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Yin and Yang: Adjustments in the Chinese Cotton Market
By Carol Skelly
Cotton exporters, be alert and
cautious in planning shipments to China -- competing forces are
tugging at profits in the cotton trade. On one hand, China
continues to exhibit strong consumer demand for cotton. On the
other, the Chinese government has taken actions that challenge
their suppliers abroad.
Imports at a Time of Surplus
Consider this paradox: China's high level of cotton imports occurred despite a surplus of domestically produced cotton. China not only is the world's largest cotton consumer but also competes with the United States to be the world's leading cotton producer.
Here's how the paradox played out in the 1990s: For the past four years, China has been the world's largest importer of U.S. cotton. During marketing years 1993/94 through 1996/97, China imported 2.5 million tons of cotton, and the United States supplied more than half of that (1.5 million tons). U.S. sales to China have averaged about one-fourth of all U.S. cotton exports during this period.
Chinese Set New Cotton Policies
The surplus of domestic cotton prompted Chinese officials to establish new policies both to encourage a preference for local rather than foreign cotton and to dispose of excess stocks. Effective Sept. 1, 1997, policies were implemented to promote the internal use of cotton produced in Xinjiang province.
The policies are intended to
allow more flexible pricing of domestic cotton, permitting
discounts of 6 percent from the official price, and a special
price reduction of 10 percent for Xinjiang cotton. To make
Xinjiang cotton more price competitive, the government said it
will refund the value-added tax for exported textiles made with
Xinjiang cotton.
In the past, China's state textile mills purchased cotton mainly from the government, while mills under joint-venture ownership were permitted to buy imported cotton if the imports were used in re-exported products. It is these joint-venture mills that are thought to account for most of China's recent import activity, and it is possible that slippage has occurred in the form of imported cotton passed along to state mills, or processed for domestic rather than export use.
Along with this carrot for domestic suppliers, Chinese officials applied a stick for suppliers abroad: Effective Jan. 1, 1998, the Chinese government began enforcing more strictly the requirement that imported cotton be processed for re-export and set quotas on the volume of cotton to be imported by import licensees.
In April 1998, the Chinese government offered nearly 1.5 million bales of surplus cotton stocks for export delivery during May-December 1998. Under the terms of the export offer, up to 500,000 bales of Chinese cotton could be exported this marketing year, with the balance shipped in 1998/99.
Chinese Government Holds Cotton Tight
The procurement and distribution of cotton in China is managed entirely by the government. This resulted last year in a price to domestic mills that ranged from 90 cents to $1.04 per pound, significantly higher than the March 1998 average world cotton price of 68.5 cents per pound.
The outcome of these competing concerns and new policies is that Chinese buyers purchased significantly less cotton in the first half of marketing year 1997/98.
Future Trade Will Be Iffy
China's total cotton imports are likely to be down significantly from last year's stout 3.6 million bales. Imports for August 1997-February 1998 were 1.2 million bales, 32 percent lower than the same period a year earlier.
The discounted Xinjiang price
was competitive with the U.S. price at the time the Chinese
policies were announced, but, since then, world prices have
trended downward without corresponding reductions in the Xinjiang
price, making U.S. cotton more attractive in China than ever.
China's mills have been steady buyers of U.S. cotton this season. As of early April, total commitments stood at 778,000 bales, down 50 percent from last year, but still an indication of substantial demand.
If China implements no further price or policy changes, total cotton imports are likely to be about 45 percent lower than last year's--or about 2 million bales--with the United States expected to supply about 40 percent of that--or about 800,000 bales.
Prospective exporters should watch for further signals from China that could dampen import demand.
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The author is an economist with the U.S. Department of
Agriculture's
World Agricultural Outlook Board. Tel.: (202) 720-9808; Fax:
(202) 690-1805; E-mail: cskelly@oce.usda.gov
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