Since the government implemented the cotton purchasing and storage system three years ago, China's cotton industry has come to a crossroads as domestic cotton prices remain much higher than those in the international market, the Beijing-based Economic Observer reports.

The nation's cotton industry production costs for raw cotton materials are too high, while demand is not strong, said Cai Min, vice president of Weiqiao Textile.

In Shangdong's Dezhou and Wucheng, many cotton and textile enterprises have restricted their production. Only big producers will quotas are scraping by, while smaller enterprises are losing their grip, said Yang Hongwen, an executive of a Wucheng textile firm.

China's cotton costs are 3,000 yuan (US$490) to 5,000 yuan (US$820) per ton more expensive than foreign prices. The lack of competitive pricing has the government wondering why it needs to continue purchasing and storing any longer, Yang said.

Golden State Securities analyst Zhang Bin believes the government will suspend the cotton purchasing and storage system next year. When the system was created, the government did not account for changes in global supply and demand and soaring domestic cotton prices. The government's cotton purchasing prices have risen to 20,400 yuan (US$3,300) per ton from 19,800 yuan (US$3,200), while the cost of foreign cotton materials stands at 13,000 yuan (US$2,100) to 16,000 yuan (US$2,600) per ton. The downstream industry cannot withstand such a high domestic cotton price, Zhang said.

The government has three ways to cope with the predicament: first, selling the cotton at a price of below 18,000 yuan (US$3,000) per ton to narrow the gap between foreign cotton prices, with the government absorbing the losses. Second, the government fully opens the whole cotton industry to connect with the international market. Third, the government maintains its cotton purchasing and storage system, allowing the industry to find its own way out, Zhang said.

Li Qunxian, vice president of a cotton trading firm in Ningbo, said foreign textile firms have been heavily selling cotton yarn and textile products to China. If the government continues its cotton purchasing and storage system, the nation will continue to build up its cotton inventory, leaving the government to hold up the global cotton and textile industries.

Li said if the government sets the cotton price at 17,000 yuan (US$2,800) per ton, it can dump cotton in large volumes to cut its inventory. The other way is for the government to suspend the cotton purchasing and storage system, so that cotton farmers will turn to grains — also a good way to cut cotton inventory.