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  • 6.2.5-MARKET PROFILES-THE DOMESTIC MARKET: A MICRO VIEW

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  • The domestic market: a micro view

    Chapter 6 - Market profiles - China 

     
     
    Different players in the market

    China’s cotton market players include cotton farmers, buyers, ginneries, domestic traders, international traders and spinning mills. There is no strict work division between them. ‘Buyers’ means the cotton dealers, i.e., those who buy the seed cotton from the cotton farmers for selling to ginneries. With bank loans, many Chinese traders also directly participate in purchasing and processing. Additionally, according to the protocol for joining WTO, after 1 January 2003, China has allowed foreign cotton traders to undertake domestic cotton procurement, processing and operation in China. Currently, some international traders are allowed to undertake domestic cotton trade in China. In China, some large textile mills are also directly involved in cotton procurement and cotton ginning.

    Specific cotton contracts

    When purchasing cotton, Chinese textile mills may have different purchase conventions according to their differing circumstances. For example, many small textile mills have comparatively scattered purchase channels, and as most of these mills cannot obtain import quota, they seldom use imported cotton. Conversely, comparatively large enterprises normally relatively fixed cotton suppliers.

    For the domestic purchase and sale of cotton in China, there is no fixed contract format, but the general contract conditions include quality specification, price explanation, payment mode, claim against quality, and shipment terms. For cotton trade between most small enterprises, oral agreement is made for trading. For cotton purchase and sale, large enterprises have their own fixed format. For commercial cotton dealt with at the China National Cotton Exchange, an electronic contract is adopted.

    Cotton finance and payment regulations

    Before 1999, cotton purchase and sale loans were provided by the central Government through the China Agricultural Development Bank. Since 1999, when the market was opened, other commercial banks have also been able to provide loans for cotton purchase and sale. The China Agricultural Development Bank currently shares 50% of the loans for cotton purchase and sale. Most of the cotton circulation enterprises still obtain bank loans against warrants: i.e. they keep the cotton in a warehouse designated by the bank to obtain the loan. China National Cotton Exchange (CNCE) has over 90 designated warehouses all over China, in cooperation with various commercial banks providing cotton trade enterprises with such financial services.

    Use of e-commerce and ICT for procurement

    Within three years from 2000, when the Government started to sell commercial cotton through the CNCE, the Government held online auctions for nearly 4 million tons of cotton. From the end of 2002, the CNCE also introduced also an e-matching trade of commercial cotton (mid- and long-term spot exchange). Currently, in China, nearly one thousand cotton traders and textile enterprises participate in this form of trading for cotton procurement and sale. The cotton acquired and reserved under the Government’s macro control all goes through online selling or buying bids.

    Consumer preference for specific fibre types and blending

    According to their spinning capacity and their product varieties, Chinese textile enterprises have different cotton preferences. Most textile mills spinning fine yarns (40s and above) prefer cotton from Xinjiang, which has good quality and contains little contamination. However, the long shipment distance and high price is a disadvantage for Xinjiang cotton. Of all the imported cotton, United States cotton has held the leading position, mainly because it contains less contamination than other cottons. When textile mills encounter contamination problems their labour costs are increased by approximately 1.5 cents per pound, as they have to employ additional staff to manually remove this foreign matter from the cotton.

    Shandong Weiqiao Pioneering Group: case study of a large national cotton consumer

    Shandong Weiqiao Pioneering Group Co. Ltd is one of the super-large comprehensive cotton textile enterprises in China, with its spinning capacity ranking first in Asia. It primarily produces different types of cotton yarn, grey cloth and denim. In 2006, its output reached 882,000 tons of cotton yarn, 1.634 billion metres of grey cloth and 175 million metres of denim.

    The enterprise’s annual cotton consumption is about 900,000 tons, of which more than one-third is imported cotton. As to the cotton varieties purchased, Shandong Weiqiao normally refers to the order of downstream products and carries out its procurement of cotton with different grades, quality and spinnability based on product orders. It procures cotton in two ways: 1) consigned procurement (i.e. it entrusts some Chinese large cotton enterprises with specific-quantity procurement through their nationwide procurement system); 2) fixed acquisition stations in the major cotton production regions such as Shandong, Hebei and Henan, to which it releases a desired acquisition price each day at a fixed time. Cotton ginning enterprises or circulating enterprises which accept this price can deliver cotton to these stations at any time. In terms of imported cotton, in recent years it has mainly selected cotton from India, Uzbekistan, the United States, and West Africa. It mainly cooperates with the representative offices of international cotton traders with a good reputation in China for the procurement of different origins and varieties. Because it is so large, the procurement prices released by Shandong Weiqiao are normally lower than the market price. Additionally, Shandong Weiqiao will select reputable large trading enterprises for cooperation in purchasing domestic cotton as well as in importing cotton.

    As for how to reach an agreement with this giant and other large companies, it is suggested that new cotton dealers should first of all make sure of their cotton standards and spinnability and provide the textile enterprises with detailed data. It is better to provide the textile enterprises with cotton samples for testing or keep a small quantity of goods at China ports for enterprises to inspect. Stability of cotton quality and company credibility are also very important factors for long-term cooperation.