Wednesday, December 26, 2012

China, Ukraine, Agricultural Investment and Serfdom

News media have been reporting tentative agreements between China and Ukraine in which the Ukraine would export corn to China and China would make investments in Ukraine. In early December, Xinhua announced that an agreement had been signed with COFCO to buy Ukrainian corn, but several days later an official from a Ukrainian agribusiness company announced that "in principle" Ukrainian corn could enter China, but there seemed to be a hang-up on which Chinese company owned the import quota that would allow them to buy it.

At least two meetings on agricultural investment were held during a Ukrainian agribusiness official's December visit to Beijing. One meeting held by the Chinese Animal Agriculture Association was convened specifically to discuss investment opportunities in Ukraine. A second meeting of Chinese business leaders on agricultural investment--both in China and overseas--was sponsored by a business magazine and included the Ukrainian official as well as Chinese economists and business leaders.

News media reports on these two proceedings indicate that Chinese government and business leaders acknowledge that Chinese farms cannot supply the growing need for agricultural products--corn, in particular--and business investment is needed to upgrade production capacity. However, business investment in Chinese agriculture is hamstrung by the need to keep peasants tied to their land. Therefore, Chinese companies are being encouraged to invest in building industrialized farms overseas in places like the Ukraine, one of the most fertile regions in the world which has a collection of deteriorating Soviet-era farms badly in need of investment. However, Chinese companies have discovered that other countries also are suspicious of business investment in agriculture and are proceeding with caution in their investment plans.

The livestock association meeting featured an American consultant engaged to facilitate investment in Ukraine. There has been a government-to-government agreement on Chinese imports and investment, and China's Import-Export Bank has pledged $3 billion in financial backing for the project. A Ukrainian company registered in the U.S. with investment from big players like Goldman Sachs, JP Morgan Chase and the Kuwait investment authority is also involved. This meeting apparently was held to recruit Chinese companies to engage in concrete investment projects in the Ukraine.

The meeting participants were told that the Ukraine has 33 million hectares of black soil and abundant water resources. They were told Ukraine's annual grain consumption is about 30 million metric tons and its production capacity is 100 mmt or more, so there is great potential for Ukrainian grain exports. The Ukraine has many moribund former collective farms from the Soviet era with backward infrastructure desperately in need of investment in equipment, grain storage and other infrastructure. Chinese investors were told Ukrainian land rents are in the range of $35-$90 per hectare (2.5 acres). Rental agreements are for 15 years and can be renewed three times for a total of 60 years.

Chinese officials said the Ukrainian investment project is expected to help supply China's grain needs and provide opportunities to score financial gains as well. Chinese livestock association officials at the meeting expressed interest but were noncommittal. They promised to evaluate possible projects, recruit potential Chinese investors and go on a fact-finding tour of the Ukraine. They noted that investment projects should be focused on crop and livestock farming and called for careful consideration of projects, including the government's attitude and regulations. There was a brief discussion of political stability in the Ukraine. (see this post on problems encountered in China's overseas investment in agriculture.)

The business leaders' meeting was a more general discussion with the theme, "cool thinking on hot investment in agriculture." The Chairman of a Ukrainian agribusiness company was the first speaker, but the speakers also included representatives from several Chinese companies and two economists from government think tanks. In brief remarks, the Ukrainian official made a general pitch for Chinese investment to promote Ukrainian grain exports to China. Speakers observed that China's booming imports of soybeans and even rice, wheat and corn showed that China's resources are not sufficient to keep the country self-sufficient. The meeting's moderator noted that Ukrainian corn was 40-percent cheaper than U.S. corn and asserted that opening more import channels was a way to improve China's future food security.

Why are Chinese companies are being encouraged (and subsidized with loans from state-owned banks) to invest in Ukrainian farmland, rather than investing in Chinese farmland? One reason is that Ukrainian land is a lot cheaper. The rents of $35-$90 per hectare are much cheaper than Chinese rents of 300-to-500 yuan per mu which work out to about $700-$1200 per hectare. The 15-year Ukrainian rental agreements are more secure than Chinese short-term agreements that undermine incentives to make long-term investments (see this post). However, at the root of the push to invest overseas is the fact that Chinese farmland has lots of people living on it.

