China's 21st-century push for "agricultural modernization" aims to undo the fragmentation of its farming sector by consolidating farms into larger operations. Like China's ill-fated 1958 "Great Leap Forward," the new "modernization" campaign needs to gather funds to finance investment in fixed assets. The new campaign is said to be guided by the "decisive role of the market," yet the banking system--behind its veneer--is still stuck in the era of central planning. Consequently, the "decisive" market mechanism is sidelined as Chinese officials subsidize, cajole and otherwise intervene to promote investment in agriculture.
In 2011, the Ministry of Agriculture signed a memorandum of understanding with the China Development Bank to finance "agricultural modernization" projects and overseas agricultural investment during the 12th five-year plan (2011-2015). The bank's agricultural loan balance was 19.5 billion yuan at the end of 2010. A bank document reports that the balance had swelled to 46.4 billion yuan by June 2013. This bank mostly funds infrastructure, research institutes, and model farming districts, not commercial farms themselves.
The "modernization" push has strengthened since last year's "third plenum." In December 2013, Minister of Agriculture Han Changfu said the country's new push for urbanization requires big investment in agriculture but warned that investments would bring steady returns, but not "overnight wealth."
In April 2014, China's State Council issued a directive endorsing improved financial services to support large-scale farms, demonstration projects, and overhauls of farming districts to boost agricultural productivity.
On September 17, 2014, the China Bank Regulatory Commission and Ministry of Agriculture jointly announced a "Guiding opinion on financial support for larger-scale agriculture and concentrated operations." The document offered guidance to financial institutions intended to "improve the allocation of capital resources" to support the "accelerated transition of agriculture from traditional, fragmented rural households to new-style business operations that have larger scale, concentrated operations, are "organized" and "integrated with society."
The "guiding opinion" ordered banks to establish credit assessment mechanisms and record systems for new types of operators like large farms and cooperatives and consider opening special departments focused on serving such farms. Banks are instructed to experiment with new products like mortgages secured by rights to use agricultural land as a means of supporting land consolidation. Banks are also directed to finance rural infrastructure, seed and equipment companies, logistics, storage, agricultural processing, retail markets and shops and e-commerce. They are urged to finance agricultural companies investing overseas.
The policy measures recommended by the "guiding opinion" include awards for increasing agricultural loans, favorable tax treatment, subsidized interest rates, subsidies for bank operation costs, lower deposit requirements for agricultural lenders, and issuance of special bonds to finance ag lending. Local governments are urged to offer their own support policies and subsidies for agricultural lending.
A November 2013 article from Laiwu, a prefecture in Shandong Province, raised concerns about the shaky financial state of local agribusiness and described numerous strategies being considered to boost lending to local agribusinesses at the local level. According to the article, local agribusiness companies are seriously short of cash and unable to pay back loans due to a slow-down in demand, a contraction of bank credit, high interest rates, rising costs and moribund exports that started in 2012. A number of prefecture governments have funds to support financing agricultural development ranging from $1-to-$2-million, and Laiwu is urged to expand its fund. Support for companies includes interest-rate subsidies, tax reductions, preferential land use, science and technology support. There is a "bridge loan fund" to meet cash shortfalls for companies "with good business prospects that are unable to repay loans on time."
The Laiwu article indicates that local governments "actively struggle for agribusiness credit" by engaging in negotiations with banks on behalf of grain marketing enterprises, partially matching company investments in storage facilities, and funding loan guarantees for agribusinesses. The article urges local government to guide each commercial bank to loosen credit requirements for agribusinesses, lower interest rates, and coordinate loans from multiple banks to meet seasonal credit needs.
Meanwhile, there are regular reports of Chinese companies making massive investments in agriculture. Last month, a giant real estate conglomerate called Hengda Group announced its plan to invest 100 billion yuan in "modern agriculture" to create branded products including bottled water, cooking oil and dairy with safety assurances. The Laiwu article also recommended that local governments actively try to attract such investments from nonagricultural companies in agriculture.
In December 2013, Development Research Center rural policy expert Han Jun warned that the flood of agricultural investment by companies could be "blind" and misguided if not thought out carefully. With China still lacking a social security system for the rural population, Han worried about the consequences of pushing millions of small farmers off the land.
China's "modernization" of agriculture is just getting underway. "Modern" modes of production that developed since the mid-20th
century depend on mechanical equipment, sophisticated buildings,
irrigation systems, scientifically-bred plants and animal
stock, greenhouses, laboratories, as well as highly-trained farmers and
technicians. This requires massive investment. To make the investment
financially viable, modern agriculture also must rely on a large scale
of operation to spread the fixed costs over large volumes of output.
The new modernization campaign bears disturbing similarities to Mao's 1958 "Great Leap Forward." It is another "great leap" from perhaps the most labor-intensive agriculture ever to large-scale "modern agriculture." Like Mao's "Great Leap" that created giant mechanized communes, today's agricultural modernization is a crash program to concentrate capital and land in large production units.
Without an efficient system for financial intermediation, the accumulation of capital in agriculture is slap-dash, capricious, and possibly fraught with danger.