Monday, February 13, 2017

Bank Loans and Bulldozers for Agriculture

China is revving up its build-it-and-they-will come economic growth model to overhaul the countryside. China's Central Document No. 1 lays out an elaborate grand-sounding program for supply side structural reform of the countryside, but it boils down to doling out cash to mop up surplus commodities, bulldozing old stuff, pouring concrete, and creating a "market" for uncompetitive seed and farm equipment companies.

The cash sluice gate was opened by the strategic agreement signed between the Agricultural Development Bank of China and the Ministry of Agriculture in September 2016 which pledged to lend no less than 3 trillion yuan ($450 billion) to support agricultural modernization by 2020.
Created from Agricultural Development Bank annual reports, adbc.com.cn

According to the Ministry of Agriculture, the Bank had approved 24.7 billion yuan ($3.5 billion) in loans by the end of December and loans had been disbursed for projects worth 13.55 billion yuan ($2 billion). The Ministry said most of the loans were made to national-level dragon head enterprises for working capital to ensure they had enough funds to buy up crops from last fall's harvest. Companies got 100 million yuan each. The borrowers were given an extended repayment period to relieve them of financial pressure.

Now that the bank has funded the procurement of the fall grain harvest, it will focus on funding the priorities in this year's "Document No. 1", most of which involve bulldozers, pipes, other construction, and funds for loan guarantee companies. The top priority is food security and improving grain quality, and the featured program is "construction of high standard fields" for grain, cotton, oil seeds, and sugar production. This is basically a construction program covering a large contiguous area that levels fields, builds irrigation networks, access roads, levels fields, and builds sheds for tractors, grain dryers and anything else needed.
An airport road financed by the Agricultural Development Bank.

Most of the other priorities in the Document No. 1 are construction projects: agricultural industrial parks, science parks, service centers for land transfer, wholesale markets and warehouses,  and organic farming projects. Other loans will be for farm machinery and seed companies, databases for new "functional grain production areas," smart farming, drones, etc. Most will be funded by loans from the Agricultural Development Bank of China. Grants from the central government to grain-producing counties and other "awards" will help pay the interest.

The bank is branching out to fund a major push for poverty alleviation which aims to move 10 million people out of poverty this year. The program is a combination of physically moving people out of poor areas and starting up industries in poor regions. The bank is also making loans for clearing out shabby houses and constructing apartments to urbanize the rural population.

Since this is a socialist country where there is no private ownership of land, no one can be expected to make investments in it. Therefore, it becomes the government's responsibility to collect the money and make the investments. In practice, the economy becomes a scramble among officials for the funds, and the winners are those with the best connections and the most red envelopes. When the construction binge results in products unneeded by the market, a second round of cash follows to buy up the unneeded commodities and store them.

3 comments:

Godfree Roberts said...

This post is little more than a drive-by shooting. Utterly ignorant of how China's economy works, it projects Western notions, derived from Western boondoggles, onto the most successful economy in world history.

Just for the record, the people making the policies and overseeing the investments are the same people who've been getting 200-300% ROI on them for decades: "Is Government Spending a Free Lunch? Evidence from China”. Federal Reserve Bank of St. Louis. https://research.stlouisfed.org/wp/2013/2013-013.pdf

They know what they're doing, and they're beating the pants off us.

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