The Reversal of Chinese Cotton Policy and Import of Cheaper Yarn

The reversal of Chinese cotton policy and import of cheaper yarn from India led to a slowdown in yarn production in the country, according to a report released by the State Bank of Pakistan (SBP).

‘The State of Pakistan’s Economy: Third Quarterly Report for the year 2013-14’ states that “Although yarn manufacturing posted growth compared to the previous year, a gradual slowdown was visible in Q2 and Q3 of the fiscal year.”

The SBP report mentions that the external demand for yarn weakened after a change in cotton policy by China. Since 2011, China was building cotton stocks by offering higher than competitive price to local farmers. This led to an increase in the difference between international and local cotton prices, encouraging the Chinese manufacturers to increase their import of cotton yarn and its bi-products. As a result, Pakistan’s export of textile items flourished.

In fact, during 2010-11 to first half of 2013-14, Pakistan earned US$ 3.5 billion from the export of cotton yarn to China only, states the report.

However, in March 2014, the Government of China introduced a major shift in this policy, i.e., instead of buying cotton at higher than market prices, the government would pay the price differential to farmers if market price falls from a target level, which is significantly smaller than the price at which government was earlier buying from the market.

The Chinese Government announced a lower target price in the new cotton reserve policy relative to support price offered in the older policy. However, the demand for yarn from China started falling from February 2014 in anticipation of the new policy, the report mentions.

Another reason for the reduction in domestic demand for yarn was import of cheaper yarn from India at zero tariffs, the report says. The import of Indian yarn reached to $86.3 million during July-March FY14 compared to $58.3 million during the same period of FY13. This not only lowered the demand for local yarn, but also kept market prices down.

However, yarn imports from India are likely to decline in the subsequent months following the imposition of 5 percent duty on yarn import from India by the Economic Coordination Committee of the Cabinet in April 2014.