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High on Hype

Companies are betting on looser policies for industrial hemp, but even as their share prices soar, technology and the regulatory environment are moving slower than expected

By NewsChina Updated Jun.1

The little-known town of Qujing, in China’s southwestern Yunnan Province, has been the focus of a recent stock market frenzy, after several listed firms announced they would start planting industrial hemp there. Speculators are betting that the market for industrial hemp and its byproducts will soar following similar trends in countries that have already legalized marijuana for medical purposes.  

More firms are eyeing suitable sites for plantations in other parts of the province, or in the northeastern province of Heilongjiang. So far, they are the only provinces in the country where planting and processing industrial hemp is legal, but others are expected to follow.  Industrial hemp is a variety of cannabis which contains less than 0.3 percent tetrahydrocannabinol (THC, the psychoactive ingredient in marijuana) and thus is regarded as having little use in making narcotic drugs. Canabidiol (CBD), a compound in hemp that does not induce physical dependence but is of value for medicine, food and cosmetics, is particularly regarded as a scarce resource for its effect in helping to relieve cancer symptoms, pain relief and certain neurological disorders like epileptic seizures. It accounts for up to 40 percent of extracts from the plant. In the past, use of compounds containing THC and CBD, which have similar chemical formulas, were both restricted, but now as THC can be stripped away, many countries are allowing CBD derivatives to be used for medical purposes.  

The market for CBD products is expected to surpass US$10 billion in the near future. The global market for legal cannabis was US$12 billion in 2018, and could reach US$166 billion by 2025, according to statistics from Euromonitor International, a market research firm. The rush to plant industrial hemp in China is based on the expectations that the restrictions will be relaxed and the market will boom in the near future. 

In the past few months, some companies listed on China’s A-share stock market have seen their share prices soar due to perceived connections with industrial hemp. Often it is based on tenuous information – some have received a license to plant hemp, but others have merely announced they will enter the sector. By late April, bets on industrial hemp have seen share prices for these firms soar by more than 170 percent, according to Wind, a provider of financial information.  

Alongside this rise, the price of planting and processing licenses has risen as firms rush into the industry at the same time as the licensing process has been tightened. But uncertainties over policy and technological development have overshadowed the market mania in the fledgling industry. 

Effective Treatment
In 2017, New Zealand, Germany, Brazil and Argentina announced the legalization, though to different degrees, of the medical use of cannabis and CBD products. In October 2017, the World Anti-Doping Agency (WADA) removed CBD from the Prohibited List. In February 2018, the World Health Organization (WHO) released a report confirming that CBD does not pose health risks for humans and animals and is an effective treatment for serious diseases including epilepsy and Alzheimer’s. Many more countries then started to allow limited-access to CBD products. As calculated by TF Securities based in Hubei Province, by January 2019, 41 countries have given legal status to medical cannabis and more than 50 countries have legalized CBD.  

At the end of 2018, the WHO recommended to the UN Commission on Narcotic Drugs that pure CBD should not be placed under international drug controls, referring to regulations in the Single Convention on Narcotic Drugs of 1961, an international treaty on drug control. 

“If the proposal is accepted, China, as a signatory state, will probably revise its prohibition,” Li Yuebo, an analyst with Industrial Securities, told NewsChina.  

In China, the application of industrial hemp is limited to fibers and seeds, and use in medicines and foods is banned. This rule was reiterated by China’s National Narcotics Control Committee (NNCC) in March. Yet while more than 30 countries plant industrial hemp, China is the biggest producer and exporter.  

Many Chinese companies are making plans even without signs of further loosening control on CBD. Among them are Shunhao Stock, which announced it would plant 1,000 mu (666,666.7 square meters) of industrial hemp as a start, and Longjin Pharmaceutical Company which announced it would to plant more than 10,000 mu (6.7 million square meters) of industrial hemp in 2019.  

Most new entrants to the market are pharmaceutical companies which intend to process, research and develop medication and health products.  

According to Su Jianguang, a researcher at the Chinese Academy of Agricultural Sciences, big pharmaceutical companies will provide capital support for the industry, as well as valuable management experience in the whole industrial chain from the extraction of CBD to the sale of new medicine.  

“The point is to research and develop new medicines. Even internationally, it’s still in the early stages, but there is huge demand,” Su said, who expects the market will explode in the next few years.  

Local governments are eager for investment. In 2010, Yunnan Province, where wild cannabis grows and ethnic groups have long exploited it, became the first in China to legally allow the planting and processing of industrial hemp. By December 2018, Yunnan had issued 45 licenses for planting and six for processing the leaves and flowers.  

