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Changes in cotton policy coming in China?

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China has spent about $10 billion so far this marketing year importing cotton and buying millions of bales of cotton from its domestic producers for $1.25 a pound.

The move was designed to take cotton off the market and drive up cotton prices, so China could then sell cheaper cotton to its textile mills.

The plan didn't work because the surplus of cotton outside of China was much larger than anticipated.

The United States has to pay Brazil millions of dollars each year for failing to eliminate certain cotton subsidies. Meanwhile China runs roughshod over free-market principles, paying its domestic cotton producers $1.25 per pound when the current world price is significantly less than that.

China has spent about $10 billion so far this marketing year on this perplexing policy — hoarding millions of bales of cotton, via imports and purchases from its domestic producers. Joe Nicosia, CEO of Allenberg Cotton Company, believes China was hoping the huge reserve would tighten the market around the rest of the world and drive cotton prices higher.

The idea was that China could then sell cheaper cotton to its domestic textile industry. China was foiled in this attempt, however, because the surplus of cotton outside China was much larger than anticipated. World prices never rose.

WTO enforcers haven’t even raised an eyebrow over China’s attempt to control cotton prices. Perhaps they know that in China, capitalism is knotted by fear and appeasement.

For example, there is a great deal of political and ethnic unrest in the Xinjiang Province, China’s largest cotton-producing area. Keeping everybody happy there drives a lot of cotton price policy, according to Nicosia.

But more often than not, China’s policies are all about control. For example, China’s ruling elite felt a loss of control after they sold cotton into the rally of 2010-11, according to Nicosia. When they ran out of cotton, they had no government response to prices that continued to move higher. “They lost their ability to have any influence over their domestic market and they didn’t like that,” Nicosia said.

This was behind China’s decision to rebuild its cotton stocks. In a free market, it may seem reasonable to ask why China simply doesn’t grow more corn and buy all their cotton from the rest of the world. “To their point of view, that would make them dependent upon the rest of the world,” Nicosia said. “And they don’t want to be dependent on anybody. They like having the ability to support their growers and all their commodities.”

To get out of the mess, China could take it on the chin and unload its cotton reserve on the rest of the world in one fell swoop. But if they did, it would be an admission that the stock hoarding was bad policy. China doesn’t like admitting failure either.

Who knows what they’ll do.

The picture could become clearer this fall, as China’s party congress selects new leadership to rule the country’s 1.4 billion people, hungry for reform. With unrest in Egypt, Syria and Libya as a backdrop, a policy based on keeping people happy may not be the way to go anymore.

“Their opening to the rest of the world will require a certain standardizing of the way business is done,” Jon Huntsman, a former U.S. ambassador to China said regarding the challenges of the new regime. “You just can’t make decisions behind the velvet curtain.”

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