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Macro Ingredient


March 18, 2014

 

China to speed up sale of state grain and cotton reserves

 

 

In order to ease the bank's mounting debts, the Agricultural Development Bank of China has urged Beijing to speed up the sale of its state grain and cotton reserves, which are now at record high levels.

 

The bank, which is one of the country's three policy lenders, provides the financing that allows big state firms to stockpile farm products, including grains, cotton and sugar - a key part of China's policy to boost rural incomes.

 

Beijing's stockpiling policy distorts the domestic market by setting artificially high prices for grains and cotton, encouraging buyers to turn to cheaper imports, the bank's president Zheng Hui said.

 

The policy also encourages smuggling as buyers and suppliers try to get round China's strict import tariff and quota system, he said.

 

As the government's expensive stockpiles expand, the bank has been put under "unprecedented pressure and difficulty" when it comes to capital flows and management, Zheng added.

 

He also urged Beijing to restrict cheap imports and to reduce its bidding prices for domestic agricultural commodities. Alternatively, it could offer tax incentives to domestic firms in order to boost reserve sales, some which were already deteriorating in quality, he said.

 

Any big sales of China's state cotton and soy reserves could dent imports and put pressure on global prices, given China is the largest buyer of both commodities.

 

Loans for stockpiling farm products accounted for 70% of the bank's total loans in 2013, and returns have been too low even to cover its costs and risks, "which is not beneficial for the bank's sustainable development," Zheng was cited as saying.

 

Loans used to stockpile cotton have reached their rate highest ever as state cotton stocks now higher than China's annual consumption levels, he said.

 

In addition to the 30 million tonnes stockpiled during the 2012-13 marketing year, China plans to add 60 million tonnes to its state corn stocks in 2013-14, said an official think-tank.

 

The world's top cotton consumer will also have an estimated 12.5 million tonnes of the fibre in its reserves, or nearly 60% of global stocks, after adding more than six million tonnes in the current marketing year.

 

The record stockpile rate has also put the country's storage capacity under pressure. Heilongjiang, the country's top soy and corn growing region, has a 15 million-tonne shortage of grain storage capacity while the top rice grower of Hunan needs to find an additional three million tonnes of storage space this year, said Zheng.

 

Beijing has already expressed its commitment to end its stockpile policy for cotton and soy this year and replace it with direct subsidies, but the stockpiling of grains will continue in order to meet the country's food security goals.

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