China, the world's top consumer of cotton, will slash its import quotas for 2015 to boost demand for domestic fiber, a senior official said on Monday, driving futures prices in both China and the United States lower.
Beijing will only provide import quotas next year for the 894,000 tonnes that it is required to offer at low duties under commitments with the World Trade Organization, according to Liu Xiaonan, vice head of the economy and trade department at the National Development and Reform Commission.
Previously, China has offered another type of quota, in addition to the one compliant with the WTO, but Liu said no additional quota would be made available next year.
Non-quota imports are subject to a 40 percent tariff, so the restricted availability of import quotas will inevitably dampen Chinese demand for foreign cotton.
In the 2013/14 marketing year, traders estimated that Beijing had issued 600,000-800,000 tonnes through the additional quota that will not be available next year.
"Apart from the 894,000 tonnes of import quota required under WTO entry commitments ... we will not issue additional import quota, instead guiding domestic textile companies to use more Chinese cotton," Liu told reporters.
To encourage domestic producers, China will offer subsidies to provinces in the Yellow River and Yangtze River valley growing areas, said another official at NDRC.
The government had previously said a new direct subsidy for cotton farmers would only be available to Xinjiang, the country's top growing region, raising fears that domestic cotton output would drop sharply.
The change in quota policy will hurt major exporters such as the United States where Chinese demand has played a key role in influencing fiber prices.
"The very clear effect of this will be big selling pressure," said a trade source in China.
The most-active Chinese futures contract on Monday dropped 3.6 percent to a more than five-year low of 12,805 yuan per ton (about 95 cents per lb).
The benchmark cotton contract on ICE Futures U.S. sank over 2 percent to a seven-week low of 62.59 cents a lb by 9:52 a.m. EDT, under pressure as the statements reinforced traders' worries that China's policy overhaul will crimp import demand.
"The market is pricing in a worst-case scenario. The futures market in China is leading us lower," said Sharon Johnson, a cotton specialist with KCG Futures in Georgia.
Benchmark ICE prices hit a near five-year low of 62.02 cents a lb in August as the market anticipated weaker fiber demand in China ahead of an overhaul of its policy.
China's government said earlier this year it would end a three-year long program to stockpile domestic cotton to support local growers, and instead offer subsidies direct to farmers.
The stockpiling had pushed the price of domestic cotton well above market prices, creating demand for cheaper imported fiber.
China's cotton imports dropped by 32 percent in the 2013/14 year to 3 million tonnes, owing to weaker demand by the domestic textile sector and mills importing yarn instead of cotton.
Imports are expected to fall further in the current year to 1.74 million tonnes, according to the U.S. Department of Agriculture.
Liu did not disclose whether next year's import quota will be tied to domestic purchases. ICE cotton prices slumped on Friday, after an industry website reported that Beijing may link a large amount of the WTO quota to domestic cotton purchases.
China will consider auctioning cotton from state reserves after the main buying season ends in March, if demand has not been satisfied by the new fiber crop, added Liu.
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