Fintech spurs agricultural modernization
A professional farmer controls a drone to apply fertillizer to her rice field in Yichun, Jiangxi Province in April, 2021. Photo: CFP
Agricultural modernization is an essential part of China’s modernization drive and the general pattern for agriculture, rural areas, and rural people. Unlike traditional agricultural patterns that are conducted on a small scale by family units, modern agriculture is a systemic industry involving a value chain, a supply chain, and an industrial chain, under moderate scale management. Modern agriculture requires massive factor input, especially financial input and financial service support.
A sound financial system, services, and mechanisms determine modern agriculture’s development. There is a high demand for financial services across the modern agricultural industry. This is a strategic move for rural vitalization.
Better access to financial services
Although various finance institutions in China have adopted the so-called “sinking strategy” (which means starting to develop businesses in lower tier cities), the financial size of agriculture-related industries continues to grow, and agricultural operating entities have gained better access to financial services. To some extent, this has met some of the industry’s financial needs as it strives to modernize.
However, a critical symptom is looming large: the financial market is divided into two separate, opposing parts under the influence of urban-rural division and their two parallel systems. Although traditional financial institutions have an absolute advantage over capital sources, they are inefficient when it comes to the application of funds and infiltrating remote areas. Making matters worse, some commercial banks have stopped loan services in rural areas due to operational challenges. Remote regions, fragile industries (industries with longer production cycles, slower returns, and those which are easily influenced by the environment) and low-income groups are all stakeholders in China’s agricultural modernization and rural vitalization endeavors. To improve the industry’s efficiency, international experience and practical explorations have both highlighted financial technology.
Currently, fintech is at the forefront of international financial innovation. Through innovation, fintech has reshaped financial development theories and organization patterns for financial intermediaries. It is offering a brand new solution to boost efficiency when applying funds. Therefore, financial institutions in the new era should accelerate digitization, and focus on the key issues which emerged during agricultural modernization.
Specifically, we should adopt big data, cloud computing, blockchain, and AI to innovate digital financial products, transform the financial supply flow, and improve financial services’ efficiency. For instance, we can use big data to uncover the main participants in agricultural modernization, and accurately match funding with those who need credit. We should also set up a dynamic feedback mechanism for financial services in order to create a new-type closed supply and demand loop. We can also make use of blockchain for its consensus mechanism, decentralization, traceability, and segregated accounts. This technology will improve the examination, approval, and supervision of credit funds for agricultural modernization construction, while making it easier to establish a new financial risk pre-warning mechanism.
For that to happen, the government should also be responsible. It should lend financial institutions a helping hand by establishing a big data platform and credit investigation platform specifically designed to modernize the agricultural industry.
Industry-led innovation
The evolution of agricultural modernization towards a higher level is primarily marked by the improvement of the agricultural value chain and supply chain, and the maturity and vitality of the agricultural industry chain. Therefore, industrial prosperity is not only a focus for rural vitalization, but also the key to promoting agricultural modernization. With the innovation of land systems and the development of moderate scale management, new types of agribusiness and specialized agricultural services distributed before, during, and after production continue to emerge, and construct a new agricultural management system jointly with farmers through agriculture’s industrial chain, value chain, and supply chain. Farmers, alongside new types of agribusiness, have formed “communities of shared interest” featuring interrelation, mutual dependence, and reciprocal symbiosis. Accordingly, financial innovation should also start with the value chain, supply chain, and industry chain, and pay more attention to these “communities of shared interests,” instead of simply identifying new types of agribusiness entities or farmers as the target markets.
The innovation of financial products and services around a “community of shared interests” is the fundamental foothold and innovation basis for financial services which support agricultural modernization. Under such conditions, financial innovation should direct industrial development and accelerate integration of the primary, secondary, and tertiary industries; deeply explore “endogenous credit enhancement” mechanisms for new types of agribusiness by interpreting industrial chains, supply chains, and value chains as “credit grantor;” and increase the supply and innovation of industrial chain financial products such as joint guarantees, order pledges, core enterprise guarantees, factoring in and pledging accounts for agricultural business entities. Through “collective restraints” and “common interests,” new financial services mechanisms in agricultural modernization constantly consolidate the industrial foundations of the supply of systematic financial services, and fully reforming financial supply modes.
Green finance
Agricultural modernization features characteristics in each stage. It exerts different features against different institutional backgrounds and development phases.
Looking ahead, a sustainable ecology would become a direct indication of agricultural modernization, whose development qualities should be assessed by evaluation criteria for green growth. Modern agriculture is green agriculture. The green transition contains giant opportunities.
To develop green finance, it is necessary to set up first-tier financing institutions or research and development departments that specialize in agricultural nonpoint source pollution treatment, green production, energy conservation, and environmental protection. Under targeted system design and arrangement, financial institutions will become greener, thus paving the way for agricultural modernization.
In terms of financial instruments, there should be more supply-side innovation on financial products such as green credit, green insurance, green funds, green bonds, and green venture capital investment. These new products will be able to fulfill the emerging needs of agricultural business entities and improve matching rates and efficiency levels for financial services in the industry.
When standardizing green finance, we must adhere to a top-level design and remain down-to-earth. We need to come up with standardized authentication, evaluation, and regulatory systems for green agricultural production, management entities, green agricultural projects, and technologies. These systems must be internationally recognized, suitable for China, standardized, unified, and practical.
Institutional guarantee
Agricultural modernization construction is costly. It involves many links, entities, and various types of risks, including credit risk, market risk, policy risk, and natural risk. Therefore, it is difficult for a single type of financial institution or agricultural production and management entity to complete a task this complex and systemic single-handedly. Agricultural industry is unlike any other industry, and financial institutional risk transmission is exceedingly complicated. Therefore, when modernizing the agricultural industry, it is important to balance innovation and regulation, development and stability, competition and cooperation. It is also necessary to improve credit systems and risk sharing systems so as to cushion the risk for financial supply.
To bring innovation to the credit system, we should establish a credit system especially designed for new types of agribusiness. It should combine multiple functions, including information collection, rating, and credit sharing. We should explore the credit relationship between new types of agribusiness and rural households, and create an endogenous mechanism for credit upgrades to mitigate credit risk for agricultural entities. We should also innovate with evaluation mechanisms as we brand villages and towns “Credit Villages/Towns” to build good credit records by incorporating growth in new-type agricultural entities into evaluation systems as an important indicator.
In terms of institutional innovation for risk sharing systems, we should, first of all, improve the risk compensation system. This means we should define the boundaries of rights and liabilities for governments and financial institutions. The government should be in charge of policy risk and natural risk in financial innovation, and financial institutions should be responsible for market risk.
Second, we should improve the multi-entity guarantee system. We need to create a policy-led, strengthened guarantee organization for core enterprises which drives agricultural modernization. This will dilute or defuse financial risks facing guarantors, including financial institutions and core enterprises in the agricultural business. It will also enhance the industry’s tenacity, the market’s adaptive capacity, and the industry’s self-development capacity.
Third, we need to work on the insurance system. We need to innovate and adjust disaster insurance and weather index insurance for agriculture to the reality of agricultural modernization and rural market development. We need to establish a linkage mechanism for “insurance plus futures,” “insurance plus share options,” and “contract farming plus insurance plus futures” as a way to reduce natural risk for the stakeholders.
Meanwhile, we should also set up an agricultural insurance regime, and dilute the risk within a larger pool with insurance contracts. Through sharing the financial supply risk, we can then ensure stable and sustainable development for agricultural modernization, and eventually vitalize rural areas.
Jiang Song is from the School of Economics and Finance at Chongqing University of Technology.
Edited by WENG RONG