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  • The structure and characteristics of the domestic cotton market: a macro view

    Chapter 6 - Market profiles - China 


    Since 1999, with the development of China’s textile industry, China has observed an annual increase of 20% in cotton consumption. By 2006, China had become the biggest cotton producer, consumer and importer in the world. It produced one-quarter of the world cotton yield; its annual consumption exceeded 9 million tons, being about one-third of the world’s total cotton consumption; and import volumes reached 3.5 million tons, between a quarter and to a third of the world’s annual import volume.

    China’s cotton holds a critical position in the world’s cotton industry. In China, cotton is the second largest agricultural crop next to grain. The cotton industry is associated not only with the income of 200 million peasants, but also with the harmonious and healthy development of China’s national economy.

    Importance of cotton in Chinese textiles

    China’s cotton consumption is dynamic and constantly changing. In the 1960s, 1970s, 1980s and 1990s, the average annual cotton consumption was 1.6 million tons, 2.51 million tons, 3.85 million tons and 4.20 million tons respectively. The main reason for the slow growth in cotton consumption in the 1990s was that in the late 1990s China’s whole textile industry experienced a long period of loss and the quantity of cotton consumed dropped. In 1997, China’s cotton consumption dropped to 3.14 million tons, while the amount of cotton consumed for textiles was only 3 million tons, the lowest since 1983. Since the beginning of the twenty-first century, China’s cotton consumption has moved into a period of rapid growth. Cotton consumption increased from 5.33 million tons in 2000 to about 10.50 million tons in 2006; an annual average growth of nearly 10%. In view of the development prospects for China’s textile industry, in the next few years, cotton consumption for textiles is likely to keep increasing.



    Domestic cotton

    Cotton production is widely distributed in China, but over the last decades has changed from scattered plantations to more concentrated growth. Cotton plantations have shrunk in the areas not suitable for growing cotton, and cotton production is now mainly concentrated in more than 10 provinces of the 3 major regions: north-west inland, mid- and downstream of Changjiang (Yangtze) River, and Huang (Yellow) River. For the three major regions, the cotton yield shared respectively 35%, 30% and 35%.

    Major problems for cotton production in China

    High fluctuation. During 1995–2006, China’s average cotton plantation area was 4.760 million hectares, with an annual average yield of 5.02 million tons. The biggest area was 5.69 million hectares (2004) and the smallest 3.726 million hectares (1999); a difference of 1.964 million hectares. The highest yield was 6.73 million tons (2006) and the lowest 3.83 million tons (1999), a difference of 2.90 million tons (see figure 6.2). The fluctuation of China’s cotton plantation area and yield has far exceeded that of the world’s cotton area and yield. This places great pressure on China’s cotton circulation, consumption and national macro control.




    Cotton varieties. The varieties of cotton planted are various, mixed and complicated; the uniformity of seed supply is low and the varieties degenerate quickly.

    Scale. There are few large-scale cotton growers. Cotton planting, field managing and seed cotton picking is basically done manually with low levels of mechanization, and labour–production ratio is not high.

    Domestic cotton market

    Since 1949 the domestic cotton market in China has experienced such operating mechanisms as free trading, centralized procurement and sale, contracted and ordered purchasing, and market economy under national macro control. Prices have been formed through free market, Government centralization of prices, and market-based pricing under national macro control.

    From 1954 to 1998 China applied a system of centralized procurement and sale and contractual ordering of cotton. For the entire 45 years, procurement and selling prices for cotton were set by the central Government. The cotton price centrally formulated by the central government was in two parts: the procurement price and the selling price. The procurement price was the price paid to the cotton farmers by the procurement authority designated by the central Government (the jute and cotton companies at all levels under the All China Federation of Supply and Marketing Cooperatives) upon purchase of the cotton from the cotton farmers. The selling price was the cotton price at which the designated procurement authority sold the cotton to the textile enterprises. Whether procuring or selling, the price for different grades and lengths of cotton was specified by the central Government.

    In 1999 the Chinese Government decided to open up cotton prices, cotton operation, and the cotton market. Cotton procurement and selling prices were then decided by the trading parties according to the market supply and demand. At the buyer market, cotton prices dropped, while at the seller market, cotton prices rose.

    Mainly through the purchase and sale of reserved cotton, management of import and export quotas and other macro control policies, the Government controls the supply of and demand for cotton, and hence the price as well. The Government has cancelled all other policies controlling cotton production, while the China Agricultural Development Bank competes on an equal footing with other commercial banks in terms of supplying the capital for cotton procurement and circulating.




