Finding Hope in Crisis
May 14, 2009 As the largest textile producer in the world, China’s domestic cotton consumption has been seriously affected due to weak textile exports in the shadow of a worldwide economic crisis in this marketing year.
According to China Customs, the cumulative cotton import of China in this marketing year (from September 2008 to January 2009) is 547,779 tons, down 42.56% from year-ago levels.
CHINA COTTON IMPORTS in 2008/09 crop year
| Month | Cotton Import | Change from year ago |
| Jan 2009 | 77,993 | -50.55% |
| Dec 2008 | 168,433 | -47.78% |
| Nov 2008 | 76,141 | -25.24% |
| Oct 2008 | 96,155 | -29.83% |
| Sep 2008 | 129,057 | -44.95% |
| Cumulative | 547,779 | -4256% |
According to the National Cotton Market Monitoring System (NCMMS), both cotton consumption and cotton imports in 2008/09 are down sharply from 2007/08, resulting in a significant increase in ending stocks. Meanwhile, the sales progress of China’s domestic cotton in this marketing year (from September 2008 to February 2009, excluding reserve procurement) is 33.6%, down 25.7% from year ago levels.
As a result, the cotton price in China has gone down constantly since the beginning of this marketing year, until the Chinese government launched the cotton reserve procurement for the new crop.
Some economists predict that a second round of mortgage defaults even more powerful than the sub-prime woes will lead to more bank closures and a prolonged recession in the U.S. and the rest of the world. I don’t think there is any need to say much about how serious the crisis has been and will continue to be. However, some bullish factors still exist and will be able to offset the impact of crisis in the rest period of this marketing year.
Cotton Reserve Procurement
After the completion of a 220,000 ton cotton reserve procurement for the old crop left over from the 2007/08 marketing year, the Chinese government respectively announced a one million ton and a 1.5 million ton cotton reserve procurement for the new crop on October 29 and December 22 last year. As of March 6, 2009, the cumulative cotton reserve procurement reached 2.40 million tons, with an average of 30,734 tons per day. Based on this progress, the procurement was expected to be completed in mid March. It should be noted that the cotton reserve procurement gives rise to a shortage of 2.2 million tons of cotton. Theoretically speaking, China needs to import an additional 2.2 million tons of cotton in 2008/09 due to cotton reserve procurement. This scenario serves as a firm support for the market.
VAT Drawback Rate
China raised the textile and apparel export Value-Added Tax (VAT) drawback rate twice in 2008. On July 31, it was increased to 13% from a previous level of 11%; on October 23, it was increased to 14%. In early February this year, the VAT drawback rate reached 15%. Recently, some representatives handed up the proposal to increase the VAT drawback rate to 17% during the Second Session of the 11th National People’s Congress (NPC) as well as the 11th National Committee of the Chinese People’s Political Consultative Conference (CPPCC). According to insiders, the proposal is likely to be approved in consideration of the current difficult position of Chinese textile mills, and thus stimulates the domestic cotton consumption to a certain extent.
Cotton Import Tax
It is reported that a representative of CPPCC has handed up a proposal to cancel the existing sliding-scale cotton import tax (5% to 40%) and replace it with 1% tax. Indeed, China once allocated a huge amount of cotton import quota with a 1% tax during the 2003/04 marketing year. However, it was a special case because the cotton production of China was seriously affected by bad weather and the price was extremely high. In recent years, however, the cotton production of China has been at a high level and the price has been at a low level, particularly in 2008/09. Obviously, such a backdrop is not favorable for the birth of a 1% cotton import tax. Therefore, the domestic cotton price will be at least kept at the current level without the competition of imported cotton with a low price.
GDP Growth
Chinese Premier Wen Jiabao said that the GDP growth of China was targeted at 8% in 2009 in his government work report during the opening meeting of the Second Session of the 11th NPC on March 5, 2009. Insiders believe that it is possible for China to achieve this goal with the implementation of a 4 trillion yuan stimulus package as well as a series of supportive policies to boost the national economy. For the textile and cotton industry, any improvement of the macro economy is welcome.
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