China's leaders recently vowed to give markets a "decisive" role. If they meant it, they might start by burning the country's mammoth cotton pile. The government sits on an estimated 10.8 million tonnes - close to half the world's annual production - which it began to sell on November 28. It's a visible symbol of China's inability to let markets decide.
In theory, China's cotton market could be almost self-sufficient. The country produces around 7 million tonnes a year, and consumes 7.8 million tonnes, according to the US Department of Agriculture. In practice, over half the crop is produced in the western region of Xinjiang, and gets shipped uneconomically to the other side of the country. Quality varies hugely. Even with high import tariffs, textile makers still prefer imports from India. As a result, the government has engaged in bizarre contortions. It buys from farmers at twice the current global traded price; around a third of what's used is imported. Cotton growers are kept in a zombie-like state: without subsidies, the industry would be hobbled.
The government has started to sell, tentatively. At the government's offer price, the stockpile is worth around $32 billion. At global prices, it's worth $18 billion- assuming it could all be sold, which is doubtful. Around half of the first batch auctioned found buyers. Imports of spun yarn, which doesn't face the same import constraints, have soared. The broader point isn't about cotton but markets. In a country as big as China, small interventions have big effects. Think of the $3.7 trillion foreign exchange mountain that China has amassed by suppressing its currency. But abandoning foolish policies is painful. Dumping either cotton or foreign reserves would cause chaos at home and abroad. Moreover, theory and practice remain far apart. It makes no sense for China, with its shrinking workforce and severe water shortages, to grow such a water- and labour-intensive crop. But putting millions of farmers out of work seems even worse. Whatever leaders say about markets, socialism and stability are still deep in the fabric. Investors enthusiastic about recently announced reforms should bear that in mind.