Li told NewsChina that just as licensed hemp growers are reaping the dividends of higher share prices, the price of licenses is also rising. “A planting license can cost between 10-20 million yuan (US$2.9m), while a license to process costs between 1.1 and 1.6 billion yuan (US$232.8m).” Cooperating with companies, authorities in Heilongjiang, which legalized the business in 2017, are pinning their hopes on hemp as an important industry for its future economy, according to a development plan it published in March 2018. It plans to develop into the largest industrial base for industrial hemp in the country, even globally.  

Neighboring Jilin Province also announced in 2018 that it would license industrial hemp. Chinese companies are also seeking cooperation with firms where planting is legal to explore opportunities in overseas markets. 

The growing CBD market will make the farmland even more valuable, said Zhao Lining, a research fellow at the Chinese Academy of Agricultural Sciences. According to Zhao, given the current price of CBD in the international market, one single mu (666.7 square meters) of industrial hemp used for extracting CBD is worth at least 24,000 yuan (US$3,492).  

But according to an insider quoted by the The Beijing News in April, many traditional growers want to cash in on their licenses, because despite the potential value in the industry, they do not have the resources to exploit it. 

Potted cannabis plants at a growing center in Austria, May 4, 2017

Hard to Harvest
Meanwhile, business activities in the sector face stricter supervision. In March, the NNCC demanded anti-drug departments in all provinces to tighten the approval process for industrial hemp. It asked that wrongly issued licenses be rescinded and for the suspension of business activities that are in violation of convention’s principles.  

In Yunnan, planting and processing licenses are issued by security agencies at county level or above. Planting licenses require companies to be engaged in industrial hemp-related business, with permitted sources of seeds and strict accounting systems. Applying for a processing license is much more difficult. A company needs to have registered capital of no less than 20 million yuan (US$2.9 million), plans for the sourcing and usage of raw materials, the processing and types of products, as well as a controlled work environment with special detection equipment to prevent misuse.  

The high benchmark explains the scarcity of processing licenses, noted Zhao Lining. He said that taking in the cost of land, equipment and labor, a company needs tens of billions of yuan to give it a try in the processing business, and in the end, this huge investment does not guarantee a safe bet as it is up to anti-drug agencies to decide if the technology is in compliance with regulations, Su Jianguang said.  

The government tightened licensing because even though industrial hemp contains less than 0.3 percent THC, factories could extract THC of high purity that could be used to make drugs, Su said. 

 “The whole process must be supervised strictly and controlled by drug control agencies so it’s completely transparent,” Su said.  

The industry surrounding industrial hemp includes propagating, planting, extracting, research and development and developing medications. Chinese companies mainly focus on planting and extracting. Gaps remain between China and some countries in several aspects, including in seed resources and extracting technology.  

The most common hemp seeds in China contain 0.8-0.9 percent CBD, Su said. “Seeds containing 1.33 percent CBD are about to be introduced in Yunnan. The Chinese Academy of Agricultural Sciences has propagated seeds with 3.6 percent, 6 percent, or even higher CBD content,” he said.  

Yet in the US, the percentage of CBD in seeds is already nearly 16 percent. The lower the percentage of CBD, the more it costs in planting, processing and wastewater treatment for the same amount of CBD.  

“This is one of the reasons why there are low returns and a lack of competitiveness in the domestic industrial hemp business,” Su said.  

Zhao Lining thinks it is equally important for companies to develop extraction technologies to lower costs, particularly as the profit from CBD products is expected to decline in an increasingly open market. 

As Sinolink Securities pointed out in a March report, China’s patents in industrial hemp are mainly for propagation or in textile production. There are few patents for CBD extraction. Many Chinese companies rely on foreign technology.  

But demand is still high, Zhao said, as hype on the capital markets is boosting interest in the sector. This year’s seeds are already sold out, given the increased area designated for planting, said Yang Ming, a professor at the Yunnan Academy of Agricultural Sciences. The government is intentionally restricting the number of planting licenses, considering the limited production capacity of factories engaged in CBD extraction, Yang said.  

The Sinolink report highlighted that returns on investment may not be guaranteed due to policy uncertainties and technological difficulties surrounding extraction.  

In a statement sent to the Shenzhen Stock Exchange in April, Shunhao acknowledged that its hemp-related business faces external risks. Tonghua Golden-horse Group, which signed a cooperation contract with the Jilin provincial government, said it still waiting for the province to legalize hemp-related industries. For now, the market hype might be based on not much more than fumes.