China Cotton Bubble Pops

Chinese cotton prices have been in a downward spiral since May. In early July, the reported by the National Bureau of Statistics was down 17 percent from its March peak. Last Wednesday the September cotton contract on the Zhengzhou commodity exchange fell 7 percent and the yarn futures price fell 4 percent. A Ministry of Agriculture analysis last month pointed out that Chinese cotton prices are now at an unusually low level below the cost of cotton imported from the world market at a 1-percent "sliding scale" tariff.

This summer's price collapse reverses last year's steep gains when Chinese factories roared to life as the world emerged from lockdown, reviving textile orders. Analysts say Chinese textile orders evaporated in recent months as extended covid lockdowns in China closed many retail outlets in 2022. The demand hit was magnified as China's latest virus lockdowns came during the usual seasonal lull in demand. Companies are slowing their cotton purchases to an as-needed basis with a new cotton harvest set to come on the market next month. A U.S. ban on Xinjiang cotton products that came into effect last month put further downward pressure on Chinese textile production and cotton demand.

Statistics show that 5.8 million tons of Chinese cotton was processed by gins during the 2021/22 marketing year as of July 14, but only 3.75 million tons had been sold. Analysts say 1 million tons from last year's harvest in Xinjiang remains unsold, and there is likely to be a similar surplus from the 2022 crop.

China's cotton reserve corporation has stepped in to buy up cotton for reserves this month as a means of sopping up excess supply, but the expected volume of 300,000-to-500,000 metric tons is not enough to solve the problem, analysts say. 

Processors are facing losses as prices fall below the cost of cotton they purchased after last fall's harvest. Xinjiang cotton-processor Xinsai Corporation reported a net loss of 58 million yuan in the first half of 2022, a reversal of its 4.6-million-yuan profit in the first half of last year. The company cited weak demand from European and U.S. companies and the U.S. ban on Xinjiang cotton for the losses. Companies are under financial pressure as they have large backlogs of inventory financed by bank loans.

China's farm policy bank, the Agricultural Development Bank of China, finances 60 percent of the cotton sold in Xinjiang. The bank has lent a cumulative 287.8 billion yuan (about $42 billion) since 2014 to finance cotton trade. In 2021 cotton held in reserves for 8-to-10 years was still being sold. The Bank reports adding to its cotton industry loan portfolio 14 billion yuan (over $2 billion) to finance land transfers for cotton farms and 156.9 billion yuan (about $25 billion) in antipoverty loans to support 181,900 poor people.

In fact, China's textile industry has been in slow decline for five years. Official figures show that production of yarn fell from 31.9 million tons in 2017 to under 26.2 million tons in 2020. The boom during 2021 was an aberration. The data show that April 2022 yarn production was down 8.9 percent from a year earlier and May production was down 7 percent.

Xi Jinping visited Xinjiang last week to show support for China's policies in the region. He visited a cotton farm and a museum run by the Xinjiang Production Corps to learn about its land reclamation and its historic role as a military garrison in the border region.

Xi Jinping in shades and always socially distanced. Officials outnumber farmer by 6:1.