    Quality of cotton produced and imported

    In China’s normal production season, the production of high quality cotton that could be used for producing high count yarn accounts for no more than 25%, with most of this produced in the Xinjiang region. Most inland cotton is of medium and low grade. High content of foreign matter is the main problem in domestic cotton; only Xinjiang cotton is free of this problem and for that reason the price of Xinjiang cotton is usually higher than that of inland cotton. With the increase in export of China’s textile products, the demand for high quality cotton that can be used for high count yarn and low quality cotton under grade 5 that could be used for producing open end (OE) yarn have increased correspondingly. Of all China’s cotton imports, United States cotton now accounts for 47%, down from 60% in 2005. The market share of Indian and Uzbekistan cotton has also increased (see figure 6.4).


    Supply and demand in the national market

    The season for collecting seed cotton in China is from September to February. Seed cotton purchasers are ginneries, cotton vendors and cotton traders. Foreign companies are now allowed to procure seed cotton.

    The volume of cotton used for textile consumption varies according to the season and the orders for textile products that mills receive. Usually April, May, September and October are the high months for cotton consumption. Because of the rapid increase in China’s cotton imports in recent years, the Chinese Government uses a tariff-rate quota system to control cotton imports. Therefore, the quantity and timing of cotton imports in China are dependent on the quota quantity released by the Government at different phases of the year. Since 1999, when the Government opened up cotton trade, the Government no longer acts as the main player for cotton procurement. For macro control purposes, the Government set up the China National Cotton Reserves Corporation, which bears the task of purchasing and managing the national cotton reserve. The purchase of reserve cotton refers to the purchase of cotton lint, including domestic cotton and imported cotton.

    Specific cotton quality requirements of the domestic textile industry

    China’s cotton consumption consists of textile consumption, batting wool and other cotton consumption. Batting wool is the cotton used for producing cotton quilts, cotton pads, cotton clothes, cotton shoes, cotton caps, cotton gloves, etc. Other cotton consumption includes medical cotton, military cotton and cotton for printing banknotes.

    From the 1960s to mid 1990s, textile cotton was generally about 85% of total cotton consumption, batting wool about 12% and other cotton consumption about 3%. From the mid 1990s onwards, textile cotton rose from 85% to 95% of total cotton consumption, while that of batting wool and other cotton dropped below 5%.

    Import developments

    China is the biggest cotton producer and consumer in the world. However, in the early 1990s, China’s cotton spinning industry developed relatively fast and China’s cotton demand exceeded its supply, which caused a huge quantity of cotton to be imported. In 1994, China’s cotton procurement caused the cotton futures price limit to rise continuously seven times on the New York Cotton Exchange. After 1995, China’s annual cotton yield was kept stable, but because of the influence of the south-east Asian financial crisis, exports of cotton textile products dropped, China’s consumption of textile cotton was reduced, and consequently the import volume dropped. Since 2000, exports of textile products have improved and the textile cotton volume has increased year by year. In 2006, China’s cotton consumption reached 10.50 million tons, while the volume imported was 3.64 million tons.


    Table 6.1 
    Cotton consumption and import volumes in China, 2002–2006 
    Consumption volume 
    Import volume 
    Ratio of imports to
    (in millions of tons) 


    China’s major cotton importing periods were during 1980–1983, 1989–1998, and in recent years. In 1980–1983, China imported in total 2.39 tons of lint cotton, being over 17% of the total cotton supply for that period, with an annual average import of 600,000 tons. During 1989–1998, the rapid development of cotton spinning enterprises caused cotton consumption to exceed China’s cotton yield and China’s cotton supply became tight. Except for 1993, when the import volume was smaller, imports were high. During this period, the total import of cotton was 4.43 million tons, with an annual average of 440,000 tons. In recent years, due to the fast growth of China’s textile industry, cotton demand has increased sharply. It has been difficult for China’s cotton production to meet the demand and cotton imports have greatly increased, amounting to 880,000 tons in 2003, 1.97 million tons in 2004, 2.57 million tons in 2005 and 3.64 million tons in 2006.



    During China’s planned economic period cotton imports and exports encountered the serious problem of ‘selling low and buying high’ due to delays in Government decision-making and lack of in-depth studies on the international market. When cotton prices on the international market were high, China imported a huge quantity of cotton. When international cotton prices dropped, a large quantity of cotton was exported. In 1995 China imported 663,000 tons of cotton, while the international cotton price reached $1.16 per pound; in 2000 China exported 293,000 tons of cotton, and the world cotton price (on the New York Futures Exchange) dropped to $0.282 per pound on 26 October 2001.

    Another reason for this mismatch was that the fluctuation in China’s cotton supply and demand was far higher than the world average, with this fluctuation in China’s cotton supply and demand in turn influencing the supply and demand of the international cotton market. Consequently, it directly caused the major rise and fall of international cotton market prices. In recent years, with the gradual internationalization of China’s cotton market, the two markets and the two resources have gradually become integrated. China’s cotton market has become an important component of the global cotton market, and the rise and fall of international cotton prices is no longer so closely associated with China’s cotton supply and demand. International cotton supply and demand has become a leading factor influencing the global cotton price, including that of China.