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China Cotton Market Review & Outlook Proposal 2004/2005

December 2004 Research Background

The cotton market in China was basically normal and steady in 2004. Cotton production grew sharply, breaking the historical record. Cotton consumption rose substantially, and export of cotton textile increased with steady steps. Cotton enterprises saw improved efficiency and risk-resistance capability. The State strengthened reform of the circulation system, the cotton market pattern took a shape relying on market adjustment and a multiple structure. The cotton futures market was established, and the construction of the market system was optimized. The trend of the cotton market in China in 2005 shall depend on the following factors:

1. Growth of export of cotton textile. Starting from the beginning of 2005, those countries which have been imposing obstacles on import of Chinese textile will abolish quota limitations, and this shall bring an opportunity for the export. Meanwhile, owing to the non market economic status of China in the beginning of WTO accession, European and American countries shall continue to use various kinds of reasons to adopt sanction measures on import of Chinese textile. The growth of export of textile shall encounter a number of uncertain factors which shall affect the growth of cotton consumption to a certain extent.

2. Readjustment of the State’s macro policies. Whether the interest rate shall be raised, whether RMB shall appreciate and the implementation of the fiscal-monetary dual stable policy will affect the capital capability and decision on investment of cotton enterprises, and hence will affect the cotton industry.

3. The State’s rectification and reform over the cotton market, especially the combating against illegal procurement and the reform of quality test and quarantine shall affect regulated and systematic development of the cotton market.

4. Readjustment of policy on cotton import and export. The import quota in 2005 shall be 894,000 tons. Whether there shall be increased allocation of quota, how much and when will that be will affect the domestic price.

This report has a detailed discussion on the above factors, and has a systematic analysis on the market trend, Government policy, production, sales, import and export of cotton and cotton textile in 2004. Based on this, there is also a forecast for the market trend, production, sales, import and export of the cotton market in 2005. This report is a reference for those who care about the Chinese cotton industry.

Page II TABLE OF CONTENTS

CHAPTER ONE Macro Policies and Analysis of Cotton Industry 1.1 Government Guidance and Development of Cotton Industry 1.1.1 Objectives and Modes of Development of Cotton Industry 1.1.2 Macro Control Policies of Cotton Industry 1.1.3 Financial Policies of Cotton Industry 1.1.4 Fiscal Policies of Cotton Industry 1.1.5 Development of Cotton Production 1.1.6 Development of Cotton Textile Industry 1.1.7 Impacts from Scale Control of Investment in Fixed Assets of Textile Industry to Cotton Industry in 2004 1.1.8 Progress of Reform of Cotton Quality Testing System 1.1.9 Policies on Quality Test and Quarantine of Cotton Import

1.2 Impacts on Development of Cotton Industry from WTO Accession 1.2.1 Impacts from Entering the System of Rules of International Cotton Trade 1.2.2 Impacts from Cotton Import 1.2.3 Export of Cotton Textile and Trade Protectionism

1.3 Policies on Cotton Import in 2004 1.3.1 Allocation of Cotton Import Quota and Administrative System in 2004 1.3.2 VAT Policy on Cotton Import in 2004 1.3.3 Policy on Import Duty of Cotton in 2004

1.4 Buildup of Cotton Market in 2004 1.4.1 Rectification of Circulation Order of Cotton Spot Market 1.4.2 Impacts on Cotton Industry from Establishment of Cotton Futures Market 1.4.3 Impacts on Spot Market Price from Establishment of Cotton Futures Market

1.5 Impacts on Cotton Industry from Adjustment of Other Variables of Natioanl Economic System 1.5.1 Impacts on Cotton Market from Raising Basic Interests of Deposit and Loan 1.5.2 Impacts on Development of Textile Industry from Price Hike of Electricity and Coal 1.5.3 Impacts on Development of Cotton Industry from Changes of Grain Prices 1.5.4 Impacts on Cotton and Cotton Textile Markets from Dual Stable Policies on Fiance and Currency 1.5.5 Impacts on Development of Cotton Industry from Pressure of RMB Appreciation CHAPTER TWO

Page III Analysis of Cotton Market Opeartion in 2004 2.1 Review of Cotton Production in 2004 2.1.1 Overview of Cotton Production in 2004 2.1.2 Cotton Acreage, Yileld and Output of Main Producing Regions in 2004 2.1.2.1 Xinjiang Cotton Region 2.1.2.2 Hebei-Shandong-Henan Cotton Region 2.1.2.3 Cotton Region Along Yangtze Valley

2.2 Characteristics of Cotton Import in 2004 2.2.1 Large Growth of Cotton Import in 2004 2.2.2 Main Cotton Exporting Countries to China and Changes of Imported Volumes in 2004 2.2.2.1 Growth of Cotton Import from US, Proportion in Total Fell 2.2.2.2 Cotton From Uzbekistan and Australia Competed in Chinese Market 2.2.2.3 Growing Momentum of Cotton Import from Africa

