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China pushes rural spending for 25m job seekers

Written by Sim Kih

Tuesday, 03 February 2009 18:00

Huge masses of migrant workers returning to subsistence standards of living may lead to a collapse in China's consumption demand.

WHETHER CHINA can hit GDP growth of 8% in 2009 hinges in part on the extent to which its 20 million laid-off migrant workers find gainful employment back in their home villages.

As many as 20 million or 15% of China’s 130-million migrant worker population have lost their jobs in recent months according to a survey by China’s Ministry of Agriculture.

Including new entrants to the job market, 25 million migrant workers from villages will be looking for jobs in 2009, according to official estimates.

Soaring unemployment in the US (7.2% as at end 2008), Europe (8%) and Japan (4.4%) were accompanied by massive factory closures in China, shattering investor hopes that the developing economies could quickly “decouple” from the leading importing nations.

After all, exports accounted for a third of China’s gross domestic product in 2008.

Is China’s miraculous domestic demand story of villagers evolving into employees and entrepreneurs with consumption power ending?

If these migrant workers and their families return to subsistence standards of living – on the harvest of farmland a mere third of an acre and without cash income, the fear is a collapse in domestic demand leading to social unrest.

That’s why rural income and infrastructure expenditure is high on China’s stimulus agenda now.

Specifically, the government intends to stimulate capital expenditure in farms, increase farmers’ income and employment rates through agricultural subsidies and price supports for agricultural produce.

Annual per-capita net income of Chinese farmers is expected to grow 8.7% this year to Rmb 5,177 according to a Chinese Academy of Sciences report released a few days ago.

If the economic target is achieved, the growth rate of farmers' income will exceed 6% a year for the sixth year in a row.

Rural infrastructure development includes improving facilities for safety in methane gas, drinking water, upgrading rural highways and power grids, hydro projects and large-scale irrigation.

These measures may benefit upstream players in China’s food chain such as animal drugs maker China Animal Healthcare, fertilizer producer China XLX and dairy (seed) producer China Milk.

China Food Sector

Price
cts

Mkt Cap S$mln

Sales S$mln

Historic PE

Operating Margin %

Gross gearing

Price-to-cashflow

Account Receivable Days

SYNEAR FOOD

26.5

364.4

489.7

6.0

21.1

2.6

5.5

56.1

PINE AGRITECH

270.0

357.7

5.4

34.1

110.4

5.6

32.7

CHINA XLX FERTILIZERS

38.5

385.0

340.4

3.6

20.6

33.1

3.9

3.7

CHINA MILK

280.7

138.3

2.5

73.2

52.4

2.7

29.0

CHINA ANIMAL HEALTHCARE

9.5

124.3

60.7

8.4

44.9

2.4

4.4

16.6

CELESTIAL NUTRIFOODS

216.4

397.5

1.9

29.8

75.1

2.0

73.2

Data source: NextInsight / Bloomberg, 3 Feb 2009

Rally in prices of fertilizer shares

Measures benefiting fertilizer producers and users include :

1) Maintaining subsidies for fertilizer producers in power tariffs, natural gas and rail freight;

2) Removal of price caps on fertilizers;

3) Increasing direct subsidies to farmers to mitigate hikes in fertilizer prices; and

4) Raising purchase prices for the national rice and wheat inventory by another 13%-15% in 2009.

A recent rally in the fertilizer sector saw HK-listed Sinofert and China BlueChem leap some 60%-70% from lows touched last Oct, but the share price of SGX-listed China XLX Fertilizer failed to sustain a rally.

UOB Kayhian maintained its “overweight” rating on the fertilizer sector yesterday.

It had a “buy” call on China XLX with a target price of 57 cents, which is 48% above the last close price of 38.5 cents.

China XLX is a leading urea producer in Henan.

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