The Question of China’s Global Role
March 19, 2009 It seems that everyone in the global cotton community is asking questions about the future of Chinese cotton. Will acreage remain stable? Will the textile sector continue its growth? Will there be new reasons to expect increased demand? Will imports remain unregulated? These questions persist because it is very well understood that the shifts in China’s cotton industry will inevitably lead to shifts in the global market.
While outside speculation and projection has been widespread, Madam Gao Fang, Secretary-General of the China Cotton Association (CCA), gave a comprehensive presentation at this year’s International Cotton Association Annual Meeting in Liverpool to share the CCA’s opinions on China’s potential for 2009. Referencing data collected domestically, and using her intimate knowledge of Chinese policy and government, she shared a generally positive view of the nation’s future.
“2006 and 2007 showed a historic high in Chinese cotton production, though consumption of cotton has been increasing much faster than production in those two years,” Fang says. China imports cotton from over 40 countries, with nearly 40% coming from the U.S. in 2007/08. This is down from nearly 60% in previous seasons. India is now responsible for 32% of the cotton imports to China.
Despite outside speculation, the CCA estimates cotton planting area was about same for next year in China; this year’s production, after a good harvest, is expected to be the same as last year. Because cotton and grain are planted at opposite times in the season, the heightened grain prices do not affect cotton acreage, Fang says. “Acreage, though not greatly increasing, will remain stable in the coming season.”
Reduction in Textile Demand
China has been experiencing lower garment and textile export growth. The rate of annual increase has been gradually reducing since 2006. The garment export increase has been tremendous since 2001, but this growth is slowing. The garment exports to the U.S. have seen the sharpest reduction, only increasing 3% in this year.
“Because of the reduction in textile demand, there are now huge raw cotton stocks, slow sales and dropping prices,” Fang says. “As the new crop arrives, price still being weak, slow procurement all lead to a stagnant situation,” Fang reports.
The spinning and textiles are in a difficult situation, with two-thirds of the existing firms facing losses. “People often think low-cost labor makes the textile industry successful, but this is not always the case in our country,” Fang says. She explains that, in the last two years, China’s average salary has increased significantly. “The average pay for a textile mill worker has risen 20% in the less than two years.”
The salaries for textile workers are much higher than that of neighboring Southeast Asian countries, which are becoming increasing attractive to spinning mills. The reality is the advantages of the Chinese textile industry are weakening. “If the mills want skilled workers, they must pay relatively high salaries for them,” Fang states.
Though shrinking demand from the West has caused concerns, there has been a recent population shift in China; citizens are increasingly moving to urban areas. As a population becomes more urbanized and a larger middle class emerges, the demand for textile products typically rises. Fang predicts Chinese textiles will benefit from this new domestic demand.
Growers: Sell High
Mills: Buy Low
Farmers want to sell at an elevated price because of a high capital investment, while textile mills obviously desire a low price because of slowing export needs. Factors influencing the development in the textile industry include:
• Change in the international economic conditions. Any failings in the U.S. and Europe have large effects because of the high percentage of exports moving to these countries.
• A tight currency policy in China. Reducing the income tax and raising export tax rebates are two possible governmental moves to help relieve the textile industry, Fang says.
• Appreciation of the RMB.
• Multiple increases in material costs.
AQSIQ Registration Program
The Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), a new government program, is now working to register and manage the overseas suppliers of imported cotton. Its charter document states it was created to “strengthen the inspection and quarantine supervision of imported cotton, prevent from misdeeds in trade, such as defect or adulteration, and guarantee the quality of imported cotton, in accordance with the Law of People’s Republic of China on Import and Export Commodity Inspection and Regulations on Implementation.”
The need for the program stems from the sheer quantity of importers and the resulting quality consequences. “Because of the huge amount of imports, the textile industry wants to monitor quality. There are many quality problems, especially from smaller cotton merchants,” Fang says.
The problem is mainly in the grade. In 2007, there was also frequent damage to the baling materials. “From some countries there was excessive foliage and insects in the cotton this past year,” Fang says, showing photos of low quality cotton tainted with debris.
Fang looks forward to cooperative work with AQSIQ; both have common interests and shared goals. “Building communication and mutual work between CCA and AQSIQ is the new objective. We hope to work on keeping cotton classing consistent, and CCA wants inspections conducted by AQSIQ to me more open and transparent.”
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