2.3 Growth of Cotton Consumption in 2004 2.3.1 Large Growth of Cotton Consumption in 2004 2.3.2 Cotton Consumption of Main Cotton Yarn Producing Provinces from Jan. to Dec. 2.3.2.1 Changing Trend of Cotton Yarn Producdtion and Cotton Consumption in Shandong 2.3.2.2 Changing Trend of Cotton Yarn Producdtion and Cotton Consumption in Jiangsu 2.3.2.3 Changing Trend of Cotton Yarn Producdtion and Cotton Consumption in Henan 2.3.2.4 Changing Trend of Cotton Yarn Producdtion and Cotton Consumption in Hubei

2.4 Characteristics of Cotton Export in 2004 2.4.1 Further Decline of Cotton Export in 2004 and Reasons 2.4.2 Cotton Exports to Different Countries

2.5 Equilibrium of Cotton Supply and Demand from January to December 2004 2.5.1 Equilibrium of Cotton Supply and Demand from January to December 2004 2.5.2 Analysis of Stocks/Consumption from January to December 2004

2.6 Changing Trend of Cotton Spot Market Price in 2004 2.6.1 Price Changes of Cotton in 2004 and Reasons 2.6.2 Changes of Cotton Prices at Various Places 2.6.2.1 Xinjiang 2.6.2.2 Shandong 2.6.2.3 Hebei 2.6.2.4 Henan 2.6.3 Analysis of Cotton Production Cost of Main Producing Regions in 2004 2.6.3.1 Xinjiang 2.6.3.2 Shandong 2.6.3.3 Hebei 2.6.3.4 Henan

Page IV 2.6.4 Analysis of Cotton Comparative Benefit in 2004 2.6.4.1 Decline of Cotton Production Benefit against Grain 2.6.4.2 Analysis of Factors behind Decline of Comparative Benefit 2.6.4.3 Decline of Cotton Production Benefit Affects Steability and Development of Cotton Industry 2.6.4.4 Government Measures to Prevent Decline of Cotton Production Benefit and Actual Effects

CHAPTER THREE Prospect of Cotton Market in 2005 3.1 Forecast for Cotton Production in 2005 3.1.1 Factors Affecting Cotton Acreage and Forecast for Acreage in 2005 3.1.2 Forecast for Cotton Productin and Supply in Main Producing Regions in 2005 3.1.2.1 Xinjiang Cotton Region 3.1.2.2 Hebei-Shandong-Henan Cotton Region 3.1.2.3 Cotton Region Along Yangtze River

3.2 Forecast for Cotton Import in 2005 3.2.1 Cotton Import to Make up Shortage in 2005 3.2.2 Cotton Import from US Still Play Leading Role in 2005 3.2.3 Analysis of Factors Conducive to More Import in 2005 3.2.4 Analysis of Factors Unfavorable to More Cotton Import in 2005 3.2.5 Forecast for Gross Cotton Import in 2005

3.3 Forecast for Cotton Export in 2005 3.3.1 Further Decline of Cotton Export in 2005 3.3.2 Forecast for Cotton Export in 2005

3.4 Forecast for Yarn and Cotton Consumption in 2005 3.4.1 New Sharp Growth of Cotton Consumption in 2005 3.4.2 Forecast for Cottn Yarn Production and Contton Consumption in 2005 3.4.2.1 Forecast for Newly Increased Production Capacity of Cotton Yarn in 2005 3.4.2.2 Analysis of Factors Restricting Cotton Yarn Production in 2005 3.4.2.3 Forecast for Cotton Yarn Production in 2005 3.4.2.4 Forecast for Cotton Consumption by Yarn Production in 2005

3.5 Equilibrium of Cotton Supply and Demand in 2005 3.5.1 Equilibrium of Cotton Supply and Demand in 2005 3.5.2 Analysis of Stocks/Consumption in 2005

3.6 Forecast for Trend of Cotton Spot Market Price in 2005 3.6.1 Factors Affecting Changes of Cotton Price in 2005 3.6.2 Forecast for Trend of Cotton Spot Market Price in 2005

Page V CHAPTER FOUR Prospect of Buildup of Cotton Futures Market and Development in 2005 4.1 Buildup and Development of Cotton Futures Market 4.1.1 Buildup and Development of Cotton Futures Market 4.1.2 Review of Cotton Futures Trade of CZCE in 2004 4.1.3 Analysis of Impacts on Futures Market from Prohibiting Futures Trade of Enterprises Which Get Loans by Agricultural Development Bank 4.1.4 Analysis of Changing Trend of CZCE Cotton Futures Price in 2004 and Affecting Factors 4.1.5 Analysis of Impacts on Cotton Market from Cotton Futures and Countermeasures

