China has already taken a number of steps to curb imports of cotton and cotton yarn, adversely affecting Indian exports to that country's market. India's exports to China fell sharply by 18.6 per cent, from $153.5 million during January-October 1997 to $124.9 million during January-October 1998.

The "Report on Reforms of China's cotton industry and their implications", prepared by the Indian Embassy in Beijing states, "in the short run it seems that China's latest cotton reforms would decrease import of cotton and cotton yarn from India and China would emerge as significant force to affect our exports to third world countries. Indian export of cotton and yarn is expected to remain low depending upon the health of the textile industry in China. In case, China's exports pick up during the next two to three years, India's export would also definitely increase... It appears likely that China will continue to need good quality cotton at world market prices if it wishes to continue exporting textiles."

However, the report points out that for the present, China's import of cotton during 1997-98 have declined sharply and the government has cracked down on unauthorised imports and plans to import only 2,00,000 to 2,50,000 tonnes, down from the previous year's figure of 4,00,000 tonnes. Imports are forecast to remain low in 1999 also. Even so, China has resumed cotton exports and expects to export 5,00,000 tonnes in 1998. The MEA report is of the confirmed opinion that China will continue to be a net importer of cotton. The immediate objective of the reform package is to encourage greater use of domestic cotton and less use of imported, thereby reducing stocks which are reportedly approaching four million tonnes.

According to the MEA report, the Chinese government has initiated a package of reforms to make the cotton sector fully market-oriented from September 1999. The series of market reforms in China's state-centric cotton sector would eventually reduce government expenditures, expose China's cotton farmers to international cotton price signals and improve the international competitiveness of China's textile industry. In the short term, the policies would restrict cotton imports, but in the longer term they could lead to renewed imports.

Till recently, the Chinese government tightly controlled cotton distribution with a "three No's" policy: No marketing agent except the Central government, no negotiated prices and no private trading. The efforts to control cotton production and distribution proved very costly with 1998 expenditures estimated at $5.4 billion.

The reforms include lowering procurement prices paid to farmers for their cotton and introducing a greater degree of flexibility in the prices that cotton mills pay for ginned cotton, offering financial incentives to mills that use Xinjiang cotton for export products and tightening up customs declaration requirements for cotton imported by joint venture mills.

The impact of these reforms, in the short run, the MEA report states, has been to encourage what could become a price war between cotton producing provinces, as each province tries to hang on to local markets for their own cotton in the face of lower priced cotton from other provinces, especially Xinjiang cotton.

According to the MEA report, the long-term impact of the reforms "is not very clear". Whether China's domestic cotton production grows or shrinks, and whether cotton imports continue at the present rate of 30,000 tonnes per month or not, depends on several factors, including the return to farmers of producing cotton relative to other crops or other non-agricultural activities, how much demand for cotton fibre grows in the future, and the outcome of the food versus fibre debate in China. Even so, the MEA report predicts that "some cotton imports are expected to continue to help key joint venture mills remain competitive with mills in other Asian countries which have the advantage of devalued currencies as well".