Well-functioning rural financial infrastructure is essential to China's bid to build a new countryside. Any progress in expediting development of financial institutions in rural areas is, therefore, more than needed.

The suggestion by the China Banking Regulatory Commission (CBRC) that small rural lenders may be allowed to accept deposits comes as a much needed shot in the arm for the country's rural financial reform.

Poor rural finance used to be not only a result but also a cause for the underdevelopment of China's rural areas.

In spite of robust economic growth that is elevating China from a low-income country to a middle-income one, Chinese farmers still earn too little. They earned only an average 3,587 yuan ($478) last year, less than a third of the income of city dwellers.

Such a low-income level has made rural areas increasingly less attractive to domestic banks most of which are eager to transform themselves into ingenious profit-making commercial lenders.

Meanwhile, Chinese farmers and rural enterprises have few places to access funds for their businesses. Official figures show farmers rarely obtain loans above 5,000 yuan.

The pilot program to build new financial institutions in rural areas indicates that the authorities have come to grips with the necessity to provide a better rural financial service.

So far, 23 rural financial institutions in the pilot areas have opened for business, including 11 village banks, four rural loan organizations and eight rural cooperative fund associations. And eight of the total 23 have even begun to report profits, defying the traditional wisdom that rural finance hardly makes money.

The CBRC's announcement earlier this month to extend the pilot project of building more rural financial institutions from the original six provinces to all the country's regions marks a recognition of the latest progress of rural financial development.

Now, by expanding rural lenders' business scope from issuing loans to accepting deposits, the banking regulator has made clear its determination to further improve financial services in rural areas.

Prudence is certainly justified for the nationwide expansion to avoid an irrational boom in rural financial institutions.

(China Daily 10/25/2007 page10)