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  • 6.2.2-MARKET PROFILES-QUOTA SYSTEM AND MANAGEMENT OF CHINA’S COTTON INDUSTRY

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  • Quota system and management of China’s cotton industry

    Chapter 6 - Market profiles - China 

     
     

    In 1998, the State Council of China issued the Decision on Promoting the Reform of Cotton Circulation System. (See the end of this section for a chronology of policies and events related to China’s cotton import quotas.) With this decision, China’s policy on cotton changed significantly towards a market mechanism under State macro adjustment. In conjunction with the concerned governmental institutions, the National Development and Reform Commission (NDRC) exerts its power to adjust the market in a macro way based on factors such as the cotton supply and demand situation, the cost of cotton production, the parity between cotton and grain, and the international cotton price.

    At the beginning of each year, NDRC allocates quotas to applicants according to the number of applicants, historical actual import achievements, production capability and other relevant business standards of each applicant. In order to receive a quota, an enterprise must fit into one of four categories: State-owned trading enterprise; central enterprises with national reserve functions; enterprises with actual import achievements of general trade in the previous year; and cotton textile enterprises with over 50,000 spindles.

    Before China initiated its cotton reform, cotton imports and exports were under the management of the China National Textiles Import and Export Corporation (Chinatex), affiliated to the former Ministry of Foreign Trade and Economic Cooperation. Cotton was traded according to the uniform price regulated by the State. After entering into WTO, China has gradually granted cotton import and export licenses to some qualified textile enterprises, cotton business enterprises and foreign trading enterprises, with the purpose of establishing and improving China’s management system on cotton imports and exports and the tariff-rate quota management system. Since 2002, the cotton quota has been uniformly managed by NDRC.

    Under the terms of its accession into the World Trade Organization, China was obliged to establish a calendar year tariff-rate quota with an in-quota tariff of 1% for agreed amounts of imports. Starting in 2003, in addition to these ‘regular’ annual tariff-rate quotas of 894,000 tons, China released additional quotas of 500,000, 700,000 or 1,000,000 tons once or twice a year. Higher sliding-scale duties applied to these additional quotas. In total, four quotas with sliding-scale tariffs between 500,000 and 1,000,000 tons were released between 2003 and 2005. In February 2006, an additional quota of a record 1.5 million tons with sliding-scale duty was released, and in April 2006 a special 200,000-ton quota was released for United States cotton (see table 6.3).

    China’s cotton imports have a significant influence on the international cotton price (see figure 6.7 for a comparison of the CC Index and the Cotlook A Index). Since 2003, the allocated cotton import quota has not satisfied domestic demand. In July 2003, for the first time, China added another 500,000 tons of cotton import quota, leading to a continuous surge to the daily limit on the New York Cotton Exchange. Since then, the Chinese Government has issued additional quota several times, but because of the time-lag between the official release of the news that China is adding to its quota and the actual issuance of quota, the market price usually declines rather than rises when the quota news is released. Exactly when NDRC will issue additional quota is uncertain as an internal clearance process needs to be followed, which involves the Ministry of Finance, the Ministry of Commerce, China National Textile and Apparel Council (CNTAC), the All China Federation of Supply and Marketing Cooperatives, the Ministry of Agriculture, the Agricultural Development Bank of China (ADBC), and finally reporting to the State Council and getting its approval.

    On 30 April 2005, the General Administration of Customs of China announced that the tariff of the additional import quota issued in 2005 would be on a sliding tariff-rate basis. It regulated that for additional cotton import quota where the pre-tax price is higher than CNY 10,029 per ton, the tariff rate should be provisionally set at 5%; if the price is lower than CNY 10,029 per ton, a sliding tax rate ranging from 5% to 40% should be imposed according to a certain formula (see table 6.2). The reasons for the sliding tax are twofold. Firstly, it stabilizes the domestic cotton price, protecting the interests of domestic cotton farmers. Secondly, it gives an indirect impetus to the industrial upgrading of China’s textile industry. The change of tariff rate results in increased costs for those textile enterprises importing low-grade cotton and decreased costs for those importing high-grade cotton, which encourages enterprises to import less low-grade cotton and improve the quality and grade of their textile products. This also encourages textile enterprises to turn to the production of high value-added products, in turn facilitating an internal reshuffle of the textile industry.


    6.2.2-en1 

     

    Note: The price after tariff is US$ per ton, including 13% VAT and US$ 5.65 per ton port fees.

     

    6.2.2-en2 

     6.2.2-en3 

     

    *The 200,000 ton quota released in 2006 was allocated to China’s Five main State owned enterprises to purchase United States cotton during China’s official visit to the United States.
    **The 300,000 ton quota released in 2006 was for the purchase of United States cotton as China State reserve during China’s official visit to the United States.
    ***The 700,000 ton quota released in 2006 was matched with the purchase of Xinjiang cotton at the ratio of 1:1.