China Cotton Clumped in Northwest; Imports in East

Cotton production stimulated by subsidies is booming in China's northwest corner, while another subsidy bonanza intended to create a textile industry in the region has spun out of control. Meanwhile, demand from textile mills along China's seaboard stimulated a rise in cotton imports during 2018.

China's 2018 cotton output was 6.096 million metric tons, according to estimates by the National Bureau of Statistics released last month. Production has rebounded from a low of 5.43 mmt in 2016, but 2018 output was still 1.5-mmt below the peak reached in 2007. Cotton area of 3.195 million hectares in 2018 was up 4.9 percent from the previous year, and the average yield of 1818.3 kg/ha was up 2.8 percent. Production was up 7.8 percent year-on-year.

All of this year's cotton expansion occurred in China's Xinjiang Autonomous Region, which now accounts for an eye-popping 84 percent of the country's cotton output--up 3 percentage points this year. Xinjiang cotton output went up 545,000 metric tons in 2018, while production in "inland" provinces fell 102,000 mt. Xinjiang's 2018 output was up 11.9 percent year-on-year, reflecting a 12.4-percent increase in area planted.

China cotton output, 2017-18
Region	Area  (1000 ha)			Output (1000 mt)
	2017	2018		2017	2018
National	3,195.0	3,352.3		5,653	6,096
Xinjiang	2,217.5	2,491.3		4,566	5,111
Others	977.5	861.0		1,087	985

A National Bureau of Statistics explanation of the cotton statistics attributed the increase in Xinjiang's output to the "target price subsidy" policy--which operates only in that region--and the Xinjiang Production Corp's cotton price policy, which was not explained. The target price policy makes payments to cotton producers annually based on the area of cotton they plant and the difference between the market price and a target price set to cover costs and provide what the government thinks is a reasonable profit margin. The target price subsidy replaced a support price policy in 2014, and operates only in Xinjiang. The  Bureau explained that area planted in cotton has been in long-term decline in other regions due to relatively low net returns (and high labor requirements). According to the Bureau, cotton area plunged 22 percent in the Yangzi River region this year.

The cotton subsidies are focused on Xinjiang to (1) maintain a degree of national self-sufficiency in the one region where the crop is attractive to growers, (2) to maintain social stability in a region where ethnic unrest is an acute concern, and (3) to engineer a cotton-textile industry belt running from northwest China through central and south Asia to western Europe as part of the "One Belt One Road" strategy.

China now has a geographically bifurcated cotton-textile industry. Xinjiang produces vast volumes of cotton, but most of the textile and apparel industry is concentrated in coastal provinces thousands of miles to the east. Imports of cotton by coastal textile companies have increased as domestic output shifted to Xinjiang. China's imports of cotton during January-November 2018 totaled 1.35 million metric tons, up 300,000 metric tons from the same period in 2017. China's imports of cotton bottomed out in 2016, the same year as the nadir in China's cotton output (the result of offloading massive cotton stocks accumulated under the ill-advised price support policy during 2011-13).

China's imported cotton is purchased mainly by textile companies in coastal provinces. Customs data show that companies registered in Shandong and Jiangsu Provinces--on the coast--imported 930,000 metric tons of cotton (69 percent of the national total) during January-November 2018. Shandong and Jiangsu only produced a combined 238,000 metric tons of cotton. Companies registered in Beijing--which probably include the government's cotton reserve corporation and other state-owned companies--imported 143,000 metric tons. Most other cotton-importing companies were registered in provinces along the coast that produced little or no cotton. Xinjiang companies imported 87,200 metric tons of cotton.

China regional cotton production and imports, 2018
Province	Cotton produced	Cotton imports* (Jan-Nov)
National	6,096	1,353.8
Coastal regions:
Shandong	217	621.5
Jiangsu	21	308.8
Beijing	0	143.0
Hebei	239	23.3
Zhejiang	6	20.9
Guangdong	0	19.1
Shanghai	0	18.8
Fujian	0	4.4
Guangxi	1	4.2
Tianjin	18	0.8
Others	8	5.6
Central/western regions:
Xinjiang	5,111	87.2
Hubei	149	31.8
Anhui	89	18.3
Hunan	86	3.0
Jiangxi	68	12.4
Henan	38	30.9
Gansu	35	0.0
Shaanxi	10	0.0
*Province where importing company is registered.

Chinese officials introduced another layer of subsidies to create a textile industry in Xinjiang to utilize the region's cotton output. In 2014, a plan was issued with a target of creating 1 million textile jobs in Xinjiang by 2020, and subsidies were offered for textile worker training, retirement and social insurance, favorable tax treatment, earmarked bank loans, electricity subsidies, subsidies for transportation of textile and apparel products, and subsidies for equipment to clean up wastewater from dyeing.

At first, textile companies were dismayed by the subsidies for Xinjiang, but they soon piled into the region, building new capacity at breakneck speed. Textile production capacity in Xinjiang exploded from 7 million spindles in 2012 to 17.46 million in 2017. However, the new plants mostly turned out the same generic low-to-mid-quality yarn, and little investment was made in upscale products, apparel and household textiles. Some industry observers raised concerns that new projects in Xinjiang were simply chasing subsidies and were not sustainable without them. In March 2018, the Xinjiang government issued an "Emergency notice on strict control of disorderly development of the textile industry" that called for a halt to all textile investment in the region.