China's textile industry is facing a deepening structural crisis, with roughly 1,500 textile and apparel firms dropping out of the country's official industrial-enterprise statistics in the first half of 2026, according to a new report by Mekong. Factory closures, accelerating layoffs, and an outward shift of manufacturing capacity are emerging as defining features of the sector's decline.

Shrinking Orders, Vanishing Margins

Factory floors across Zhejiang, Guangzhou, and other major manufacturing hubs have recorded a sharp fall in order sizes, according to the report. Contracts that once ran for months are now lasting only days, squeezing profit margins and making long-term planning increasingly difficult.

The Mekong report attributed the slump primarily to persistent weakness in domestic demand. 'Beijing sought to transition the Chinese economy from export dependence towards consumer-led growth. However, weak consumer confidence, a prolonged property sector crisis, economic uncertainty and slowing income growth have undermined household spending,' the report noted.

Layoffs Spread Across the Supply Chain

The human toll is becoming increasingly visible. Migrant workers who once flocked to China's industrial zones have reportedly returned to their hometowns as factories failed to guarantee stable employment. Many manufacturers have shortened work shifts, halted recruitment, or implemented layoffs to survive the downturn.

The impact is not confined to factory floors. 'Fibre producers, yarn manufacturers, dyeing facilities, finishing companies, logistics providers and apparel exporters are all experiencing the effects of reduced demand,' the Mekong report said, underscoring the breadth of the contraction across the textile supply chain.

Manufacturing Moves Out: Mexico Emerges as a Beneficiary

Jiaxing Kanglong Textile Co. Ltd, based in Zhejiang Province, reportedly plans to halt production in China and transfer part of its denim manufacturing operations to Mexico. The move is seen as a broader signal that manufacturing capacity is actively leaving China.

For producers seeking access to the North American market, Mexico has emerged as a primary destination for this industrial migration, owing to its proximity to the United States and lower logistics costs. Critics have argued that China's growing investment in Mexican manufacturing facilities could eventually weigh on the American textile sector, as Chinese companies establish production platforms closer to the US market.

What the Broader Trend Signals

This comes amid a wider pattern of 'China+1' sourcing strategies adopted by global buyers seeking to reduce supply-chain concentration risk — a trend accelerated by post-pandemic disruptions and geopolitical tensions. The textile sector's distress is, notably, one of the clearest early indicators of how deeply China's domestic consumption shortfall is feeding through to industrial output.

Whether Beijing's policy response will be sufficient to stabilise household spending — the linchpin of any recovery — remains an open question, with analysts watching stimulus measures and property sector resolution closely in the months ahead.