Monday, January 21, 2019

China Agribusiness Debt Problems Accumulate

Debts are suffocating many agribusiness companies in rural China as shortages of working capital force closures and bankruptcies, according to reports appearing in Chinese State media last week. The reports appear to presage new credit policies to support rural development programs this year that will pile on even more debt and open a new money pit for Chinese banks.

A Business Reference News report," Some Dragon Head Agricultural Enterprises Stranded," describes mounting debts and seizing-up of credit supply among "model" agricultural enterprises in Anhui Province visited by a journalist (a "dragon head" is a leader who pulls along those behind him/her like a line of dancers in the traditional dragon dance). The report claims bankruptcies and shrinking business operations he observed among flour, poultry, bamboo flooring, and farm equipment companies are typical of the national situation and warns that "the business and financial risks are worthy of attention."

The communist party's Semi-Monthly Chat described a "working capital crisis" that caused hog- and chicken-farming companies, flour mills and soybean processors in neighboring Henan Province to scale back production and pushed them to the brink of bankruptcy.

Vice Minister of Agriculture Yu Xinrong said rural revitalization reveals an "unprecedented" need for capital investment of at least 7 trillion yuan (about $1 trillion) (also reported by Business Reference News), focused on "supply side structural reform," "land system reform," and internet development. This will require a "huge increase in financial services" and a guaranteed flow of government funds to rural areas "tilted toward" financial organizations, Yu said.

National Bureau of Statistics data show zero growth in agricultural processing industry fixed asset investment during 2018 and 3.8-percent growth in food manufacturing investment, consistent with stories of abrupt slowdown and financial difficulties in China's agribusiness sector. Both were below the relatively slow 5.9-percent average growth in fixed asset investment last year (down from 7.2 percent in 2017). Meanwhile, fixed asset investment in agriculture, forestry, and fishing was up 12.3 percent during 2018 as "rural revitalization" and "high standard field" projects pushed money into farming after decades of neglect.

"Companies' financing problems were evident" in a survey conducted by Anhui Province agricultural officials that showed banks reluctant to lend, nonperforming loans, and use of underground financing channels, according to Business Reference News.

Reports indicate recent credit-tightening set off a collapse in credit that has sent high-flying--but highly leveraged--agribusiness companies into a downward spiral. In Henan, a 30-year-old food company once considered a local bank's "star pupil" had its supply or working capital disrupted when a new loan was held up for five months during 2017. A 1.4-billion-yuan egg producer's working capital chain seized up when a bank called in a 60-million-yuan loan late in 2017. Henan banks began calling in loans last year after a livestock company in the province encountered financial problems (The Semi-Monthly Chat journalist appears to describe Chuying Pastoral's repayment of bond-holders with hams last November although he did not name the company).

An agricultural official in Anhui's Xiao county said statistics show an abrupt slow-down in local agricultural processing. The sector tripled in size since 2012, he said, but growth was just 0.68 percent during January to October 2018. He said seven of the county's nine provincial- or national-level dragon head agricultural enterprises are in financial straits. According to Business Reference News, ten of Anhui's agricultural enterprises have lost their status as national-level "dragon head" enterprises in recent years.

A company in western Anhui said its bank borrowing shrank from 360 million yuan in 2014 to 190 million yuan last year. The head of a flour mill in Anhui said his borrowing from banks grew tenfold during 2005-2011 to reach 589 million yuan but lending began to slow down in 2012. In November 2018, the flour mill's loans were sliced to 26 million yuan. Lacking working capital, the flour mill is able to use only 300 tons of its 2000-ton capacity. It needs to produce 500 tons to break even. A company that produces bamboo flooring products and furniture is using only 10 percent of its capacity and can fill only a fourth of its export orders due to lack of working capital.

Many agribusinesses have turned to informal lenders to keep their businesses running, but some companies actually had funded their operations by acting as shadow banks. A rural banker in Anhui told Business Reference News that one Jiangsu company with numerous subsidiaries in forestry, farming, and real estate was suspected of acting as an illegal shadow bank. It took deposits from the public and used a portion of the cash as working capital for its agribusiness subsidiaries, but the supply of working capital dried up when regulators cracked down.

The reports note systemic problems facing agricultural processing companies. A banker in Anhui says that rural companies often lack sufficient collateral. Banks evaluating loan applications cannot easily assign a value to customized equipment installed in processing plants. Although bank supervision authorities have a tolerance for nonperforming loans, the banker says they must be careful because a bad loan could result in garnishing wages or penalties for nonpayment. A tea company near Anhui's Huang Shan used its trademark as collateral but still could not raise enough cash to sustain operations.

A poultry company in Henan complains that rural companies are unable to profit from rising real estate values--as many urban companies do--because they have to rent collectively-owned rural land. A livestock company noted that every sow requires 20,000 yuan in fixed asset investments that take 5-to-6 years to recover, but the company has to finance investments with short-term loans.

An Anhui official criticizes agricultural processors for lacking R&D, using outdated production methods, and producing generic products with little value-added. However, companies in Henan producing premium "antibiotic-free" eggs and quality flour say they have encountered capital shortages after cycling through a series of investments to upgrade their operations. Similarly, the Henan poultry company says they have had to rent one land parcel after another as they have upgraded their barns and facilities.

Although the Business Reference News and Semi-Monthly Chat articles are presented as investigative journalism, they appear to be veiled justifications for a new initiative to pour capital into rural small and medium enterprises as part of rural revitalization and poverty alleviation initiatives this year. Official news media in China never report on problems unless they are announcing a program to fix them. It's no coincidence that these articles were released the same week that the Ministry of Agriculture and Rural Affairs held a summit on financial services to support rural revitalization attended by major commercial banks and a prominent insurance company. A pilot program to consolidate village land converts villagers' land use rights to shares in companies and farmer cooperatives, but the companies will also need banks to supply working capital. Rural poverty alleviation programs also are centered around agribusinesses as employers and payers of fat dividends to collective members, providers of new marketing channels and purveyors of new techniques.

Both articles emphasize the importance of agribusiness companies for boosting income for rural people and integrating agriculture with the broader economy. The articles recite many favorite buzz words of rural policymakers such as "pulling along" farmers, rural revitalization, "transformational upgrade," and "company plus farmer" models.

Business Reference News quotes the head of a livestock company in western Anhui: "Government leaders worried that my company could collapse give me encouragement but no material help." The article criticizes local officials for failing to aid small and medium businesses due to lack of coordination among multiple departments. In Henan, companies told Semi-Monthly Chat that local governments had offered some aid, but it was just a "glass of water."

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