The Chinese government is estimated to have provided total subsidies of $4.3 billion (33 cents per pound) to the cotton sector in 2017-18, up from $3.3 billion in 2016-17 (30 cents per pound), according to International Cotton Advisory Committee (ICAC). In addition to direct subsidies, border protection benefits are enjoyed by producers in China.

The government of China supports cotton production by controlling cotton import volumes and values and by applying border protection measures based on quotas and sliding scale duties, with an effective tariff of 40 per cent on cotton imported without a quota, says the report prepared by ICAC secretariat in Washington DC.

The Chinese government also maintains a strategic reserve of cotton, serving as a national buffer stock, which is managed by the China National Cotton Reserve Corporation (CNCRC). China releases cotton to the market from the reserve through a system of auctions when there is a shortage, and replenishes the reserve in times of abundance, thus supporting prices.

However, since 2014-15 there have been no purchases by the government into the reserve. Instead, the government paid direct subsidies to cotton growers, in addition to the border protection benefits enjoyed by producers in China, says the report titled “Production and trade subsidies affecting the cotton industry”.

Since 2015-16, China restricted imports by issuing only the tariff-rate-quota (TRQ) import quotas, with the objective of reducing government stocks. As a result of government interventions and quotas, domestic cotton prices in China have exceeded international prices during the past three seasons, the ICAC report said.

The ICAC Secretariat uses the difference between domestic and imported cotton prices to estimate the border protection support to Chinese cotton resulting from government interventions. The price differential between the CC index (an index of mill-delivered cotton in China) and the FC Index L (an index of imported cotton arriving in China’s main ports) adjusted to include value- added tax, port charges and transportation to mills, is used in calculations. The estimated benefit (subsidy) received by producers in China as a result of the government border protection increased from $1 billion (9 cents per pound) in 2016-17, to $1.5 billion (12 cents per pound) in 2017-18.

“In addition to the higher price differential between domestic and imported cotton, increased production during the 2017-18 season also contributed to a larger cumulative border protection benefit,” the report said.

Moreover, through seasons 2014-15, 2015-16 and 2016-17, the Chinese government provided direct subsidy payments to cotton producers in Xinjiang based on the difference between a target price set for the season and an average market price. For 2017-18 and the next two years, the target price was set at the 2016-17 level of 18,600 yuan/tonne (about 130 cents per pound at the average seasonal exchange rate). Using the difference between the target price and the average CC index (domestic cotton price), it is estimated that direct subsidies paid to producers in Xinjiang totalled $2.1 billion (20 cents per pound) in 2017-18, up from $1.6 billion (20 cents per pound) in 2016-17. In other provinces, a direct subsidy of 2,000 yuan/tonne was provided to producers during both seasons. It is estimated that these direct subsidies totalled $340 million (14 cents per pound) in 2017-18, down from $380 million (13 cents per pound) in 2016-17.

“Total direct subsidy payments provided to producers in China, in addition to border protection support, are estimated at $2.4 billion in 2017-18, up from $2 billion in 2016-17. The increase is attributed to higher production during 2017-18, while the difference between the target and the market price remained almost unchanged,” mentions the report.

In addition, the government of China pays growers a subsidy amounting to about $150 million a year for using high-quality seeds, although small-holder farmers do not benefit significantly from this policy. During the past several seasons, China provided subsidies estimated at about $150 million per year for the transportation of cotton from Xinjiang to mills in eastern and southern China. (RKS)