Bean counters

Soya beans become currency of choice for Chinese underground lenders

Bean counters

A lucrative financing tool: soya beans

Buy low, sell high is one of the most basic tenets in business. So how come plenty of China’s soya bean importers seem to be ignoring the advice in their day-to-day endeavours? Costs per tonne of soya bean imports now come in $38 above the sales price for the same quantity, warns the local media. Warehouses are full and an industry glut is ruining local farmers. But the traders keep on buying.

China is expected to import a record 58 million tonnes of soya beans in 2011 – more than double the volume brought in five years ago. That’s being driven by some well-documented trends, especially more Chinese cooking with edible (soya) oil and eating meat (fed on soya meal). But since soya beans need lots of water, it seems natural that China’s farmers should switch over to less thirsty crops. Hence the run-up in imports.

But none of that explains why prices seem divorced from fundamentals.

The reason: an innovative (and risky) scheme to use imported soya beans in underground lending. “[The central bank] has raised interest rates five times in a row and banks have cut back on lending,” writes Capital Week magazine. “Many SMEs can no longer borrow, making the private lending market very lucrative.”

Here’s how it works: traders get a bank letter of credit to pay for a shipment of soya beans (which typically has to be repaid within 90 days). Then they sell the cargo as quickly as possible and use whatever time is left to lend out the proceeds of the soya bean sale to desperate business bosses. (The interest rate can be exorbitant – anecdotally, as high as 10% a month).

“[Importers] often sell at a loss,” explains the magazine, “there is only for one reason for it – to keep the bank credit flowing.”

The illicit nature of the scam means it is hard to gauge just how significant ‘soya bean financing’ has become.

“The argument that 30-40% of the soya bean inventory at port is used as financing tool is overstated,” commodities analyst Jiang Xingchun told “A more objective figure is 10-15%.”

The State Administration of Foreign Exchange, or SAFE, is now responding to the trend by tightening the terms on many letters of credit financing. But the dangers are obvious – lending at usurious rates to over-leveraged small companies is inherently unstable. If these firms can no longer pay back the importers, banks will ultimately be stuck with the losses.

In fact, WiC has written before about similar schemes in which commodities are being purchased as makeweight for financing schemes (see WiC103 for how it has been done slightly differently with copper). Alumina powder, iron ore and even paper pulp is also said to have been traded as part of financing transactions.

But the move into the soya bean market is alarming for government officials, creating further uncertainty for growers of a major food staple and one that was already struggling to compete with cheap imports. (Chinese soya bean farmers are subsidised by about $35 a hectare, roughly half what their American counterparts receive).

China was largely self sufficient in soya for decades – a result of government policy (the need for cooking oil, animal feed, plus the ubiquitous soya sauce).

But imports skyrocketed in 2002, after China joined the WTO and agreed to allow genetically modified US soya into the market. Two years later a handful of the international agribusiness giants cornered nearly 80% of the country’s processing capacity. (Rival Chinese processors went bankrupt after speculating wrongly on volatile US-traded soya bean futures).

As imports have grown, domestic acreage has fallen. Farmers in the key soya-growing region of Heilongjiang are reportedly planting as much as 20% less of the crop this year. That could, for a time at least, make underground lending more profitable.

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