* Huge cotton reserves unlikely to put pressure on price
* China seen as not increasing yarn import duty
* Global price rises more than a fifth this year (Updates with closing prices)

By Lewa Pardomuan and Naveen Thukral

SINGAPORE, March 21 (Reuters) - Chinese cotton industry officials downplayed the impact of the country's ballooning reserves on Thursday, a day after prices in New York fell more than 2 percent on plans by China and fellow Asian giant India to sell down stockpiles of the fiber.

China's ambitious cotton stockpiling policy has driven up domestic raw fiber prices, forcing the world's largest textile industry to buy more foreign yarn, a semi-finished product which has no import duty. Lower production costs in southeast Asia have spurred mills in the region to lift yarn output.

China is expected to sell about 3 million tonnes of cotton this year from state reserves of around 10 million tonnes. In India, the ruling cabinet has yet to decide how much to sell in a dispersal expected to kick off from April.

But China's reserves would not pressure global markets, thanks to high domestic prices, while WTO commitments make it impossible for the country to hike its import duty on yarn, Chinese industry officials said on Thursday.

Xi Jin, a manager at the government-funded China National Cotton Information Center, said Chinese state reserves would not weigh on the global market, which has seen prices in New York surge more than a fifth this year.

"I don't think it's a pressure. It's very expensive. I mean the auction price is much more expensive than the international cotton price," he told Reuters on Thursday at an industry conference in Singapore.

On Wednesday, cotton posted its biggest daily decline in two months, as news of the sales by India and China prompted investors to take profits on prices that have surged in the commodity's longest bull run in two years.
Prices extended losses on Thursday, down about 1 percent to a one-week low as news of the sales kept roiling the market.

Data showing U.S. export sales data declined in the latest week fed worries about waning demand.

The most-active May cotton contract on ICE Futures U.S. settled down 0.9 cent, or 1.01 percent, at 88.20 cents per lb. Prices were on track for a weekly loss of nearly five percent, the steepest since October.

Cotton's recent surge carried prices to a one-year high of 93.93 cents a lb last week. Cotton has had one of the steepest gains of any commodity this year after two years of double-digit percentage declines.

"One of the reasons the Chinese policy is so disruptive is because it really is very opaque," said Terry Townsend, executive director of international farm group ICAC.

"We really have no idea what's going on in China."

Despite the decline, cotton is still about 50 percent more expensive in China's domestic market, pushing millers toward cheaper supplies from neighbouring countries.

Xi Jin at the China National Cotton Information Center, who pegged the domestic cotton auction price at 19,000 yuan ($3,100) per tonne, said, "China can't keep buying. The stocks are so high."

Speaking of the estimated stockpile of cotton, Xi Jin said, "As for 10 million tonnes, I can't confirm that, but last year we purchased over 3 million tonnes. This year, we purchased over 6 million tonnes."

Cotton imports by China for the current season to July 2013 are estimated at more than 3 million tonnes, he said.
But the country's textile mills are turning to neighbors, such as India and Pakistan, for cotton yarn. Yarn imports, unlike raw cotton, are free of Beijing's tough quota limits and are about 2,000 yuan ($160) per tonne cheaper than at home, traders have said.

"According to my understanding it is impossible to increase duties because WTO regulations don't allow us to do so," Robert Yang, an official of industry body the China National Textile Apparel Council, told Reuters through an interpreter.

India has about 2.5 million bales (425,000 tonnes) of stocks and has faced calls from mills to sell down in order to cool soaring prices, which are near year highs.

But India may also need to cut prices to attract buying from China, one Indian exporter said.

"Chinese stocks are way higher than their consumption and I do not expect them to buy from India unless we lower our offers to around 88 cents per pound," said Rahul Jitendra Shah, managing director of Acme International Ltd.