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VAT cut impacts on imported cotton yarn market
On Mar 15, Premier Li Keqiang mentioned that VAT would be reduced from Apr 1 in the answers to reporters’ request. And the impacts on domestic textile enterprises and imported cotton yarn were not exactly the same. Profits of imported cotton yarn are much more than that of domestic one. First of all, for many domestic private enterprises, there was not much tax payment under the operation of “making account into a loss". Moreover, many local governments had certain tax credit for local enterprises to pay taxes. Even if the tax was reduced, the enterprises must pay certain taxes. As for domestic large-sized spinners, losses of “syndrome low buckle” (high taxes and low input taxes) of spinners were reduced from 10%-16% to 9%-13%, a boon for the spinners. There was theoretically large room for price cut, but in fact, there may not be so much tax paid amid mature tax shelter used by large-sized spinners. Therefore, there was not much room to reduce prices amid the coming boos. Calculating VAT by solving “syndrome low buckle” of inland regions like Shandong, tax will decrease by 100yuan/mt. “Syndrome low buckle” problem of yarn mills in Xinjiang eased somewhat and more rewarding may be seen. And tax will drop by 400yuan/mt. 


Plus, due to VAT cut, imported cotton yarn clearance tax reduced by 3%, and cost directly dropped by 3%. Price of different varieties moved down by 400-600yuan/mt. Compared with domestic cotton yarn, advantages of tax cut on imported cotton yarn were more obvious, and prices may be weaker amid current ample supply of imported cotton yarn, tolerable profits of traders, and shipping mindset. Currently, for cleared cotton yarn, due to concerns about tolerable profits and low-cost customs clearance resources, traders mainly focused on selling products. There are still many resources on the market and prices are weakening. At the same time, fabric mills purchase stocks actively and selling products rapidly amid more discounts before April 1. In addition, traders mostly delay the clearance of arrivals from end-Mar to Apr as much as possible. Cotton yarn prices may show weakness after April 1. 

In terms of forward imported cotton yarn, import cost decreased the price spread between cargos and spots expanded amid VAT cut. Theoretical profits of traders were tolerable. Mainstream forward imported cotton yarn will be sold until end-Apr, and there was price spread between spot and forward cotton yarn. 


Even though price of forward imported cotton yarn moved up, current price difference was still large, so traders may still continue to order and orders may be tolerable. 

Price spread of spot and forward imported cotton yarn is tolerable, and market participants hold optimistic mindset towards exchange rate in 2019, short-term trend of US cotton and international cotton prices after the Sino-US negotiations. Downstream manufacturing companies saw better operations and concerns about consumption decreased amid VAT cut. Overall, optimistic mood of forward imported cotton yarn orders spread on the market. Imported cotton yarn will enter China smoothly in short run. For outlook, on the one hand, China's orders will drive foreign prices up; on the other hand, spot market price will drop. Therefore, price spread will narrow. Eyes are suggested to production increment of US cotton. 
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