Authorities have decided to place strict limits on acquisition of Chinese farmland by business enterprises. At the business leaders meeting, an economist from the State Council's Development Research Center (DRC) noted the special nature of agriculture that sets it apart from other types of investment. Hu Jintao declared that agriculture is a foundational industry for tranquility, support of the people and national self-reliance. It has so-called "externalities" associated with maintaining food security and it serves as a reservoir of labor for industrial development, explained the DRC economist. 

During the question and answer period, the owner of a construction company asked whether the government would endorse moving farmers into high rise apartments in newly-built rural towns, thus freeing up land for large-scale farms operated by companies. In response, an economist from a Ministry of Agriculture think tank replied, "You have raised a very strong policy-oriented issue." The economist said the people are "tied" to the land, so if a company rents their land, "what will they do?" The government views farmland as a means of guaranteeing minimum subsistence for the peasants and a fall-back if they lose their factory jobs. He gave the current party line: the government does not  encourage companies to engage in long-term or large-scale rentals of Chinese farmland, but it does encourage companies to invest in rural infrastructure and to provide services to farmers. The discussion also included rhetoric about how Chinese companies need to invest in agriculture as a social responsibility with a long-term payoff (implying that they shouldn't expect to make any profits in the short or medium term).

The contrast between China and Ukraine in farmland today goes back to the different approaches to agriculture followed by the Soviets and Chinese during the 20th century. The Soviet Union formed massive collective farms and starved or shot the peasants if they raised objections. China briefly tried to follow that model in the late 1950s with disastrous consequences, but they never went as far as the Soviets, and Chinese  farm communes were organized around traditional villages. The Chinese were able to return to a family farming model in the late 1970s after the commune model of agriculture had clearly failed. Under the "household responsibility system" installed during 1978-83, collective "ownership" of land by village families was maintained, but the rights to cultivate the land and derive benefits from it were distributed to families who were members of village collectives.

The Soviets cleared most of the Ukrainian peasants off the land several generations ago, leaving big tracts of land corporate-farming-ready. In contrast, China's farmland is still occupied by a massive population of peasants who don't directly own their land but are tied to it through their collective "ownership." The MOA economist said "our people are tied [to the land]." The Chinese word translated "tied" is "结合" which can mean "combine," "linked," or "united in wedlock." In other words, Chinese peasants are combined with their land like medieval European serfs who occupied and cultivated land that was owned by the lord of the manor in exchange for the lord's protection. Chinese peasants are, in effect, vassals of the communist party leaders who are the de facto "owners" of land who can sell it and reap capital gains. To their credit, the Chinese communist party has eliminated the explicitly feudalistic requirements to deliver grain to the State, pay agricultural taxes and corvee labor requirements. However, Chinese "collective" land ownership still retains the vestiges of a feudal system that officials are trying to undo. Ironically, the Ukraine was considered one of the main centers of serfdom in Europe. The Soviets took over the land from the manorial lords and their Ukrainian technocrat descendants are now preparing to rent it out to Chinese companies.

The second measure that defines the Chinese neo-feudal system and keeps peasants on the land is the household registration system which prevents rural residents from becoming legal residents of cities. The wikipedia entry on serfdom notes that "[serfs] were tied to the land and could not move away without their lord's consent and the acceptance of the lord to whose manor they proposed to migrate to." This sounds identical to China's household registration system.

The Ministry of Agriculture economist's reply to the question about developing rural land zeroes in on land issues Chinese officials are grappling with. He told the Hebei construction company official that developing rural land involves some thorny issues that need more "research." For example, he says, if you consolidate a parcel of rural land and then develop it, how is the increased value of the land distributed? What proportion of the increased value do the peasants get? (The normal practice has been to compensate peasant "owners" only for the value of grain that the land could produce--a miniscule amount. Most of the value of newly-developed rural land goes to officials, local government coffers or business enterprises.) Officials are preparing to announce some new guidelines or regulations that will require that peasants be given a higher proportion of the capital gain on land developed for nonfarm use.

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