China's first cotton futures started trading Tuesday with robust gains, offering the world's biggest cotton consumer a new tool to cushion risks brought by price fluctuations.

Most of the cotton contracts ended between 260 yuan and 490 yuan (US$31.4-59.2) higher Tuesday in the Zhengzhou Commodity Exchange, where the new product is traded.

The November contract (CF411) was the most active, opening 1,700 yuan (US$205) up at 16,000 yuan (US$1,932) a ton but moving back to a 14,670 yuan (US$1,772) close with a daily increase of 370 yuan (US$45).

The April contract (CF504) was the only one to fall Tuesday, closing down 900 yuan (US$109) to 14,200 yuan (US$1,715) a ton.

Combined transaction volume of the cotton contracts was a moderate 3,244 lots yesterday.

A Zhengzhou exchange official said they were satisfied with the first-day performance of cotton futures, though analysts said the exchange still had to do more homework in market promotion and training to investors and traders.

Many futures brokerages are still taking sidelines to await for clearer price signals towards the new product, said Li Lei, research director of China International Futures Corp (CIFCO).

The launch has come rather hastily and many people are still not familiar with the design and characteristics of the cotton contracts.

Zhengzhou got regulator's approval last month to launch cotton futures, following an April approval of fuel oil futures on Shanghai Futures Exchange, which have not been introduced yet because of unfinished preparation and timing concerns.

Cotton is the newest product developed by the futures exchanges in China, which have been operating since late 1990s. Dalian Commodity Exchange has applied for trading in corn futures, but has not yet gained approval.

Officials from the China Cotton Association (CCA) said the development of cotton futures would help cotton growers, distributors and users, to forecast cotton prices.

"Usually, cotton growers base their planting plan on the price at which they sold in the previous year," said the CCA's secretary-general Gao Fang. "The price usually fails to reflect the ongoing situation."

And the futures will help cotton distributors and consumers to hedge risks and regulate their buy-and-sell activities, she said.

Gao also said it is hard to predict for the time being how the futures trading will influence the cotton price on the spot market.

China, the world's largest cotton consumer, will not buy much more international cotton before the domestic harvest in August because of a combination of factors such as domestic prices drop, large prior orders and central government credit curbs.

China has already signed contracts to buy 1.6 to 1.8 million tons of cotton since September, accounting for 64 to 72 percent of the low-duty import quotas totaling 2.5 million tons for this year, Gao said.

From January to April, the country has imported a total of 1.28 million tons of cotton, she said.

She said that the exports and domestic supply would roughly meet demand, and that the quota for 2004 might not be used up.

Estimated slowdown of cotton import in coming months might result in a decreased domestic cotton price, she said.

By the end of May, cotton prices stood at 16,200 yuan (US$1,960) a ton, compared to the peak of 17,700 yuan (US$2,140) in February.

Another factor that inhibits import incentive is the control of excessive lending to the textile industry.

China has published a list of industries, including steel, non-ferrous metals and textiles, which face credit curbs as the country moves to cool its economy.

"Newcomers will find the market entry threshold raised," Gao said.

A worsening energy shortage will also force a number of textile mills to run at half or even lower percentage of their capacity.

The cotton association estimated cotton acreage to rise by 10 percent in 2004 with production forecast at six million tons, a rise of 23 percent from 2003.

"The April and May climate was very conducive to cotton growth," Gao said, "Given the climate continuing to be good in the next three months, the cotton harvest may exceed the historic high of 1984."

That year achieved a production of 6.25 million tons of cotton.

(China Daily June 2, 2004)