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China intensifies crackdown on sale of imported cotton to state reserves

Dominique Patton
Tuesday, 10 Dec 2013 | 12:05 AM ET

* Two more firms banned from selling to national reserves

* Beijing wants to stop companies mixing in imported fibre

* Clamp down could signal closer scrutiny of cotton processors

BEIJING, Dec 10 (Reuters) - Two more Chinese cotton processors have been barred from selling to the state stockpiler as Beijing intensifies a crackdown on firms suspected of mixing in imported fibre to profit from cheaper overseas supplies.

Under the illegal practice, known in the industry as 'rotation', companies look to cash in on the large price gap between overseas cotton and the amount paid to feed state reserves.

The clamp down indicates closer scrutiny of cotton processing firms - or ginners - and could weigh on global prices if it prompts a drop in imports.

Beijing in November cancelled the permits of two other companies suspected of selling imported cotton to reserves.

China, now in the third year of its stockpiling programme, is paying 20,400 yuan ($3,300) per tonne of cotton, 88 percent higher than the benchmark March cotton contract on ICE Futures U.S., as it looks to support local growers.

The China Fibre Inspection Bureau, which manages the reserves, said on its website on Friday that two firms based in Shangqiu city, Henan province - Jinfeng Cotton Trading and Yudong Quality Cotton Processing - had been found 'rotating' cotton.

Neither firm could be reached for comment.

The inspection bureau also said it suspected an unnamed processor in Shandong province of carrying out similar activities.

EXPECTED CHANGE

Industry sources believe the practice was common in previous years but has increased in 2013 as ginners seek final gains ahead of an expected change to the stockpiling policy in 2014/15.

"It's worth the risk for ginners and I don't think the government has enough manpower to supervise reserve buying," said a trade source.

He added that daily volumes purchased by the reserves suggest that recent government efforts to prevent illegal practices are having little impact.

China has bought just over 3.5 million tonnes of domestic cotton for its reserves since it started stockpiling in September, close to the same level as this time last year.

But some industry participants have said that Beijing is being tougher on processors this year as it comes under increasing pressure to reduce its huge stocks, a portion of which is sold off each year at a loss.

It holds an estimated 10 million tonnes of cotton in state stockpiles, more than half global supplies.

China's National Cotton Reserves has cancelled permits allowing both Jinfeng and Yudong to sell to the state and urged relevant authorities to withdraw their processing licences. The companies must also take back cotton already sold to reserves and pay back fees spent on management of the stock.

(Editing by Joseph Radford)