China, concerned about rising food costs, a growing rural-urban wealth gap and the ability of the country to feed itself, is making it easier for lenders ranging from HSBC Holdings to mini-lenders such as UA Easy Lenders to operate.
That will help the country's 700-million strong farming community secure more loans, boosting the opportunities for stronger growth in agricultural output and so adding even more muscle to the country's fast-growing economy. Agriculture, along with other primary industries of forestry, animal husbandry and fisheries, accounted for almost 12% of the country's gross domestic product in 2006.
Better access to loans may also help ease the drift of young people from farm areas to big-city factories, and brake the consequent disintegration of rural communities and infrastructures.
At one extreme, the government plans to ease curbs on how international banks such as London-based HSBC can operate in rural areas, Bloomberg reported this week, citing two people with knowledge of the matter.
Other regulatory changes will now allow small-loan operators such as UA Easy Lenders, an outfit based in Shenzhen, near Hong Kong, to raise money from banks, rather than just from shareholders and donations.
That will strengthen their ability to lend money to farmers whose limited needs and lack of assets for collateral often leave them shunned by bigger lenders. More loans should mean more investment in modern machinery, higher spending on better seeds and fertilizer, so improving output and farmers' incomes.
Growth in rural per capita income, while apparently strong at 9.5% last year, lagged the near 12% expansion in the economy as a whole in 2007.
The government's efforts to boost access to funds in the countryside come as inflation is hitting near 12-year highs of 8.5%, led by increases in food prices, which in April were 22% higher than a year earlier. Farmer's are meanwhile having to rebuild after much of the countryside was hit earlier this year by the worst snowstorms in five decades.
HSBC, which set up a rural bank in Suizhou, central Hubei province in December, 2007, is so far the sole foreign-owned countryside lender in China. Citigroup said in October last year it would set up at least 10 rural banks and loan firms in China.
The country first allowed foreign firms along with local investors to establish rural banks and loan companies in selected areas in December 2006. Up until now, overseas banks have had to oversee these businesses through offshore entities with separate teams for each unit.The rule change would let them operate through a single unit or a China-incorporated subsidiary, according to Bloomberg. That would cut costs and the problems of finding numerous experienced branch-management teams.
Greater impact might be felt by the changes covering companies such as UA Easy Lenders that lend out small sums to businesses, operations sometimes referred to as micro-finance. Rates charged are high, but access to funds to support lending has until now been severely restricted.
Micro-finance, with small-volume lending to farmers or laid-off workers to help them start up their own businesses, has increased in importance as Beijing seeks to improve rural development and reduce the widening wealth gap between city and countryside. Such loans have historically been granted via specialized agencies such as rural credit co-operatives.
To expand the sector, the People's Bank of China in early 2006 began a loosely regulated pilot scheme in some of the more agricultural provinces such as Shaanxi, Shanxi and Sichuan, involving establishment of seven small-loan companies. Their number has since grown to about 300.
Faster expansion has been hindered by the absence of official policy to define the nature of such lenders, their funding resources and such issues as bankruptcy processes.
"Also,given that the central bank has no rights to grant licenses, small-sum loan companies have been shut out of the [official] financial sector," said Zeng Gang, an economist with the Research Institute of Finance under the Chinese Academy of Social Sciences.
The China Banking Regulatory Commission (CBRC) and PBoC recent issue of guidelines go some way to removing these hindrances.
Under the new guidelines, the small-loan companies can now raise funds from not more than two banks, in addition to existing channels such as shareholders and donations. Zeng believes this will encourage establishment of more small-loan companies.
Along with the new funding opportunities, limits have been set on rates lenders can charge their customers. To encourage better pricing of credit risk, small-loan lenders can set rates with an upper maximum of four times the rate offered to the small-loan company by its funding bank. As a lower limit, they must charge at least 0.9 times the one-year lending rate set by the PBoC, at present at nine-year high of 7.47%.
UA Easy Lenders, one of the pilot companies, offers loans at an interest rate of 27.6% per annum. The country's benchmark one-year lending rate is at a nine-year high of 7.47%.
"The release of the new guideline is surely a good thing for the small loan lenders. Now we can officially operate on the mainland," said Li Jie, director and general manager of Zhongan Xinye in Shenzhen, which offers financing for small business owners.
Wang Tao, a farmer-turned-businessman, said he is going to buy two more machines for making furniture after receiving 40,000 yuan loan from Zhongan Xinye. This is the second time he has borrowed money from the local lender. "With the immediate cash, I now can meet increased spending for the machines and pay for new hires," he said on the phone.
At the beginning of the year Wang received his first loan of 20,000 yuan from Zhongan Xinye and paid it back six months later. He said he will continue to apply for loans from Zhongan Xinye if he needs money again.
"For small businesses like us, it is hard to apply for loans from the large banks such as Bank of China and China Construction Bank. However, at privately owned small-loan lenders, we get immediate money to smooth out our cash flow," he said.
The transformation in recent years of big national banks into commercial banks, bringing an increased focus on cutting costs and making profits, has cut financial support for small businesses in rural areas. Farmers largely depend on rural co-operatives for financing. These control about 10% of the mainland’s 42.9 trillion yuan in deposits and tend to make small loans of 500 yuan to 20,000 yuan. By the end of July in 2007, there were 80,692 credit co-ops, with an overall a capital adequacy ratio of 8.38%. Loans granted were worth 2.16 billion yuan, of which 56% was for agricultural purposes. The bad loan ratio was below 2%, from 14.8% as of the end of 2005.
In July 2006, Agricultural Bank of China started to be restructured to promote rural finance and at the end of last year the CBRC approved the creation of a postal savings bank to develop retail and intermediary businesses.
About 60% of farmers and half of small business owners in rural areas have no access to banking services, according to recent research by Beijing's Qinghua University, which also find high demand for loans from these sectors.
A researcher said inadequacy of rural financial services has hindered development of the Chinese government's san nong policy of "agriculture, villages and farmers", which aims to better balance rural and urban development and revenues.
About 60% of the country's 1.3 billion population live in rural areas. Fast economic growth and social development over the past decade has been led by eastern coastal areas and industrial centers, with the vast countryside left far behind. That has also hindered the country's efforts to build a harmonious society.
Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said the guideline on small-sum loan companies will still leave unresolved issues for small lenders.
"These companies are only given licenses to offer loans but they are not allowed to take deposits from local residents - different from many small-loan companies in the world, which grant small loans to poor people without taking collateral," he said.
He said the restriction on taking deposits will affect the sustainability of these projects because they might lack the capital to grow. He called for the government to allow micro-credit institutions to take deposits and develop micro-finance projects such as those set up by the 2006 Nobel Peace Prize winner Muhammad Yunus, a Bangladeshi economist and founder of Grameen Bank.