China evolving in cotton, textiles

Contrary to predictions, China will not take over the world of cotton and textiles, says a leading expert in cotton markets. The dragon, however, will be around for the long haul in cotton.

“The whole logic has been that China will take over the world after Jan. 1, 2005,” says Ed Jernigan, president and CEO of Globecot, Inc., and the Jernigan Group.

“It's not going to be that way,” he told the annual meeting of the Carolinas Cotton Growers Cooperative. “Maybe in one category, but China has slowed investment in its textile industry.”

Labor costs are beginning to play a role, even in China, as workers become more affluent and wage-wise, Jernigan says.

Quotas on textile and apparels are set to expire on New Year's Day 2005. Many have feared that China will take over the U.S. textile market.

China is important to the world cotton trade for many reasons. It has the sixth largest economy in the world, is the third most active trader, has a middle class of 100 million, and has the world's largest textile and apparels sector.

While China uses one out of every four bales of cotton produced in the world, the country also grows large amounts of cotton.

“Cotton acres are now determined by grower's returns,” Jernigan says. The cotton is hand picked.

In the western province of Xinjiang, cotton is grown under 100 percent irrigation in the northern oasis region, in the mountain valleys and in the south along the desert. This region produced about 7.95 million bales of cotton in 2004.

In the North China Plain, in provinces such as Shandong, producers grow cotton on a hectare or less by small-acreage producers without irrigation. This region produced some 12.17 million bales in 2004.

In south China, or the middle section of the country, the acreage is widely scattered. Excessive rain is a problem in this area. The south China region and other areas produced about 9.38 million bales of cotton last year.

Until a few years ago, China's cotton was a state secret, Jernigan says.

Because China is trying to form a regional market, there is currently a fight to determine who will provide the “official” numbers of the Chinese crop. “That's one of the reasons why there are so many reports out,” Jernigan says.

Cotton moves in China much like it does in the U.S.

There are more than 35,000 different companies involved in the process.

While free market competition determines price, the government does influence it.

“The government influences cotton prices by credit policy, purchases and sales from the government, cotton strategic reserves and the issuance of import quotas,” Jernigan says.

An example of the government's influence on prices came when it clamped down on the credit textile manufacturers use for working capital, so mills could not buy cotton. More than half of the mills had less than 30 days of cotton in storage.

In July, the government restored credit. The move had an effect on world cotton prices.

“The Chinese government influences prices on a global basis by issuing or withdrawing credit,” Jernigan says.

China is still evolving in the cotton and textile industries.

A cotton futures market opened June 1. “It may give the New York Cotton Exchange a run for its money,” Jernigan says. It is trading some 25,000 contracts a day. “There are a lot of brains behind this futures market.”

The government does not allow foreign entities to trade on the futures market. The lack of infrastructure in the country creates a situation where the players have the freedom, but do not necessarily know the rules of commerce, Jernigan says.

China now uses up to 50 percent of its cotton for domestic use. China expects to use 35 million bales of cotton in 2004/2005.

Higher grades are the focus. There is currently a debate about whether the cotton is of too high of a quality for its intended use, Jernigan says.

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