China's efforts to cool down its overheated economy are causing major headaches for U.S. cotton merchants and putting a damper on already depressed New York cotton futures, according to trade sources.
The American Cotton Shippers Association estimates that at least 38 Chinese textile mills are technically in default on 208,000 bales with a sales value of $80 million due, in part, to China's tightening of credit for its textile industry. Those numbers include only members' contracts that had been reported to ACSA as of July 27.
The chairman of an Australian cotton cooperative said the total amount of cotton the Chinese mills could be in default on ranges between 100,000 and 200,000 metric tons or 458,000 to 917,000 480-pound bales.
“This unpaid cotton is sitting in China and exporting ports, leaving potential sales cancellations and renegotiations as inevitable,” Stuart Boydell, chairman of Australia's Namoi Cotton Cooperative Ltd., was quoted as saying by Dow Jones News Service. “Until this situation is resolved, it will continue to have a negative impact on prices.”
Boydell and other observers attribute the defaults to efforts by the Chinese government to slow the pace of its economy, which has been estimated to be growing at the rate of 9 percent to 10 percent annually.
New York December cotton futures fell to a life-of-contract low of 44.40 cents per pound July 27 on new cancellation reports and forecasts that the 2004 U.S. cotton crop could reach 19 million bales and that production would be much higher in China and Brazil.
Last October, nearby New York futures rose to 82 cents per pound on reports weather problems had reduced the 2003 Chinese cotton crop to the equivalent of 22 million bales. Early this year, analysts predicted China would be forced to buy up to 11 million bales of foreign cotton to make up for the shortfall.
Since then, the Chinese government has begun forcing banks to restrict their lending to some of the fastest growing of its economic sectors, including the textile industry. More recently, analysts have been reporting significant increases in China's cotton plantings in 2004, which would mean fewer imports in 2004-05.
“The trigger for this whole thing is China and the overhang of undelivered contracts,” said one bank executive. “You have potentially about 300,000 metric tons of cotton that has been sold to China, which may have been shipped but hasn't been paid for.”
China had been importing an average of slightly more than 1 million bales a month in the first five months of 2004. In June, experts believe shipments dropped to 690,000 bales.
American Cotton Shippers have been meeting staff members in the U.S. Trade Representative's office and the Agriculture and Treasury Departments to find ways to get the Chinese mills to honor their commitments.
For openers, ACSA asked the USTR officials to consider pointing out to the Chinese government that since it issued licenses for the purchases of foreign-grown cotton, it is responsible for the contracts.
The organization also asked U.S. officials to ask the Chinese government to impose sanctions on defaulting mills by denying them the right of future purchase authorizations or licenses to export textile goods until they fulfill the outstanding contracts.
As a final step, the Cotton Shippers asked that the USTR and the Department of Commerce consider imposing sanctions on Chinese textile exports to the United States until outstanding contracts are honored.
The organization is planning more meetings with U.S. government officials in Washington and a possible conference with the Chinese ambassador to the United States, according to trade sources.