Is a consortium of profiteers on China’s eastern seaboard secretly pushing up the price of an essential commodity?
Cotton prices have more than doubled over the last year, hitting levels that haven’t been seen in more than a decade. China’s leaders (and its media) are blaming speculators for the bout of inflation. But the economy – and Mother Nature – have also played a part in the drama.
“Traders are making a fortune flipping [cotton],” garments baron Zhao Lanning, president of Huate Textile, told Caixin Magazine. “We wish we’d bought more before the price surge.” That ‘surge’ has seen cotton change hands for nearly $4,700 per tonne on the Zhengzhou Commodity Exchange.
Cue policymaker concerns over social stability. “When cotton prices rise, the higher costs are passed down through a long industrial chain in China that includes cotton gins, yarn makers, weavers, dyers, finishers and exporters,” warns the magazine.
“China will face relatively high inflation pressure in the near future,” the China Federation of Logistics and Purchasing concluded dryly in a recent report.
That’s putting it rather mildly. September inflation ended up at 3.6% – well above the official target of 3% – and October prices are expected to be even higher.
So who’s behind the cotton squeeze? The main suspect is a group of businessmen from the city of Wenzhou in Zhejiang Province (for more on this highly entrepreneurial and speculative city, see WiC63).
“Allegedly, some of the real estate developers in Zhejiang as well as Shanxi coal bosses have gone to Xinjiang to buy cotton,” writes China Business Herald. “Media reports are that at least Rmb10 billion [$1.5 billion] in private capital from Zhejiang has been pulled out of the coal and real estate market this year and moved to cotton.”
The argument is that the uncertainty that very speculation has created has in turn led to a vicious spiral of price rises.
“Some cotton merchants with strong financial strength and experience have begun to hoard cotton,” warns the newspaper.
Government officials started to crack down on the speculators, but it remains to be seen whether it will be effective. “Our acquisition of cotton is basically dependent on bank capital,” Wenzhou-based cotton merchant Yang Tongren told 21CN Business Herald, “[but] this year banks have refused lending to us.”
That’s on the orders of the National Development and Reform Commission (NDRC), the Ministry of Finance, and other government bodies.
So why then are prices still climbing? It turns out that cutting the credit lines hasn’t really presented much of an obstacle to speculation. That’s because companies need a ‘procurement certificate’ to buy cotton and many happen to be in the hands of the speculators (the cotton merchants) rather than the textile companies themselves. The textile enterprises have thus ended up providing financing to the Wenzhou cotton merchants, explains 21CN.
Curbing speculation alone won’t solve the industry’s problems – there’s also a basic lack of supply. “China’s domestic cotton production fell by 14.7% [last year],” reports Bloomberg. That wouldn’t have been a problem if exports hadn’t recovered so strongly from last year’s trough. “A recovery in the textile industry coupled with a drop in production because of lower income from cotton planting has resulted in a relatively big change in the demand and supply balance,” the China Cotton Association told the newswire.
The China Meteorological Centre is also forecasting a bout of cold weather, which is keeping prices up despite government auctions of stockpiled reserves.
And although China is still the largest global producer of cotton, the loss of land to its industrial programme and urbanisation is likely to continue to tighten supply, argues Mao Shuchun, an expert with Cotton Research Institute of the Chinese Academy of Agricultural Sciences. He told 21CN that even if the area under cotton cultivation increased by 1.6 million acres, the country would still have to import around 5 million tonnes to meet demand (see WiC40 for our take on the loss of arable land).
Experts say that the long-term solution is to make cotton farming a more lucrative business for farmers. “First, increase the subsidies for cotton production,” argues 21CN. “Second, the state should introduce a minimum purchase price for cotton to prevent price fluctuations.”
But realistically, with so much liquidity and still relatively few financial assets in which to invest, it seems likely that speculators will continue to target commodities for quick profits.
Last year, garlic, today cotton. What next?
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