ADBC Props Up Cotton Market

Chinese policy officials purchased huge volumes of cotton for reserves and subsidized loans for private purchases to support cotton prices during 2011.

 A January 16 article explained that the ADBC--the government's policy bank for subsidizing commodity procurement--stepped up its purchases in the face of a decline in private funds for cotton purchase and downward pressure on cotton prices.

As of the end of December 2011, ADBC had issued 66.2 billion yuan (over $10 billion) in loans that supported cotton purchases of 65.39 million dan (3.27 mmt). Both amounts were up more than 75% from the previous year. Subsidized loans from the Agricultural Development Bank of China (ADBC) financed 73% of China's cotton purchases in 2011.

Most of the purchases were made in Xinjiang, the largest cotton-producing region which is about 2000 miles from most of the textile industry in eastern China. Xinjiang's subsidized cotton-purchase loans totaled 48.6 billion yuan, supporting purchase of 47.04 million dan (2.3 mmt). The Xinjiang loans doubled from the year before.

ADBC also made loans of 28.5 billion yuan (about $4.45 billion) to support purchases of 2.17 mmt of cotton for government reserves, "promoting cotton market price stability."

Another article reported that reserve purchases of cotton totaled 918,000 mt during November and 1.133 mmt during December. Most of the December reserve purchases (685,000) were made in Xinjiang. This article says Xinjiang accounted for 1.4 mmt of the 2.17 mmt purchases for reserves during 2011.

Another article on the cotton market explains that domestic cotton is being sucked into reserves and is replaced by imported cotton. Imported cotton totaled 790,000 mt in December (a high for that year). The cotton purchased for reserves is relatively high in quality, leaving only poor quality domestic cotton available for purchasers. Imported cotton has a price and quality advantage, so enterprises are eager to buy imported cotton, especially those that need high quality cotton. 

The article explains that textile export growth was slowed by economic troubles in Europe and America in the second half of 2011. Textile exports grew only 22% during 2011, and apparel exports grew only 19%. How long can you plan on your exports growing 25-30% per year?