China will start sales from its cotton reserves on Nov. 28, and will run the auctions until Aug. 31, but trade sources expect tough competition from cheaper Indian imports.
The sale had been expected for weeks, contributing to a sharp drop in prices for cotton futures in New York. Spot prices fell to their lowest since January at just under 74 cents a pound last week, from near 94 cents in August.
China reserves of about 10 million tonnes account for half of the global stocks of the fibre.
The China National Cotton Exchange confirmed a widely expected floor price of 18,000 yuan ($3,000) per tonne for standard grade fibre from the 2011 crop, about 70 percent above the December cotton contract on ICE.
Chinese buyers importing Indian cotton currently pay around 17,700 yuan per tonne including a 40 percent tariff, just under the reserve price, traders said.
"Mills have a lot of choice. New Indian material has just arrived and will increase a lot to the end of the year," said a source at a Chinese trading house.
India's new crop quality may also be slightly better than China's 2011 crop.
"India will fight for its market share. They have the possibility to drop their price which the reserves can't do," said another trade source.
It is not clear if buying from reserves will bring additional import quotas. Last year buyers were issued an import quota for 1 tonne of cotton for every 3 tonnes bought at state auctions, but industry website CNcotton.com reported that no quota will be allocated by the reserves.
"The 3-for-1 system put a lot of demand into the world market, and now they're restricting the amount of cotton coming into China," said Ron Lawson, a partner at commodity investment firm LOGIC Advisors.
About 1.5 million tonnes of additional imports were allowed last year on top of the 894,000 tonnes of 1 percent tariff quota agreed under Beijing's WTO commitments, according to estimates from a trade source. ($1 = 6.0927 Chinese yuan).