, China’s worldwide exports of textile and apparel products are expected to increase 16 pct to 170.5 bln usd this year.