Voluntary Report - public distribution

**Date:** 12/30/2004

**GAIN Report Number:** CH4039

CH4023

**China, Peoples Republic of**

**Cotton and Products**

**Update on China\'s Cotton Classification Reform**

**2004**

**Approved by:**

![](media/image1.wmf)Ralph Gifford

U.S. Embassy, Beijing

**Prepared by:**

James Butterworth & Wu Xinping

**Report Highlights:**

This report summarizes recent developments on China's reforms of its
cotton classification system that were announced on December 17, 2003.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Beijing \[CH1\]

\[CH\]

Table of Contents

[Background 3](#background)

[Main Contents of the Reform 3](#main-contents-of-the-reform)

[What Has Been Done? 4](#what-has-been-done)

[Next Steps 5](#next-steps)

[Preliminary Analysis of Impact on US Cotton Exports
5](#preliminary-analysis-of-impact-on-us-cotton-exports)

[Appendix 6](#appendix)

[Facilities selected to participate the pilot project
6](#facilities-selected-to-participate-the-pilot-project)

[List of Gins 6](#list-of-gins)

[List of classification facilities
6](#list-of-classification-facilities)

#   {#section .unnumbered}

# Background

On December 17, 2003, China's National Development Reform Commission
(NDRC) and State Administration for Quality Supervision, Inspection and
Quarantine (AQSIQ) jointly published circular entitled, "Cotton Quality
Classification System Reform Plan." The intent of the reform is to
integrate China's Classification System with international standards. As
follow up, on July 22, 2004, NDRC and AQSIQ held a conference during
which NDRC reiterated its commitment to the reform program and AQSIQ
summarized progress to that date.

# Main Contents of the Reform

**[Bureau of Fiber Inspection Will Take Over Classifying &
Labeling]{.underline}.** The new plan specifies that the Bureau of Fiber
Inspection of China (BFIC) will take over responsibility for cotton
quality classification and labeling from the processing industries. BFIC
will collect samples on a voluntary basis and test each and every bale.
Specific procedures are: 1) two samples to be collected from each side
of the bale while baling, half of each sample to be mixed to make two
final samples to be tested from each bale; 2) unified bar code issued by
BFIC (four copies for each bale) to be packed within the samples and the
bale (one copy for each sample and two copies packed in both sides of
the bale); 3) two samples to be delivered to Fiber Testing Agency. Along
with the testing results will be the following information: origin, name
of the processing mill, the processing date, weight and content of
foreign fiber. This information will be entered in the National Cotton
Quality Database and a copy of these data to be kept by the enterprise
and to accompany the bale to market. All cotton-processing enterprises
are requested to set up and perfect their internal quality management
system according to the relevant laws.

**[Adopt High Volume Instrument (HVI) Testing]{.underline}.** The
current testing method is based on the classifier's subjective judgment
and experience. The new system will be based on high volume instrument
testing (HVI). The goal is to make the testing process more objective
and science based.

**[Develop Quality Standards for HVI Testing]{.underline}.** To adopt
HVI testing and meet the textile industry's demands, the Plan calls for
the following to occur: 1) to formulate China's Cotton Color
Characterization Chart and develop the necessary software; 2) develop
cotton quality standards and related technical specifications applicable
for HVI. New standards should add parameters such as strength, fineness,
maturity and uniformity to reflect the inner quality of cotton.

**[Adopting 227 Kg Bales]{.underline}.** The international standard of
227 kg bales will replace the 85 kg bales currently used. A nationwide
overhaul of enterprises' packing equipment will phased in gradually.

**[Implement Humidity Control Measures]{.underline}.** In an effort to
avoid the weight differentiation resulting from differences in humidity,
a new humidity control system will be developed to ensure appropriate
moisture levels for cotton throughout the processing chain. Use of this
humidity conditioner with the new packing equipment will ensure
standardized weights.

**[Establish National Cotton Quality Database]{.underline}.** The Bureau
of Fiber will issue a bar code for each bale of Chinese cotton. Traders
can use this bar code to learn the quality, origin and date of each bale
because it will be contained in the National Cotton Quality Database.

**[Establish Specialized Cotton Warehouses]{.underline}.** Tested and
classified cotton will be delivered to specialized warehouses on a
voluntary basis and without changing ownership. The seller will deliver
cotton out of the designated warehouses after a sale is completed. The
functions of designated warehouses are: 1) ensure no fraud or deception
takes place; 2) facilitate a bank's monitoring the cotton as collateral;
3) select cotton based on the buyers requirements; and, 4) promote
online transactions.

**[Reform Testing & Classification]{.underline}**. Classification will
switch to the processing enterprises facilities from the textile
factories where it currently is done. Classifiers will be trained and
licensed before they are hired. BFIC will render services to cotton
enterprises. Independent reclassification facilities shall be set up to
handle traders' appeals.

# What Has Been Done?

In a follow up Conference held on July 22, 2004, AQSIQ Deputy Minister
Mr. Wang Qinping summarized the development of the proposed Reform,
which consists of three phases: 1) preparation; 2) trial; and, 3) full
implementation. Starting from the State Council approval dated September
17, 2003, the preparation work as indicated below had been completed as
of the date of the conference:

**Progress on Phase I - Preparation:**

The following had been accomplished between when the State Council
approved the reform package and the date of the mentioned conference:

\-- Formulated the eligibility and measures of check and acceptance for
the trial facilities. Currently, ten gins are selected to conduct trial
reform implementation.

