On June 30, 2020, the State Administration of Grain and Material Reserves announced the Ministry of Finance of the People’s Republic of China (No. 1, 2020) (hereinafter referred to as the rotation policy). The rotation policy is generally in line with market expectations, and the price mechanism is fully committed to maintaining market stability. It will effectively promote the cotton industry to do a good job in “six stability” and achieve the “six guarantees” goal.
1. The rotation policy is in line with market expectations
1. The scale of rotation is within the range of market expectations. Since June, news about the release of central cotton reserves has been heard in the market. Regarding the launch scale, many market participants estimate it to be between 500,000 and 1 million tons. In a questionnaire survey conducted by the China Reserve Cotton Information Center on June 15, 70% of the companies recommended that the country appropriately rotate out cotton reserves, and any amount within 100,000-500,000 tons is acceptable. The total amount of cotton reserves released this time is about 500,000 tons, and a balanced release is implemented. In principle, about 8,000 tons are listed for sale every working day. The rotation volume is within the market expectations.
2. The rotation time is reasonable and meets market expectations. The reserve cotton rotation time in 2020 is from July 1 to September 30. For cotton farmers, cotton planting in 2020 has been fully settled, and the rotation will not affect farmers’ enthusiasm for cotton planting. The market expected launch date is July, which is basically consistent with market expectations. On July 1, 100% of the reserve cotton was sold.
2. Roll out policies and price mechanisms to maintain market stability
1. Give full play to market mechanisms , the lowest listed sales price will follow the market. According to the announcement of the State Administration of Grain and Material Reserves (hereinafter referred to as the announcement), this round of rotation continues the dynamic adjustment mechanism with the market. In principle, it is linked to the domestic and foreign cotton spot prices. It is determined by the domestic market cotton spot price index and the international market cotton spot price index. Each is calculated and determined based on a 50% weight, and is adjusted once a week. This means that this round will continue to give full play to the market mechanism and proceed in an orderly manner in line with the market.
2. Use the round-out price circuit breaker mechanism for the first time. The announcement pointed out that when the cotton spot price index in the domestic market is lower than 11,500 yuan/ton, trading will be suspended from the next working day; when the cotton spot price index in the domestic market exceeds 11,500 yuan/ton for three consecutive working days, trading will resume on the next working day. Start transaction. During the period of continued sluggish domestic cotton prices, the fuse point of 11,500 yuan/ton is equivalent to the bottom price, which means that this round of sales pays special attention to proceeding smoothly without suppressing market prices.
3. Sufficient policy space should be reserved to provide “reassurance” to the market. The announcement clearly shows that according to the actual rotation situation of cotton reserves and the supply and demand situation of cotton market, relevant national departments will choose the opportunity to arrange the rotation, and the specific arrangements will be announced separately as soon as possible. At the same time, the announcement pointed out that during the rotation process of the central reserve cotton, if there are major changes in the domestic and foreign cotton markets, the State Grain and Material Reserves Bureau will make necessary adjustments to the rotation arrangements with the National Development and Reform Commission and the Ministry of Finance based on market regulation and other needs. In the face of uncertainties in the domestic and international economic environment, this rotation policy not only reserves sufficient space for response and adjustment, but also helps guide market expectations and maintain the stability of the cotton market.
3. The rotation policy will effectively promote the cotton industry to do a good job in “six stability” and implement the “six guarantees” goal
1. The rotation policy will help enhance the international competitiveness of my country’s cotton yarn. Since May, the price advantage of foreign cotton yarn has continued to show, and my country’s cotton yarn companies have faced greater external pressure. In May, the price of foreign cotton yarn was generally lower than the price of related varieties of cotton yarn in my country. The average price difference was around 114 yuan/ton. In June, the gap widened to 485 yuan/ton. With the start of the rotation of cotton reserves, my country’s textile companies will have the opportunity to purchase more cost-effective cotton resources. It will help our country’s cotton yarn gain market competitiveness in the process of competing with foreign cotton yarn.
Figure 1 Domestic and foreign cotton yarn price trends since 2015 Data source: National Cotton Market Monitoring System
2. The rotation policy helps to build a new dual-cycle pattern with domestic circulation as the mainstay and domestic and international mutual promotion. . Affected by the epidemic, the elasticity coefficient of global clothing consumption has been significantly expanded, and consumption willingness and ability have been significantly restricted. my country’s clothing exports have declined, and domestic clothing consumption is in the recovery stage. Some of the reserve cotton released has a storage time of about five years, is of good quality, has price advantages, and is cost-effective. At present, the mainland cotton inventory on the market has bottomed out, and the reserve cotton released is a good option for some textile companies. From this, we can use this round of cotton reserves to launch my country’s domestic cotton and textile market, tap the potential of domestic demand, and build a new development pattern in which domestic and international dual cycles promote each other.
3. The rotation policy is a further deepening of the supply-side reform of the cotton industry in the new situation. The current spread of the COVID-19 epidemic is accelerating, overseas clothing consumer markets are struggling to recover, and my country’s cotton industry is relatively weak. How to cultivate new growth points, connect the upstream and downstream cotton industry chains, help do the “six stability” work, and implement the “six guarantees” The goal has become the top priority of the current cotton economic work. The central cotton reserve rotation policy in 2020 is based on the potential demand of the cotton market, starting from the supply side of the cotton market, and through the time window.Planning, price mechanism design and market protection measures will effectively unblock the cotton industry chain and activate the upstream and downstream cotton markets.
Under the leadership of relevant national departments, China Cotton Storage Company will strengthen cooperation with relevant units and make every effort to promote the effective implementation of the rotation policy. It is foreseeable that the rotation of cotton from the central reserve in 2020 will enhance the operating momentum of my country’s cotton industry under the new crown epidemic, strengthen the confidence in the development of the cotton industry, further deepen the supply-side reform of the cotton industry, and implement the “six stability” and “six guarantees” work. </p
