Hidden Fundraising and Lending by Agriculture-Related Enterprises: Runaway Cases Sound the Alarm

Reporters interviewing in Hubei, Shandong, Henan, Hebei and other places found that small and micro agriculture-related enterprises, including self-employed businesses and farmers' cooperatives, have in recent years engaged in various forms of fundraising and lending activities in increasing numbers. After absorbing deposits, they on-lend to others at high interest; due to broken capital chains, cases of bosses “running away” or “losing contact” have already appeared in some areas, causing many cooperative members and farming households to become the ones left holding the risk.

Industry insiders and experts say similar private financial activities are currently characterized by strong concealment and broad reach, and urgently need attention.

⟦NL> Bosses “Run Away” After Collecting Money

Wangji Subdistrict Office in Xinzhou District, Wuhan City, is an aquaculture village, and many fish farmers have joined the Qunfa Aquaculture Cooperative. At the beginning of this year, cooperative chairman Wang Qunfei collected 700,000 yuan in “feed prepayments” from members, including 250,000 yuan of his own money, and handed it to Xianfa Feed Co., Ltd. of Xiantao City, Hubei. At the end of May, the feed company went bankrupt, and the boss “ran away”, which at one point triggered petitions by the fish farmers.

During interviews, reporters noticed that the money Wang Qunfei collected from members was neither simply used for mutual aid among members nor an ordinary “feed prepayment”.

Judging from the contract signed between the cooperative and the company, in addition to being able to purchase a corresponding amount of feed, the biggest feature of the “prepayment” was that payers enjoyed interest returns to varying degrees. Depending on the time of payment, the “rebate” was divided into three tiers: prepayment before January 31 earned 1,000 yuan in interest per 10,000 yuan; prepayment before March 31 and April 15 was reduced accordingly to 800 yuan and 700 yuan. At the same time, feed prices remained at the level at the time of payment and would not rise during peak season, and some also promised a certain amount for travel expenses.

Gao Guangming of Changgang Farm in Changgang Town, Echeng District, Ezhou City, Hubei, told reporters that he raised 3.23 million yuan from more than 170 member households, and together with 400,000 yuan of his own money, gave a total of 3.63 million yuan to Xianfa Company. “During this period, fish farmers come every day demanding money and feed; the threshold of my home has been worn down by their footsteps.”

According to the reporters' investigation, similar incidents have occurred to varying degrees in some places.

According to a relevant person from the Intermediate People's Court of Xuchang City, Henan, in 2012 and 2013, courts across Xuchang handled more than 6,000 private lending cases, 17 fund-raising fraud cases and 11 illegal absorption of public deposits cases, more than in previous years. After sorting through them, it was found that in cases where rural small and micro enterprises absorbed deposits and on-lent to others at high interest, then failed to recover the loans in time and were unable to repay depositors, there were as many as 1,611 private lending cases alone, involving more than 2,800 rural residents and 158 small and micro enterprise owners.

High Interest as “Bait”

Reporters found in interviews that the reason some members chose to put money into the cooperative was not only the preferential activities they could enjoy, but more importantly the temptation of high interest.

In March this year, Qunfa Cooperative member Wang Liujun handed 80,000 yuan to Wang Qunfei in one go. He told reporters that feed prices were rising too fast, so since 2001 he had adopted the “prepayment model” to buy feed. “Paying in advance made each ton about 300 yuan cheaper, and I could also get a little interest. I never expected the company to collapse, and I don't know where to go to get this money back.”

Relevant cooperative members in Guantao County said that after contributing funds they could get cable television for free and also obtain wheat seed or corn seed for free; depositing 10,000 yuan came with seed for one mu of land, and more importantly, the cooperative's interest rate was high. According to the agreement, some local cooperatives offered annual interest of 1,600 yuan per 10,000 yuan raised.

Behind the high-interest temptation offered to members and farming households, most small and micro agriculture-related economic entities such as cooperatives and self-employed businesses engaged in hidden lending, with considerable risk.

