China's efforts to curtail imprudent bank lending represent the country's latest policy move to cause unforeseen impacts on the cotton market - but, again, encouraging domestic millers to switch to imports.
The country's central bank, the People's Bank of China, two weeks ago flagged its willingness to tighten monetary policy, with the aim of achieving more stable economic growth, in a move seen targeted at curtailing banks' appetite for risky loans, and for channelling deposits into off-balance-sheet "shadow banking" vehicles.
However, one of the most immediate impacts was felt on the cotton sector, where the move has reduced further spinning mills' appetite for domestic fibre, rather than foreign supplies which, besides often being cheaper even with import duties included, can be bought on easier terms, the International Cotton Advisory Committee said.
'Expanding imports'
"The new policy already had an immediate impact on spinners who are reducing purchases from the state reserve, which requires payment upon delivery," the committee, an intergovernmental group, said.
Instead, they are "expanding imports with 90-day letters of credit", said the ICAC, which termed Chinese policy the "main driver of world cotton prices".
Weekly export sales data on Thursday from the US, the top cotton exporter, may reveal a further insight into the trend.
The last data showed a modest 50,000 running bales in US sales, 2012 and 2013 crop combined, half for China, were for the week to June 20, before the People's Bank move.
'Market distortion'
The dynamic reflects the latest unforeseen knock-on effect on the cotton market of Chinese policy, the most important one being the impact of a guaranteed price to farmers for the fibre – set at levels which far exceed those on the international market.
The result has been a jump in state cotton inventories, as farmers sell, and an upward pull on domestic market prices, with mills facing some restrictions on import volumes beyond paying duties.
This in turn has reduced the competitiveness of spinners, driving business to rivals such as Vietnam – from where Chinese textile manufacturers are importing increasing quantities of yarn.
The ICAC highlighted, that with policymakers increasingly aware of the market "distortion" caused by its cotton support programme, China is to test a direct subsidy mechanism to support cotton farmers in Xinjiang, after paying Hebei growers such a payment in April to quell a slide in acres.
Stocks estimates
The ICAC forecast that, despite the fresh incentive for mills to seek cotton abroad, China would cut its state reserves to 8m tonnes as of the end of this month, equivalent to roughly 45% of world stocks, down some 1m tonnes from June.
"Purchases into the reserve will resume in September as the 2013-14 harvest resumes," the ICAC added.
The comments came as the committee trimmed by 130,000 tonnes, to 18.51m tonnes, its forecast for world cotton stocks at the close of 2013-14, which starts next month.
The downgrade reflected a smaller estimate for world production, combined with a small, 20,000-tonne improvement to consumption hopes.