Seizing opportunity

A recent report by China's central bank once again highlights the difficulties that farmers, the backbone of the nation's phenomenal economic growth, feel when trying to get access to credit from financial institutions.

At the end of 2007, more than 2,800 townships or counties in China, or 7 percent of the total, had no banks or small credit companies at all, the People's Bank of China says in its report, pointing to an enormous vacancy for financial services in those areas.

As a matter of fact, despite the long-rooted weakness of financial service in the nation's vast rural areas, Chinese banks are increasingly focused on the wealthier urban regions.

Official figures show that the number of financial players' outlets serving rural areas stood at 124,000 in 2007, a decline of more than 9,800 compared with three years ago.

As more Chinese banks are pulling out from the less profitable rural markets, however, their overseas competitors have shown tremendous interests in the nation's underdeveloped regions and are rolling out rural outlets one after another.

HSBC, Europe's biggest bank, which celebrated the opening of its second village bank near Chongqing municipality earlier last month, plans to further tap the rural market by opening two more rural branches before the end of the year - of course with bigger the ambitions in the rural market for future.

Others including Standard Chartered Bank and Citi Bank are also seeking expansion or further development in China's vast rural market.

"The tremendous potential in China's rural markets is bringing foreign banks here," says Chinese Academy of Social Sciences' researcher Du Xiaoshan.

China's rural financial market has long been underdeveloped, especially since major State banks retreated from rural areas beginning in the late 1990s because of high costs and inadequate business volumes.

As can be seen from the four major State banks, their presence in rural finance has been declining, with the number of outlets dropping 6,700 in three years from 2004 and rural banking employees down by 38,000 people over the period.

The presence by other financial players in underdeveloped regions is also on the decline, as the number of rural credit cooperative outlets was reduced by more than 9,000 from 2004 to 2007.

"Large-scale commercial banks are not in advantageous positions when offering financial services in rural areas," the central bank says in the report. "Their business models cannot adapt to small-scale farming by individual owners nor resolve the high risks and colossal costs along with imbalanced information sharing."

Also, compared with the US, where 5,000 of its 8,000-odd banking institutions are small players that target customers within a county, the number of county-level local financial incorporations is still insufficient.

"China has abundant big banks, but the small and medium-sized financial institutions close to farmers, especially those micro organizations rooted in rural areas, are in need," the central bank says.

But foreign banks have seen rising opportunity in China's less developed areas as China plans to make it easier for foreign banks to set up rural operations to boost funding for farmers.

Vincent Cheng, chairman of HSBC, says the establishment of Chongqing Dazu HSBC Rural Bank, which marks the first entry by an international bank into the rural market in western China, is an important part of growing the bank's rural finance business on the Chinese mainland.

"HSBC seeks to bring its international experience to the rural market in China and support the development of a sustainable rural economy," he says. Behind his courteous words, the British bank lavished 40 million yuan in registered capital, or four times that for its first rural subsidiary in Hubei province, and employs 20 staff in the Chongqing subsidiary.

The rural branch provides a wide range of financial services, enabling a rural enterprise to borrow up to 2 million yuan while an individual is entitled to credit of up to 100,000 yuan. As the business grows, the bank plans to roll out more products and services to meet the growing needs of the local rural economy, including the provision of loans to farmers through collaboration with farming associations.

Late last year Standard Chartered Bank, one of the earliest foreign lenders to locally incorporate in China, joined the "rural finance campaign" by launching its first micro-finance program to provide small loans to cotton farmers in Awati county in the Xinjiang Uygur autonomous region.

Financial giant Citi has also proposed to make inroads in China's vast rural areas.

Analysts say foreign lenders bring some hope to Chinese farmers and will promote healthy competition in rural financial markets.

At least the Agricultural Bank of China, one of the four big State-owned commercial banks that targets rural residents and enterprises, has felt the pressure. According to Xinhua News Agency, the lender has received approval from industry regulators to set up township banking units in the northern Inner Mongolia autonomous region and central Hubei province.

Zhang Yun, the bank's vice-president, says the new units would start operation soon. In addition, the lender also plans to acquire stakes in rural financial leasing firms and rural insurance companies.

In the next three years, the bank plans to get 80,000 to 100,000 small- and medium-sized corporate clients and expand its service network coverage to half the nation's 250 million rural households.

(China Daily 10/06/2008 page3)