No cotton, no Chinese exports

With President Xi Jinping expected to inaugurate the Pak-China Economic Corridor this month, one becomes giddy thinking about all the increased prospects of trade with China. But as it stands, trade with China is no cause for celebration.
Exports to China have declined by 20 percent for the eight months ended February 2015. The main culprit behind the fall was low value added cotton products, which — even after the 20-percent decline — accounted for 64 percent of total exports to China in 8MFY15.
Cotton yarn exports to China fell by 23 percent year-on-year to $742 million. To put it into perspective, total cotton yarn (HS Code 5205) exports to all countries declined by $252 million; cotton yarn exports to China alone fell by $222 million.
In addition, exports of woven cotton fabrics (weighing less than 200g/sqm) to China declined by 31 percent to $79 million, whereas non-carded cotton exports fell by 93 percent year-on-year to a mere $3 million. These three items alone accounted for 81 percent of the drop in exports to China.
Sources in Pak-China Joint Chamber of Commerce and Industry (PCJCCI) told BR Research that the main reason for the decline in exports of cotton products was “high prices”. He said the cost of production in Pakistan is too high and sellers cannot agree on a price suitable to Chinese buyers.
Add to that an overvalued currency. “The exchange rate is currently overvalued and I think it would help Pakistan if the exchange rate was perhaps a bit lower. Whether it is a 110 to the dollar or 115, one can hypothesis about it,” Werner Liepach, Asian Development Bank’s Country Director Pakistan had told BR Research last in February 2015.
The currency is hurting Pakistan’s competitiveness in a cutthroat international market, where players like India, Turkey, and Bangladesh are snatching up the cotton market with their lower prices. Citing a soon to be released study, sources in APTMA told BR Research that the cost of production of one kilogram of cotton yarn in India is 2.59 cents, whereas in Pakistan it is 3.01 cents. And that too explains much about the fall in cotton related exports to China.
Still, the problem is not that Pakistan’s exports to China have fallen in 8MFY15; see-saw is often the case in international trade. So for instance, cotton exports may have fallen in the year to-date, there is some silver lining ahead. China intends to reduce its cotton acreage by 20 percent this year, which may fuel Chinese demand for cotton imports. Hopefully, Pakistan will have gotten its house in order by then – at least enough to compete in the market and capitalize on this opportunity on the horizon.
But the problem remains that low value added textile products such as those mentioned above continue to be major exports to China, and little is being done to diversify the country’s export basket. Source at PCJCCI say that the Chinese are increasingly showing interest in minerals, livestock, gemstones, chemicals, and fruits, but the government “lacks seriousness” in terms of capitalizing on the opportunity and promoting non-cotton exports. This lazy mindset has to change – and fast - to end Pakistan’s cotton dependency.