KARACHI: The reversal of cotton policy by China has hit Pakistan’s yarn production and yarn export, reveals a report recently issued by the State Bank.

China has been building cotton stocks since 2011 by offering higher than competitive prices to local farmers. The consequent widening of the gap between international and the local cotton prices encouraged Chinese manufacturers to increase their import of cotton yarn and its bi-products. Pakistan’s export of textile items flourished due to this policy.

“In fact, during fiscal year 2011to first half of FY-2014, the country earned $3.5 billion from export of cotton yarn to China only,” said the report.

While China had been building cotton stocks which created space for Pakistani yarn, neither the government nor the textile industry came out with an alternative policy in case of change in the Chinese Policy.

In March 2014, the Chinese government introduced a major shift, i.e., instead of buying cotton at higher than market prices, the Chinese government would pay the price differential to farmers if market price falls from a target level, which is significantly smaller than the price at which the government was earlier buying from the market.

Interestingly, yarn demand from China had already fallen in February 2014 in anticipation of this new policy, said the SBP report.

Yarn export to China fell to $80 million in February 2014 while in January it was about $200m.

Cotton yarn production has also started falling in the country, reflecting the slowing demand from China.

Although yarn manufacturing posted growth compared to the previous year, a gradual slowdown is visible in the second and third quarters of the fiscal year 2014, said the SBP report.

Another report showed that growth in cotton yarn production was just 0.9pc in the third quarter of the FY-14 while the growth was 3.2pc in the same quarter of last year.

The SBP report also indicated another bad impact on local cotton yarn production that is import from India.

“While external demand for yarn weakened after a change in cotton policy by China, import of cheaper yarn from India (at zero tariff) lowered the domestic demand,” said the report.

The import of Indian yarn reached $86.3m during July-March FY-14 compared to $58.3m during the same period of FY-13.

This not only lowered demand for local yarn, but also kept market prices down.

In response, the Economic Coordination Committee of the cabinet restored 5pc duty on yarn import from India in April 2014.

The Chinese government announced a lower target price in the new cotton reserve policy relative to support price offered in the older policy.

Published in Dawn, July 13th, 2014