Xinjiang cotton at crossroads of China's new Silk Road

AKSU, China (Reuters) - The Youngor cotton spinning factory is one of the biggest employers in Aksu, an agricultural town on the edge of the Taklamakan desert in China's restive Xinjiang region.

Youngor, one of China's largest shirt-makers, opened the plant in 2011 to be closer to the main cotton-growing region in Xinjiang. Soon it will be joined by others: Beijing wants to create 1 million textile jobs in Xinjiang by 2023.

Xinjiang fits into Beijing's larger vision of shifting labor intensive industries such as textiles out of the Pearl River Delta and into the interior. China is putting less value on being "the world's workshop" amid labor shortages and competitive pressures from Southeast Asia.

The textile hub is also a key initiative in President Xi Jinping's "one belt, one road" initiative, the new silk road and economic belt spreading from Western China to Central Asia and onwards to Europe.

More immediately, Beijing is offering the carrot of jobs and development, even as it wields a harsh stick against Uighur separatism.

"We must promote employment as a permanent cure to maintain social stability and achieve long-lasting peace, and particularly solve the unemployment problem for peoples in southern Xinjiang," a 2014 official document stated in outlining a massive expansion of Xinjiang's textile industry.

China says it is fighting an Islamist insurgency in the deserts, mountains and forests of energy-rich Xinjiang. Critics say the unrest largely stems from repressive Chinese policies against the Uighurs, a minority Muslim people who speak a Turkic language and have different customs from Han Chinese.

MIGRATING TO CITIES

Most Uighurs live in towns and cities such as Aksu in the poorer southern part of Xinjiang, where much of the violence has unfolded.

There, in one of its first serious attempts to address the economic factor in Xinjiang's unrest, Beijing is making a clear effort to create more jobs for Uighurs.

Almost all of the 520 employees at the Youngor factory are Uighurs. The average factory floor salary is around 3,000 yuan ($463.18)a month, and comes with food and lodging - compared with roughly 4,000 yuan for textile workers in the southern China factory belt.

"There are still a lot of people to come out of (Xinjiang's) countryside," said Xu Zhiwu, general manager at Youngor's Aksu factory, referring to government data that show 2.6 million rural residents sought work in Xinjiang's cities in 2014.

Xinjiang Youngor Cotton Spinning Co Ltd, a unit of Youngor Group, is planning to expand its factory, built among apple orchards on Aksu's outskirts, Xu said.

Yarn maker Huafu Top Dyed Melange Yarn is already at work on a 5 billion yuan plant outside Aksu, undeterred by September's attack on a coalmine near the city.

Texhong Textile Group Ltd, one of China's top spinners, is targeting a 1-million spindle project in the region.

"The scale of the project has to be big to ask for more favorable policy support from municipal governments," Texhong said in a stock exchange statement, referring to subsidies Beijing offers to lure firms to the region.

COTTON TO GARMENTS

More than 60 percent of China's cotton crop is grown in Xinjiang. It's a major advantage for companies who process the fluffy material into cotton thread to be close to supplies. Their automated spinning factories also benefit from electricity prices around half those in coastal provinces.

Spinning needs relatively few workers. Creating 1 million textile jobs will require a build-out of the entire industry chain, from dyeing and weaving to garment production. And that poses a far greater challenge than attracting more spinners.

Dyeing, bleaching and washing of fabric would demand substantial supplies of water in the arid region. Much of Xinjiang, including Aksu, is classified as "high risk" for water stress by the non-profit World Resources Institute. The WRI has designated Shihezi and Korla, two cities also targeted for major textile expansion, as "extremely high risk".

Aksu is consulting with textile companies on plans to build a 50,000-tonne waste water treatment facility to handle discharge from future dyeing operations, said Youngor's Xu, who has attended recent government meetings on the issue.

A similar facility is also under discussion for Shihezi, near Urumqi, but some firms are wary of proceeding with dyeing in the area.

"We are not sure whether the capacity of the facility could meet all the demand and protect the environment from damage," said Zhao Yang, general manager of three Xinjiang spinning factories owned by Hong Kong-based shirt maker Esquel.

"Compared with Guangdong, where our fabric mill sites are, Xinjiang's water is very scarce," he said.

Xinjiang's location, more than 4,000 km (2,480 miles) from Shanghai in the east or Guangzhou to the south, is also a hurdle for companies rushing to meet tight deadlines for overseas clients, said Xu.

Like Youngor, Esquel, maker of men's shirts for brands like Lacoste, Tommy Hilfiger and Ralph Lauren, also has no plans for downstream operations in Xinjiang, Zhao said.

Officials in Xinjiang's capital Urumqi did not respond to a fax seeking comment.

ONE BELT, ONE ROAD

President Xi Jinping's "One Belt, One Road" plan, announced in late 2013, aims to restore China's old maritime and overland trade routes. Xi has said he hopes to increase trade with over 40 countries to $2.5 trillion within a decade. Xinjiang is at the "heart" of the "new silk road into Central Asia.

China is making huge investments in new railways running from eastern China through Xinjiang to Central Asia and on into Europe. That should eventually cut transport times to some markets by weeks, giving Xinjiang companies an edge over manufacturers relying on ocean freight.

By subsidizing transport, staff training and insurance, and offering generous support for financing, Beijing's efforts to build a textile hub in Xinjiang could counter the tide of textiles investment pouring out of the country.

But take away the subsidies, and Xinjiang looks a lot less appealing. Freight costs on the first rail lines running west are still 50 percent higher than shipping costs. Add a minimum wage already about 50 percent higher than that of Vietnam, one of the world's fastest growing textile hubs, and costs in the region begin to look non-competitive.

High costs were behind a 36 percent drop in Xinjiang's textile exports in the first eight months of 2015, according t0 Xinjiang's customs bureau.

Beijing's subsidies are simply not enough to put much focus on exports, said Hua Jingdong, board secretary at Bros Eastern, another cotton spinner.

"Our strategy is to make our current domestic production stable, and any additional capacity to be overseas," said Hua.

Texhong has recently scaled back its Xinjiang project, from an initial 3 million spindles, to just 1 million. Company officials could not be reached to comment on the reason for the change.

BLENDING CULTURES In the past, Han migrants from other provinces often filled jobs in Xinjiang. But many have left since violence began escalating following the 2009 riots in Xinjiang's capital, Urumqi, said a young Han shop assistant selling mobile phones in an Aksu store. Those that have stayed are not keen to work in the noisy textile factories, said several textile company managers.

But for the Uighurs, cotton spinning jobs that pay around 3,000 yuan a month are double those of other city jobs, and several times that from agriculture work.

Drawing them into the cities for factory work may also help Beijing achieve its desired "blending" of cultures in the region. Efforts would be strengthened on "exchanges and blending" between ethnic groups and education in the Mandarin Chinese language, China's Communist Party chief in Xinjiang Zhang Chunxian told a meeting in the old Silk Road city of Kashgar in November.

"They're offering a certain way of living, to make them want to be like Han people," said Tom Cliff, a Xinjiang expert at the Australian National University.

($1 = 6.4770 Chinese yuan)

(Reporting By Dominique Patton. Additional reporting by Beijing Newsroom. Editing by Bill Tarrant.)