4.2 Prospect of Cotton Futures Market in 2005 4.2.1 More Traders in Futures Market 4.2.2 Further Expansion of Trading Scale at Futures Market 4.2.3 More Linkage between Futures Market and Spot Market 4.2.4 Impacts on Futures Market from Readjustments of Interest and Exchange Rate 4.2.5 Forecast for Cotton Futures Price at CZCE in 2005

Chapter 5 Review and Outlook of Cotton Textile Industry 2004/2005 5.1 Review of Cotton Textile Industry in 2004 5.1.1 Production of Cotton Textile in 2004 5.1.2 Characteristics of Export of Cotton Textile Garments in 2004 and Affecting Factors 5.1.3 Impacts on Export of Cotton Textile from Implementation of New Anti-dumping Rules 5.1.4 Impacts on Cotton Consumption from Disputes over Cotton Textile Trade 5.1.5 Analysis of Economic Efficiency of Cotton Textile Enterprises in 2004 5.1.6 Price Trend of Cotton Textile in 2004 5.1.6.1 Price Trend of Cotton Yarn 5.1.6.2 Price Trend of Other Cotton Textile 5.1.7 Existing Problems and Countermeasures in Cotton Textile Industry

5.2 Prospect of Textile Industry in 2005 5.2.1 Major Factors Affecting Development of Cotton Textile Industry in 2005 5.2.1.1 Export Quota on Textile Garments to Be Abolished on Time 5.2.1.2 Foreign Countries to Ablish Import Quota on Textile 5.2.1.3 Impacts on Textile Export from Ievying More Export Duty 5.2.1.4 Steady Growth of Cotton Textile Consumption 5.2.2 Forecast for Cotton Textile Production 5.2.3 Forecast for Cotton Textile Export 5.2.4 Forecast for Price Trend of Cotton Textile 5.2.5 Analysis of Uncertain Factors in Development of Cotton Textile Industry in 2005

CHAPTER SIX Characteristics of New Cotton Procuremetn in 2004 and Relevant Polcies 6.1 Procurement of New Cotton in 2004

Page VI 6.1.1 Characteristics of Procurement Course of New Cotton in 2004 and Reasons 6.1.2 Analysis of Changes of Principal Buyers of New Cotton in 2004 and Reasons 6.1.3 Price Index of New Cotton Procurement in the Nation and Producing Regions in 2004 6.1.4 Price Trend of New Cotton Procurement in 2004 and Reasons 6.1.5 Procurement Prices from Perspective of Cotton Production Costs of Producing Regions 6.1.6 Procurement of New Cotton in Producing Regions in 2004

6.2 Relevant Polices for New Cotton Procuremetn in 2004 6.2.1 Government Guiding Price on New Cotton Procurement in Producing Regions in 2004 6.2.2 Agricultural Development Bank Requested Branches to Do Well in Fund Supply for Cotton Procurement and Management in 2004 6.2.3 Impacts on New Cotton Procurement from Upper Limit of Loans from Agricultural Development Bank 6.2.4 Agricultural Development Bank Accorded Equal Importance to Assisting New Cotton Procurement and Prevention of Financial Risks 6.2.5 Impacts on New Cotton Procurement from Readjusting Loan Objects by Agricutlural Development Bank 6.2.6 Impacts on New Cotton Procurement from New Cotton Reserve Plan in 2004

CHAPTER SEVEN Impacts on International Market from Development of Cotton Industry in China 7.1 Status of Chinese Cotton Industry in the World 7.1.1 Proportion of National Cotton Production in the World (1959-2004) 7.1.2 Comparison of Cotton Yields with Foreign Countries (1995-2004) 7.1.3 Steady Growth of Proportion of National Cotton Consumption in the World (1997- 2004) 7.1.4 Impacts on International Market from National Cotton Trade 7.1.5 Gradual Linking up between National Cotton Price and International Price 7.1.6 Analysis of Relations between Fluctuations of Cotton Price in China and International Price in 2004

7.2 Issues to Be Solved to Expand Influence of Chinese Cotton in International Market 7.2.1 National Cotton Quality Standard Must Meet International Norms 7.2.2 Natioanl Cotton Market System Should Be Optimized 7.2.3 Cotton Enterprises Should Develop towards Scaled Operation 7.2.4 Enhancing Macro Control Capability of Government over Cotton Market 7.2.5 Perfection of Cotton-related Enterprises’ Crediblity System 7.2.6 Strengthening Financial Infrastructure Construction, Improving Risk Prevention Ability of Farmers 7.2.7 Gradual Improvement of Comparative Benefit of Cotton Production

Page VII CHAPTER EIGHT Appendix

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