High debt crushes agribusinesses in China

Observers say the government would likely buy companies if they were overwhelmed by high debt and capital shortages

Reports are surfacing that China’s agribusiness sector is in deep financial trouble.

“Debts are suffocating many agribusiness companies in rural China as shortages of working capital force closures and bankruptcies,” according to a recent blog on the Dim Sums website.

The anonymous blog, which claims to be bringing clarity to a murky Chinese economy, said the Communist party’s Semi-Monthly Chat publication called the situation a “working capital crisis.”

Hog and chicken companies, flour mills and soybean processors in Henan province are scaling back production and are teetering on bankruptcy.

A Business Reference News story said “dragon head,” or leading agricultural companies, in Anhui province are going bankrupt or shrinking their businesses because of restricted credit availability.

China’s vice-minister of agriculture, Yu Xinrong, said there is an “unprecedented” need for a capital investment of at least $2 trillion for rural revitalization, according to the Dim Sums blog.

China is Canada’s second largest agri-food market next to the United States, but Brian Innes, president of the Canadian Agri-Food Trade Alliance, said there is no need to push the panic button.

He noted that the two provinces talked about in the Dim Sums blog are inland provinces.

“There is these two solitudes in China of a traditional or more inland agricultural system and the agribusinesses associated with it, as well as a more import-focused supply chain,” he said.

Canada’s exports are going to China’s coastal regions and major cities and use the import supply chain to get to market.

“Agribusinesses serving that need in China are doing well,” said Innes.

There is strong demand for imported products because they are offered at a lower price and are often of better quality than domestically produced goods.

So he isn’t concerned about debt and working capital issues in China affecting Canadian agri-food exports to that country.

Arlan Suderman, chief commodities economist with INTL FCStone, said there is merit to the Dim Sums report. He recently had a long conversation with an employee who just returned from China, where he spoke to many economists.

“That basically appears to be true,” he said.

“There are significant problems with China’s economy.”

Suderman believes the slumping economy is the result of the combination of a normal cyclical downturn and the tariff trade war with the United States.

He too isn’t overly concerned about Chinese demand for agricultural imports drying up as processors go out of business because the Chinese government has a habit of swooping in and buying them up through its state-owned enterprises.

“I think China is capitalized enough in order to survive the pain in its agricultural sector,” said Suderman.

“It is a concern, but I think African swine fever is probably a bigger threat right now to the soy crushers.”

Suderman has heard that hog feeding is down 15 percent nationally, which would explain the collapse in soy meal prices in recent weeks.

“That is something that is not being widely reported,” he said.

“That’s a big structural threat.”

The Dim Sums blog believes the “investigative journalism” reports appearing in China’s state media about the financing problems facing the country’s agribusiness sector are pure propaganda.

“They appear to be veiled justifications for a new initiative to pour capital into rural small and medium enterprises as part of rural revitalization and poverty alleviation initiatives this year,” stated the blog.

“Official news media in China never report on problems unless they are announcing a program to fix them.”

The articles were released the same week China’s ministry of agriculture held a summit on financial services to support rural revitalization.

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