High cotton prices are eating into the profits of China's textile industry and weakening competitiveness in the world market, officials and analysts say.

Experts have predicted a 20 per cent price rise in cotton prices this year, which means the textile industry will have to pay an additional 11 billion yuan (US$1.3 billion) in costs, equivalent to one-third of the industry's total profits last year.

Cotton usually accounts for 60 per cent of the export-oriented industry's costs.

Cotton prices in both the home and world markets started to jump in mid-2002, and the price hike accelerated recently as the cotton crop entering this year's market has led to a new round of speculation.

Li Zhixian, analyst with Guotai Jun'an Securities, predicted a 10 per cent decline in profits for the textile industry this year.

He said that cotton and wool-spinning enterprises would suffer the most from the price hike but chemical fibre producers might embrace more business opportunities as more textile producers use chemical fibre as raw material.

The situation has led to concern in government departments.

"Dangers are brewing in the cotton market," noted a recent national cotton working conference organized by the National Development and Reform Commission (NDRC).

"The high price in cotton market has made it hard for the textile industry to maintain its rapid development in the past two years," it said.

With domestic prices exceeding those in the world market, export competitiveness of China's textile products will be severely weakened while growth of both production and exports will be slowed down.

Earlier, the NDRC targeted 10 per cent growth for the textile industry's output and 3 per cent growth in profits this year.

To ease price pressure and stop speculative activities, Agricultural Development Bank of China has decided not to grant loans to cotton traders once the price rises to a certain level.

A notice issued jointly by NDRC and other four related departments called for cotton traders to maintain market order and warned them that blind purchasing might lead to difficulties in selling.

The notice said prices for this year's new cotton might be higher than last year but there is only "limited room" for a price rise since China's cotton planting area increased by 20 per cent this year.

Meanwhile, the world's major cotton producing countries all increased cotton production this year, which will ensure plenty of supply in world market.

In addition, stable oil prices will encourage more textile firms to use chemical fibre, which will help reduce demand for cotton.

Observers say the fluctuating domestic cotton price has forced textile makers to import more; and an official with the China Textile Industry Association predicted that this year's import quota would be used up.

Chinese manufacturers can import up to 860,000 tons this year, compared with 820,000 tons last year.

Meanwhile, savvy enterprises are taking different measures to deal with the price hike.

An official with Heimudan (Group), a Changzhou-based textile company, said it was restructuring its products mix. More high value-added products will be developed to reduce the impact of price hikes.

But more firms are calling for the government to take effective measures to ease the market price and to open up cotton futures to allow producers and traders to hedge risks.

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