China's textile industry battled the soaring yuan, higher production costs and lower tax rebates to emerge with remarkable profits last year.

Some analysts attribute this growth to higher domestic demand which largely compensated for the loss of exports, and expect that the trend will continue throughout this year.

Last year, China's domestic consumption contributed 4.4 percentage points to the 11.4-percent increase in the nation's gross domestic product, becoming the biggest driver of economic growth for the first time in seven years.

Retail spending rose 16.8 percent to 8.92 trillion yuan (US$1.24 trillion) in the period, which contributed a lot to the textile industry's development.

And growing disposable annual income, which jumped 17.2 percent to 13,786 yuan last year for city dwellers, also leads to more spending on clothes.

"Middle class," defined as families with annual incomes between 60,000 yuan and 500,000 yuan by the National Bureau of Statistics, make up 12 percent of China's population. This group is highly brand-conscious and buying more expensive products.

Wholesale and retail textiles are estimated to grow 18 percent this year and 20 percent next year, said Li Xin, an analyst with CITIC Securities Co.

Last year, the sector's profits hit 115.2 billion yuan, rising 32 percent from a year earlier. The industry is expected to report a 27.5-percent growth this year, according to www.webtextiles.com, a domestic follower of the industry.

Garment production amounted to 17.9 billion pieces from January to November, increasing 13.44 percent year on year, higher than the 11.84-percent growth in 2006. With surging investment in the industry, garment sales are estimated to grow by 15 percent in 2008, said Ping An Securities Co. On the other hand, rising production costs pressured by higher wages and a stronger currency impacted the industry's development.

Wages of workers in the industry rose significantly in 2007, and with the new labor law at the beginning of 2008, costs will continue to soar.

Cheap labor has always been China's competitive edge, and the loss of this will be devastating to the manufacturing industry.

"The average wage of textile workers rose 15 percent in the first eight months of 2007, and it was still only 70 percent of the average wage of workers in the manufacturing industry nationwide, which indicates there is still room for increases," said Li Zhixian, an analyst with Guotai & Jun'an Securities Research Institute. "This poses a great danger for the labor-intensive textile industry."