China's lending push bypasses cash-starved farm sector

Daniel Acker | Bloomberg | Getty Images

As China pulls out the stops to get more lending into its economy to bolster flagging growth, farming, a sector that employs almost a third of its 1.4 billion people, remains in desperate need of funding.

Policymakers have cut interest rates, increased lending targets and freed up banks' reserves to lend more, helping to sustain a rally in Chinese shares and a property bubble, but it is not getting through to agriculture, which produces around 9 percent of China's GDP, though with pitiful productivity.

World Bank data showed the value added per farm worker in China was $750 in 2012, compared with around $63,000 in the United States.

Inefficient and obsolete farming techniques have also been blamed for causing major soil and water pollution and food scandals, but it needs investment to turn the sector around.

What's behind weak China housing, lending data?

Jin Yong, a lifelong farmer in Anhui, one of China's poorest provinces, formed a corporate entity with other individual investors in an effort to improve his access to funding.

The plan is to sell organic vegetables, but the company has yet to turn a profit, and credit is part of the problem.

"We don't have rights to the land. We have things in the ground, but banks don't care. They just want evidence of ownership for collateral."

Read MoreChina goes organic amid food scandals

Beijing is aware of the problem; its recently published "number one" planning document listed modernizing farms as a key priority for 2015, including plans to encourage private investment and cheaper financing.

But lenders are steering clear.

The share of loans going to agriculture has declined every year since 2010, official data shows. In 2014 banks lent 306.5 billion yuan ($49.1 billion) to agriculture, compared with approximately 1 trillion yuan for margin finance for use in stock speculation, and 2.8 trillion yuan for real estate.

Reform dilemma

Chinese bankers who spoke to Reuters said official calls to lend to farmers were effectively countermanded by official orders to reduce the bad debt on their books.

"When banks lend, they're not going to think, 'I wonder what direction the country is expanding in?'" said a senior loan officer at one of the big five state-owned banks.

"A bank's priority is still going to be a firm's liquidity; is it good? Cash flow, is it good? Do they have the ability to repay?"

Foreign bankers told Reuters they have been approached by regulators asking them to increase lending to the sector, but they, too, are reluctant.

There is also a failure by banks to adapt to changing needs, said Cheng Enjiang, senior research fellow at Victoria University in Australia specializing in rural finance and microfinance in China.

"There has been an increase in demand for agricultural loans to larger-scale farms, but rural credit co-operatives and agricultural banks don't have feasible products tested for that," he said.

There are also political dimensions to the problem.

Agricultural analysts say self-sufficiency goals intended to minimize China's dependence on food imports have resulted in mandated production of staple grains and starches that earn far lower profit margins for farmers than fruits and meats.

Some officials also fear that increasing efficiency and profits through mechanization would ring Chinese cities with slums full of unemployed farmers.

But policies designed to keep farmers on small, low-yielding plots impedes the consolidation that could create economies of scale.

The right to buy and sell rural land is retained entirely by the local government, so not only is a farmer unable to use his land as collateral, he can't buy other people's land.

Thus Jin Yong, the aspiring organic vegetable magnate, can only rent land, and rental contracts are no use in securing bank loans.

Without major policy reforms, farming will remain a bad bet both for the farmers and the bankers.

"We don't lend to certain sectors just because the government tells us to," said a fund manager at a listed Chinese commercial bank.

"We'll only lend to a company in any sector if it means we'll come out profitable."