Reporters learned during interviews in Guolutan Township, Gushi County, Henan, that in 2011, local agricultural product broker Liu Dongsheng “borrowed” money from villagers, eventually “borrowing” more than 5.5 million yuan from more than 110 villager households. In November 2013, because he could not recover the money after on-lending it, Liu Dongsheng committed suicide; the villagers who had contributed funds jointly sued Liu Dongsheng's son in court, and the case is currently being heard.

Villager Wang Benfang “lent” Liu Dongsheng a total of 120,000 yuan in four installments. She told reporters that Liu Dongsheng's borrowing interest was 720 yuan per 10,000 yuan per year, much higher than bank demand deposit interest. The reason so many people lent money to Liu Dongsheng was that they were attracted by the high interest he offered.

A relevant staff member of the Gushi County Court in Henan said that according to a preliminary investigation, after “borrowing” money, Liu Dongsheng engaged in on-lending and profited from the interest spread.

He Xuesong, associate professor at Xinyang Normal University in Henan, had previously conducted research on rural mutual fund cooperation. According to his analysis, the current increase in fundraising and lending activities and the frequent “runaway incidents” in some rural areas are in fact the result of multiple causes working together. On the surface, farming households cannot resist the temptation of high interest, but behind this, relevant agriculture-related enterprises did not use the funds for their own development after “raising” them, but instead issued usurious loans outward in pursuit of “quick big money”. Because similar financial activities are widely dispersed, broad in scope and highly concealed, and sit in a vacuum of multi-party supervision, problems are relatively likely to arise.

Strengthen Supervision and Address Both Symptoms and Root Causes

Rao Yajun, chief judge of the Guolutan Tribunal of the Gushi County Court, told reporters that as villagers resorted to law to collectively demand repayment, court staff promptly sealed up Liu Dongsheng's agricultural product purchasing station, auctioned 1.2 million jin of red jute, and froze Liu's relevant bank accounts. Because many people are involved, the court is currently investigating debt relationships and striving to begin repayment work as soon as possible.

Mending the fold after a sheep is lost is not as good as preparing beforehand. Based on the opinions of industry insiders and experts, the hidden fundraising and lending phenomenon of small and micro agriculture-related enterprises has the following characteristics:

First, it uses legal forms to conceal illegal purposes. Because the profits from maintaining production and operations through private borrowing are lower than the returns from lending at higher interest rates, some small and micro enterprises borrow money from villagers at high interest under the pretext of needing funds for production and operations, absorbing funds, and then on-lend to others at even higher interest rates to profit from the interest spread. Such deposit-taking and lending methods are highly concealed, and the risks are not easy to monitor.

Second, many people are involved. Because the borrowing rates of small and micro enterprises are far higher than the deposit rates of banking and credit institutions, some villagers with weak legal awareness cannot resist the temptation and lend out all their personal savings or even the savings of relatives and friends; such cases involve a relatively large number of families and people.

Third, the social harm is great. After upstream borrowers fail to repay principal and interest in time, causing the capital chain to break, individual small and micro enterprises are unable to repay villagers' principal and interest, triggering a large number of private lending disputes; in addition, some individual small and micro enterprise owners who have fled do not appear in court even when sued, resulting in many default judgments and no property available for enforcement, leaving villagers unable to recover principal or interest and easily leading to incidents that threaten stability.

Liu Mingxing, deputy director of the Agricultural Economics Division of the Henan Provincial Department of Agriculture, suggested that in response to the financing difficulties of small and micro enterprises, the state should introduce more specific policies to alleviate problems such as their reliance on private lending.

At the same time, financial supervision must be strengthened, private lending behavior must be regulated, and a management mechanism with controllable risks, effective supervision and strong binding force must be established. Publicity and education should also be strengthened to remind farming households to clearly recognize risks and prevent themselves from being tempted by profit.