China's Rural Investment Jump-Start Plan

China has piled up mountains cash in some of world's biggest banks, but officials are relying on commercial companies to come up with the cash to invest in an initiative to overhaul the countryside--one of China's top priorities for 2020. Last month the Ministry of Agriculture and Rural Affairs (MARA) published a document to "guide" more commercial investment into rural industries and infrastructure as they watched rural investment plummet this year.

An April 30 Q&A published by MARA explains the targets for rural investment and the inducements for investors. A MARA official explained that "social capital" (non-governmental investment) accounts for 80 percent of rural investment and is therefore necessary to build infrastructure, overhaul the agricultural sector, offer services to farmers, and to create rural industries. Commercial investment also brings technology, personnel, and management needed to build modernized agriculture and rural business.

The MARA official explained that fixed asset investment in agriculture has been on an extended downturn since last year, and the coronavirus pandemic caused a 13.8-percent decline in investment in "primary industry" in 2020. Officials determined that they must provide stronger policy guidance to revive investors' confidence and boost investment in agriculture and the countryside.

Areas targeted for investment include agricultural production, processing and services, rural infrastructure, and science and technology. Priorities include "modernized" crop and livestock, regional specialty industries, cold-chain facilities, and grain-drying. The plan features construction of entire industry chains, including warmed-over Stalinist strategies repackaged by 21st-century technocrats as "agricultural industrial complexes" and "industry clusters." The plan includes a big emphasis on custom farming, technical services and training for farmers, rural tourism, and rural e-commerce. A call for investment in garbage collection, sewers, reconstructing ramshackle housing, ecological agriculture, renewable energy, and waste utilization reflect the priority of creating a scenic and sweet-smelling countryside. The need to raise agricultural productivity is reflected by priorities on investment in "high-standard fields," rural innovation parks, technical training, and "platforms" to link up research institutions with industry.

The MARA official acknowledged that land and financing are bottlenecks that constrain development in the countryside. Rural land is owned by village collectives and each parcel has a designated use as agricultural, housing, or "construction" that cannot be changed without extensive negotiation and horse-trading. Major banks are state-owned and rural banks are often controlled by a local fiefdom. Banks and officials like to finance big photogenic vanity projects. Since there is no land ownership, mortgages can only be secured by vague "land use rights" and other illiquid or hard-to-value assets like barns, a shed full of garlic, or tractors. A new initiative to expand the pig industry this year is to mortgage livestock that can die, decline in value or turn out to be nonexistent.

The official said the government has been contemplating these problems and offers some work-arounds in the plan. The 2020 "Number one document" decreed that land designated for growing crops may be used to construct cold storage and grain-drying facilities, machinery sheds, buildings for farm management, packing sheds, waste management facilities, and other auxiliary farm structures. Electricity for storage facilities will be charged at the lower rate designated for farming. "Construction land" parcels in villages will receive priority for rural business investment, especially by returned rural migrant workers.

Credit services will be improved following a policy document published last year by MARA and the Peoples Bank of China. In 2020 the government announced a package of re-lending, discounts, and interest subsidies to improve rural credit availability, and an agricultural loan guarantee system is beginning to show results, the MARA official said. Agricultural officials at the provincial and local levels are expected to set up platforms to link up financial institutions with rural investors. Agricultural insurance is being expanded to mitigate risk. Insurance premiums are subsidized for traditional crops, several types of livestock and local specialty crops are being added. Pilot programs are covering the entire production cost for crop and livestock and insurance for income from grain production.

The investment guidance plan calls for respecting market rules and acknowledges that companies need to expect a stable stream of profits to justify their investments. In return, investors must accomplish the government's objective of refurbishing the countryside and "raise the rural people's level of happiness." Investors must "respect" rural villagers as the "main actors" in rural business and must share profits with them in a win-win model. Investment must stimulate the enthusiasm and entrepreneurial passion of rural people.

Investments are encouraged to follow a whole industry chain model that integrates and "pulls along" farmers, processors, and providers of services. Pig-farming companies like Wens Group are cited as orchestrators of "long" industry chains. A PPP (public-private partnership) model is envisioned for ecological services and digitization of the countryside. Another model features establishment of "industry funds" for investment in "relatively mature" sectors in regions with rich financial resources, citing a "modern agriculture investment fund" in Guangdong Province and a "rural revitalization fund" in Zhejiang Province as examples.

Perhaps not by coincidence, a plan by real estate conglomerate Vanke to invest in pig farms had the Chinese internet puzzled last week. "Are pigs more profitable than real estate now?" was the question. A Beijing newspaper article last week pointed out that there is a history of seemingly-odd plans to invest in pig farming by Goldman Sachs, other real estate companies, entertainment-real estate conglomerate Wanda, Wuhan Steel, and an internet-gaming company over the past 15 years. There are many other examples of rich Chinese companies making agricultural investments that have no connection to their core competency and little prospect for profit.

During the mid-2000s the Evergrande real estate conglomerate invested in apple juice processing in impoverished regions of Shaanxi Province as part of a strategy to move apple production westward and manufacture juice for export. Soon thereafter Evergrande won rights to develop a shopping mall in the provincial capital, Xian. Probably not a coincidence (and not the only project won by Evergrande in the "Develop the West" investment frenzy that was in full swing at the time). Goldman Sachs invested in China's two largest meat companies about 15 years ago and also bought a string of pig farms, but lost interest in pigs after taking both meat companies public. A small investment in an apple juice factory, a rural amusement park, or a pig farm is a cheap way to build goodwill with officials who award billion-dollar real estate projects, stock market listings, and movie theater licenses.

While few Chinese investors speak Latin, "quid pro quo" is a keyword that probably explains many of China's baffling rural investment projects.