China's cotton market has faced heightened uncertainty following the official release of the detailed rules for the 2026 state reserve cotton auction, with routine daily competitive sales commencing on July 20, 2026. The market is now navigating the intersection of old-to-new crop transition and the traditional textile off-season, with near-term price direction and mill buying sentiment emerging as key focal points.
According to the rules issued by China National Cotton Reserves Corporation (CNCRC), the auction will adopt a daily listing format, with an initial offering of about 8,000 tonnes on the first day. The base price for the first week (July 20-24) is set at Yuan 16,291/tonne (equivalent to grade 3128B), and eligible bidders are restricted to textile mills for captive use, with on-selling prohibited. Following the policy announcement, the short-term bearish impact was quickly priced in, market momentum slowed notably, and trading dynamics turned more contentious.
Prior to the cotton auction rollout, market attention had been fixated on the impact of high temperatures in growing regions on new-crop cotton yields, driving the most-traded ZCE cotton futures to a peak near Yuan 16,200/tonne on July 16. However, with the launch of routine sales on July 20, the contract retreated to consolidate around the Yuan 16,000/tonne level.
Apart from ongoing reserve cotton release, the domestic cotton market is currently weighed down by a preponderance of bearish factors, including high inventories and weak off-season demand.
According to Mysteel's survey, China's national commercial cotton inventories stood at 2.728 million tonnes as of July 17, up 10.99% year-on-year and near multi-year highs. Combined with an estimated reserve release of around 400,000 tonnes, the market faces abundant supply, which is likely to cap upside in the short run. That said, high-quality grades, such as Northern Xinjiang Double 29 and 30 cotton, remain relatively scarce, keeping spot basis firmly supported.
In addition, July and August mark the cotton industry's off-season, with limited order visibility. As of July 16, the operating rates at major textile mills averaged 72.4%, while inland mills ran at only about 50%, per Mysteel's data. Downstream orders are predominantly short-term and small-lot, and squeezed margins leave mills with little incentive for large-scale restocking. With supply increasing, upward price momentum faces considerable resistance.
Looking ahead, the reserve cotton auction, weak seasonal cotton demand, and incremental cotton supply are likely to remain the dominant near-term drivers, with prices broadly expected to trade in a wide range. Over the medium to longer term, however, the critical growing period for new-crop cotton remains exposed to weather uncertainties, while the global supply-demand balance stays relatively tight, both of which should lend support at lower price levels. Going forward, market focus will center on actual reserve transaction volumes, the pace of releases, downstream order recovery, and weather developments in key producing regions.
