Shares of Western clothing companies H&M (STO: HM-B) and Nike (NYSE: NKE) dropped yesterday after social media users called for a boycott in China after the apparel giants have opposed the alleged use of forced labor to produce cotton in Xinjiang.  

Fundamental analysis: Major issues in the key market

Several months ago, apparel companies have voiced their concerns about rumors that forced labor has been used to produce cotton in the autonomous region of Xinjiang, however, H&M and Nike are now facing boycotts after receiving heavy criticism on the Chinese social media. 

H&M has reportedly been pulled from common e-commerce stores in China and was forced to cut ties with a celebrity. In addition, Nike and Adidas, as well as several other apparel brands have also faced criticism. 

The complaints came after a group related to China’s Communist Party posted a statement from H&M where the Swedish apparel giant said it was very concerned over allegations of forced labor in the production of cotton in Xinjiang. 

Furthermore, human rights organizations and governments around the world have been continuously criticizing China for detaining Uyghurs and other Muslim groups in the so-called “re-education” camps, using them as forced labor.  

World leaders including the United States, the United Kingdom and the European Union have imposed heavy sanctions over Xinjiang allegations, resulting in a massive pushback from the Chinese government, which claims the camps are “vocational training centers” designed to fight poverty and religious extremism.

China’s Communist Youth League condemned H&M’s stance on Xinjiang allegations. 

“Spreading rumors to boycott Xinjiang cotton, while trying to make a profit in China? Wishful thinking!” it said in a viral post.

The post gave a rise to a firestorm on the Chinese social media platforms directed at the Swedish clothing company. Some of the most liked comments spotted on social media include “H&M clothes are rags,” and “They don’t deserve our Xinjiang cotton!”, as well as a viral hashtag “I support Xinjiang cotton.”

Products removed from e-commerce sites

The Communist Party criticized the Western apparel companies through its mouthpiece People’s Daily, claiming that “China’s Xinjiang cotton is white and flawless.” The outrage also prompted Chinese e-commerce behemoths including Alibaba (BABA) and JD.com (JD) to lift all H&M products from sale. 

Also, broadcasting company China Central Television said these companies are “earning big profits in China but attacking the country with lies at the same time.” Last night, H&M published a post on Weibo, claiming it has always attempted to maintain high standards and transparency in its global supply chain.

“[This] does not represent any political position … H&M Group always respects Chinese consumers. We are committed to long-term investment and development in China,” the company said in the statement. H&M also said it was collaborating with “more than 350 manufacturers” in China. 

Just a few hours later, Nike faced similar criticism in the statement which said that the footwear manufacturer “does not source products from [Xinjiang] and we have confirmed with our contract suppliers that they are not using textiles or spun yarn from the region.”

Technical analysis: Shares dip

Investors’ concerns that both H&M and Nike will face weaker demand in the greater China region amid calls for boycott resulted in a pullback in shares of both stocks. H&M stock price closed 1.9% lower yesterday after it traded nearly 5% in the red at one point.

H&M daily chart (TradingView)

This way, a pullback from a near-record high extended below the 200 mark. Hence, the price action is now trading below the 2020 high at 213.9, which will now act as resistance. On the downside, the pullback stopped at 196 where the ascending trend line came into the play.

Nike stock price gapped over 4% lower as it is one of the companies with the highest exposure to the Chinese market. Shares fell over 6% at one point to hit the $125 mark and print the lowest levels since November. 

Nike daily chart (TradingView)

The 200-DMA, in addition to the 127.2% Fibonacci extension line, is offering strong support just below the $125 handle. Looking higher, the area between $135 and $140 is hosting multiple resistance levels and will act as a target zone for the short-term buyers of Nike stock.

Summary

Western apparel giants including H&M, Nike are facing heavy criticism in China after voicing their concerns over the alleged use of forced labor to produce cotton in Xinjiang. As a result, shares of both companies pulled back in yesterday’s trading session. 

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