China serves up pig-backed loans for its hogtied farmers

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China is so desperate to rebuild pig herds after swine fever that its banks are experimenting with loans to farmers backed by a novel asset: their hogs.

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The country’s swine herd fell steeply after African swine fever, which is harmless to humans but usually deadly for pigs, first emerged in August 2018. That pushed up prices for pork, a staple food in China.

The government, worried about food-price inflation, has since encouraged farmers to restock and larger commercial farms to expand. But small family farms—which make up a third of the country’s more than 26 million pig farms—were already struggling with debts and have few assets to borrow against, partly because they don’t own their land, though they can sometimes borrow against land-use rights.

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Visitors wearing face masks to help protect against the coronavirus visit Forbidden City in Beijing, Thursday, Aug. 13, 2020. (AP Photo/Andy Wong)

With China’s pig herd still roughly 20% smaller than it was at the end of 2017, according to national statistics, authorities have prodded its mostly state-owned banks to find solutions.

Last September, China’s banking regulator and its agriculture ministry urged banks and insurers to better support pig farmers, including by developing pilot programs using hogs as collateral.

In March, the ministry told banks to start accepting pigs, land-use rights and farming machinery as collateral. It also lowered the threshold for a separate loan-subsidy program by 90% to cover farmers with as few as 500 pigs. These loans aren’t collateralized with livestock.

Since then, tens of millions of dollars have been put to use in pilot programs. In June, officials in Zhejiang, eastern China, said farmers in 32 of the province’s counties had borrowed a total 178 million yuan, the equivalent of $26 million, in loans backed by live hogs.

And in the western city of Chongqing, a hog-raising company pledged sows protected by government-designed insurance policies to a local bank. That allowed it to increase its loan with the lender more than fourfold to 38.5 million yuan, the equivalent of $5.6 million, while cutting its interest rate to 5.0% from 7.4%.

The pledged pigs are remotely monitored by the local animal-husbandry department. The loan’s value was based on a discount to the average pig price in the previous 60 days, according to an August press release by China’s central bank and a state media report.

Lending against livestock isn’t unique to China. Some U.S. banks make short-term loans to farming clients secured against livestock or crops under production.

The sums deployed in China are a tiny fraction of its huge banking system, and lenders may be reluctant to adopt this practice more widely.

Yanyan Liu, senior researcher with the International Food Policy Research Institute, said banks would face challenges both in valuing pigs and enforcing their rights if loans went bad.

She said hog prices are volatile, meaning banks could face losses if pig prices fell after they had made loans and they later had to seize their collateral. And banks would need to develop systems to value hogs, and monitor, manage, or even dispose of them, if they were to end up owning pigs.

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While this could work at scale, “it simply does not make much economic sense to work with small farmers,” she said. That gave banks little incentive to expand the program, she said.

Feng Yonghui, chief analyst at pig-industry portal Soozhu.com, said banks tended to make steep discounts to the value of a farmer’s pigs when deciding how big a loan to offer. In practice, too, he said commercial banks also tended to require that farmers bundle other assets, like facilities or vehicles, with their pigs to get loans.

Mr. Feng said an environmental cleanup campaign in recent years had also reduced China’s pig herd. From 2015, authorities have torn down many pig farms near urban areas and close to water sources, primarily because effluent from farms was polluting streams and rivers.

Getting a precise picture of China’s pig industry is challenging. Earlier this year, African swine fever began reappearing after several months of no new cases on farms, and in April, the U.S. Department of Agriculture said underreporting of the disease was rampant.

Still, other measures point to improvement. Pig stocks rose 13% year on year in July, agricultural ministry data shows.

In the first half of the year, China built nearly 6,200 large new swine farms, and nearly 10,800 major farms have restocked after culling their herds over the past two years, the agriculture ministry said.

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A 53% rise in retail pork prices helped push overall food prices up 11% in August, compared with a year earlier, according to the National Bureau of Statistics. Still, the rate of increase slowed compared with July, when pork leapt 86%, fueling a 13% rise in food prices.

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