With downward pressure on many commodity prices, ADBC loans are holding up sagging crop markets. In a press conference last month, the bank's president touted ADBC's role in maintaining food security by announcing that ADBC lent 170.4 billion yuan ($24.3 billion) to finance purchases of 124 million metric tons of grain and oil in the first three quarters of 2019--up 87 percent from last year. The ADBC president acknowledged that the bank financed 75 percent of wheat sales this year and 71 percent of early rice purchases. These shares were up from 49 percent last year. The boom probably reflects the 31 million metric tons of wheat purchased through the minimum price program--the largest total since 2008. Early rice production was down sharply this summer as farmers cut back on double-cropping, but officials still had to support the price with purchases at the minimum price.
The fall grain harvest happens in the fourth quarter, and the bank has announced that it has 160 billion yuan ($22.8 billion) of "money waiting for grain" to finance procurement of this year's fall grain crop. That's slightly more than last year when the bank financed half of fall grain purchases. Five rice-growing provinces have already begun minimum-price purchases of their fall rice crops which news media credit for price rebounds. Minimum-price purchases of medium grain rice are expected to begin in northeastern provinces after an audit of warehouses is complete. Markets are watching carefully to see whether big rice provinces Hunan and Jiangxi launch the program.
There is no longer a formal price support for corn or soybeans, but ADBC finances purchases for government reserves when the market looks weak. There were rumors in October that the government was considering purchasing corn for reserves, but nothing concrete. Officials are probably monitoring downward pressure on corn prices to determine whether they need to intervene as more grain is sold by farmers and demand remains soft due to the decimated pig herd and weak starch production. Chinese soybean prices fell to their lowest point in 5 years last weekend, but China's grain reserve company swooped in to make additional purchases--almost certainly financed by ADBC--to spark a rebound in prices.
The Agricultural Development Bank of China (ADBC) was carved out of the Agricultural Bank of China (ABC) in a 1994 reform that created specialized banks to carry out government policies, thus freeing up ABC and other state-owned banks to focus on commercial-oriented lending. ADBC's primary function historically was to finance the marketing of grain, edible oils, and cotton by state-owned enterprises. (Other policy banks focus on financing infrastructure and foreign trade.) ADBC is financed mainly by selling bonds. ADBC is one of the top three bond-issuers in China with 4.45 trillion yuan in bonds outstanding.
ADBC's outstanding loan balance has been doubling every five years--from 1.2 trillion yuan in 2008 to 2.5 trillion yuan in 2013, and 5.1 trillion yuan at the end of 2018. The ratio of the loan balance to the total value-added of China's agriculture, forestry and fishing has more than doubled from about 35 percent in 2004 to 75 percent in 2018--an indicator that loans have grown at a faster pace than the agricultural sector.
|Source: ADBC annual reports and National Bureau of Statistics web site.|
|Source: Annual reports of Agricultural Development Bank of China and U.S. Farm Credit System.|
"Agricultural modernization" is the third chunk of loans described in the 2018 annual report, with a smaller balance of about $31 billion. These include loans for marketing system development ($6.5 billion), so-called "dragon head" agricultural business enterprises ($4.7 billion), high-standard farmland projects, support for agricultural industry parks and "protected zones" for key commodities, and agricultural S&T. ADBC has loans to support "new-style" scaled-up farms. ADBC recently announced intentions to lend 50 billion yuan to support hog production over the next three years. ADBC finances transportation of grain from north to south.
Historically, China's banking system has siphoned money out of the countryside via peasants making deposits in postal savings banks and credit cooperatives which then deposit the funds in city-based banks or real estate and industrial investments. ADBC is reversing that tide by sending some of that same money from bond-buyers (probably commercial banks) back to the countryside, but it would be more efficient to develop self-contained credit markets in the countryside. One of ADBC's current initiatives is to jump-start "marketized" lending in the countryside by capitalizing loan guarantee entities run by provincial governments intended to reduce risk of bank lending to private grain traders and processors.
In theory, ADBC's money pipeline to the countryside is one of the few mechanisms to reduce the massive inequality in China. But the system has built-in incentives for corruption--a lot of the money was stolen by corrupt officials and unscrupulous warehouse operators--and one wonders whether the lending is unsustainable. ADBC claims its non-performing loan ratio is only 0.4 percent but it seems unlikely that loans for moldy, poisoned or nonexistent grain, fields producing crops that are falling in price, and apartment complexes for elderly peasants can be paid back. Moreover, the ADBC reflects the Chinese communist tendency to rely on behemoths. ADBC is itself a behemoth and one of its stated strategies is to help other creations of central planners--COFCO, Sinograin, the Supply and Marketing Cooperatives, and a State investment company--to "play a leadership role in the market" and stabilize market expectations.