On the one hand, the higher costs of labor and materials and currency factors that are choking the textile industry remain to be reckoned with. On the other hand, emerging markets, such as Pakistan, Viet Nam and Bangladesh, have been intensifying their competition with China.

According to data issued by the U.S. Department of Commerce, American textile imports from China in the first four months of the year fell 69.38 percent in value year on year while those from Pakistan soared 552.45 percent year on year. A survey conducted by the American Chamber of Commerce in Shanghai in May also found that 17 percent of its more than 1,400 member companies said they were considering relocating from China to neighboring countries where labor was cheaper.

While the export tax rebate hike is just a makeshift measure, a more sustainable solution would be to upgrade the whole industry, Sun said. Since it is unlikely that the strong yuan would weaken any time soon, the country's textile manufacturers should fire on all cylinders to pursue self-improvement, which could lead to a real way out of their current dilemma, he said.

Weakness in innovation has always restricted the country's textile sector, which has an excess of low value-added products. Analysts said the policy adjustment implies that the government supports industry innovation, because it made some highly polluting products such as chemical fiber cloth and viscose staple fiber ineligible for the higher export tax rebates.

Zhao Meiling of Essence Securities said the export tax rebate hike would not be a remedy for textile manufacturers in the long run. Only product innovation could give them access to the high-end market, she said.

Analysts say the 2-percent rebate hike could give suffering textile manufacturers a break, but at the same time pile pressure on them to increase their production efficiency and push ahead with product innovations. The innovative players will be able to realize greater development while the rest could be muscled out of the market in cutthroat competition, Zhao said. But the game of survival of the fittest would be good for the health of the whole sector, she added.