Dawson has bought a stake in the Luyuan Cashmere Group, a state-owned company, and plans to form a joint venture, Baotou Luda JiLi Cashmere Products.
Dawson has set aside more than pounds 5m to fund the project. The initial investment is pounds 700,000 for a 15 per cent share and Dawson will spend another pounds 500,000 before the end of the year to raise its stake to 25 per cent.
However, pounds 4m, the bulk of the investment, will be spent on improving the manufacturing processes to produce cashmere goods for sale in China. The move takes Dawson closer to its supply of cashmere, which is widely used in the production of its up-market knitwear brands such as Pringle and Ballantyne.
Nick Kuenssberg, chief executive, said that the price of the goats' wool was now between 60 and 100 per cent higher than it was a year ago. He said the deal struck yesterday would not relieve the short-term price pressures.
Dawson, which recently closed its US sports shirts factories, made taxable losses of pounds 95m last year - its worst result.
At the end of last month it asked shareholders for pounds 45m to reduce its debts through a rights issue priced at 120p a share. Yesterday the shares rose 1p to close at 144p.