\-- The terms of preferential loans, which are intended to assist gins
to purchase the necessary baling and related equipment, had been
determined.

\-- A circular was issued suspending approval of new gins that are not
equipped with standardized baling equipment. Also, changes to the
eligibility and certification requirements for cotton traders were
discussed thoroughly.

\-- Formulated and published an assistance policy to the facilities
participating in Phase II \-- the trial reform.

\-- Formulated preliminary standards and the relevant implementation
measures for specialized warehouses for classified cotton.

\-- The Ministry of Finance approved a budget for Phases I and II. The
earmarked funds will be allocated to the relevant facilities soon.

\-- China's Cotton Characterization Chart and the relevant software have
been developed. All test items and physical parameters were basically
determined.

\-- A draft of cotton quality standard for HVI classification was
formulated. Studied and formulated technical specification for HVI
equipment, instrumental and certified classification methods, supervised
sampling methods and liability system.

\-- A Chinese HVI sampling machine was produced and compared with an
imported HVI machine. Nine imported HVI machines arrived for the trial,
of which five were set up and tested.

\-- The database has been completed and is being installed and tested.

\-- BCFI collaborated with the China Cotton Industry Corporation in
completing the bar code system for baling.

\-- Drafted minimum eligibility standards for cotton classification
facilities. Eight facilities were selected to participate in the trial
of which five had been retrofitted with the necessary instruments,
equipment, laboratories, and data processing equipment by the end of
July 2004. BCFI completed staff training for the operation and
maintenance of the equipment.

\-- Preparation work relating to cotton processing was completed as
scheduled. The baling machinery and related equipment have been
manufactured and operating on a trial basis. A baling standards and
specifications on processing technology were drafted and reviewed. All
of the gins in the trial reform have completed installation and testing
of equipment.

# Next Steps

The first year trial implementation has been has been sufficiently
successful for BCFI to determine that new classification system will be
implemented nationwide. NDRC officials stressed that the Reform would be
phased in over five years, during which the old and new systems would
have to co-exist. NDRC recognizes the potential problems of having two
systems in operation at the same time. In response to these potential
problems, NDRC intends to study the cotton industry's distribution
network, guide the configuration of resources, promote technical
upgrading, stress risk management, and facilitate elimination of small,
outdated gins that do not meet the new standards.

In the trial implementation phase, there are two technical issues that
are or will be the most difficult to overcome. First, verification that
the following meet the new standards: baling machines and auxiliary
equipment; new technology in cotton processing; new classification
instruments, technical specifications of HVI classification; data
processing and supervision system. Second, through the trial
implementation, establishing a complete operation model, including
certifying system of eligibility of processing enterprises; operation
model on production management under new technology and instrumental
classification in the processing chain. Other issues related to
classified cotton, such as logistics, marketing, state reserve and use
by mills. One of the important tasks for the Reform is to set up the
National Standards for Instrumental Classification. Formulating China's
Cotton Color Characterization Chart and developing the needed software
will be key to the success of this effort. Additional challenges include
researching and manufacturing humidity control equipment and the on-line
moisture testing system and testing equipment for foreign fiber
identification and elimination.

# Preliminary Analysis of Impact on US Cotton Exports 

In general, the proposed reform program will bring China's
classification regime in line with the international cotton
classification and trading system. The relevant Chinese agencies have
shown a strong interest in learning about, but do not want to copy, the
U.S. system. Taking account of the complicated nature of this reform,
and the numerous players (over 10,000 gins nationwide) involved, it is
not surprising that the implementation will take years.

A positive development was BFIC's announcement at the "China Cotton
Industry Development Summit Forum" held June 29-30, 2004 that the
proposed standards for neps and short fiber content", which caused
considerable concern among U.S. cotton exporters, will only be included
at the request of applicants, but will not be mandatory. (Please refer
to GAIN Report CH4013 for further information).

In summary, it appears the reforms will not have much of an immediate
impact on U.S. cotton exports to China. Any impact is likely to be
positive because China's system will be more like the U.S. system and
that is expected to facilitate, not impede, trade between the United
States and China. Post will pay close attention to any new developments
in this regard. U.S. exporters are encouraged to report any problems
resulting from these new reforms to FAS/Beijing (<agbeijing@usda.gov>)
and FAS Cotton and Oilseeds Division (<cots@usda.gov>).

# Appendix

## Facilities selected to participate the pilot project

### List of Gins

Hebei Guoxin Agricultural Extension Cooperative

Hebei Nangong Seed Co.

Shandong Tianyuan Cotton Industry Co.

Shandong Juye Lumian Cotton Industry Co.

Henan Zhongmian Cotton Industry Co.

Henan Huapeng Cotton Industry Co.

Hubei Qianjiang Cotton Co.

Xinjiang Manasi Dema Cotton Inddustry Co.

Xinjiang Weili Cotton and Jute Corporation

Xinjiang Production and Construction Corp. (No.123 and 125 Farms of
Agricultural Co.)

### List of classification facilities

Hebei Fiber Inspection Bureau

Shandong Dezhou Fiber Inspection Institute

Henan Fiber Inspection Bureau

Henan Shangqiu Fiber Inspection Institute

Hubei Fiber Inspection Bureau

Xinjiang Shihezi Fiber Inspection Institute

Xinjiang Bazhou Fiber Inspection Institute

Xinjiang Quitong Fiber Inspection Institute