BEIJING - China's government is consulting with the textile and cotton industry on plans to sell some of its bulging cotton stockpile, according to sources, a move that may drive domestic prices lower and further reduce import demand.
Beijing is estimated to hold around 11 million tons of cotton stocks, about half of the global total, after a three-year stockpiling programme aimed at supporting farmers.
The government is under pressure to sell its ageing stockpile, which degrades over time and is racking up storage costs. An auction last year sold less than 64,000 tons, much less than a target of 1 million tons, as the government-set prices did not attract bids.
Cotton ginners and textile firms shared views on the plans with government officials at a closed-door meeting in late December organised by state-backed industry researcher Cncotton.com, said a person who attended the meeting but was not authorised to talk to media.
Zhu Beina, president of the China Cotton Textile Association, said her organisation had also been consulted regarding the plans.
Du Min, a director at the Research Center for Rural Economy under the agriculture ministry, and an expert regularly consulted by the government on cotton policy, commented that, "It's completely unreasonable. Half of global stocks are in China, they have to release some."
"Our 10 million tons of cotton in warehouses is no small thing, the financial burden is so huge and also it is impacting market prices."
China's National Development and Reform Commission, responsible for the country's grain and cotton stockpiling policy, did not respond to a fax seeking comment on the discussions.
Talk of the potential stockpile sale led to a 1.45 percent drop in May cotton futures in the first two trading days of 2016. May prices are at 11,325 yuan ($1,718) per ton, close to parity with import prices.
International market participants are watching the plans, as a reserve sale could further dent demand for cotton imports by the world's top textile manufacturer, already at a multi-year low.
While the timing, pricing and volume of future sales still need to be set, industry and experts want the government to adopt a different pricing mechanism to the fixed auction price that failed to attract interest in last year's sale, said Du.
Prices should be aligned with international and domestic market prices, she added, a mechanism that would also be more favourable to traders.
"I would prefer a flexible price mechanism. As long as the import price and domestic price changes, this provides everyone some room to trade," said a China-based trade source who was not involved in the discussions but had heard of proposals to change the price mechanism.
While the government frequently seeks opinion from key stakeholders on policy, it has tended to favour farmers over industry in recent years.
Beijing is struggling under massive stocks of all major grains, particularly corn. Policymakers said in an end-of-year meeting that "supply-side reforms" were needed to reduce large farm product inventories.
