County finds answer to rural credit challenge
By Bai Xu (China Daily)
Updated: 2005-11-05 06:18

For decades, Chinese and foreign experts have wrestled over ever-more elaborate micro-credit schemes to lift Chinese farmers out of poverty. But farmers are too poor to present any collateral for the loan. It has long been assumed that there is no solution to the problem.

Now it seems a remote county in the Xinjiang Uygur Autonomous Region has done the impossible all on its own. The Hutubi County solution creates a new kind of collateral: the old-age pension card.

A typical Chinese farmer's access to a loan has been either by using land or house as collateral or by applying for a group loan with at least four other families joining together.

But farmers in the country rarely own their land, and even when they do, the acreages are too small for useful loans and they rarely have the ownership to their houses. Coming to group loans, they carry the risk of all-round loss even if only one family defaults.

Since its inception in 1997, the Hutubi old-age endowment insurance fund has grown at a rate of 7 per cent a year into 10.8 million yuan (US$1.35 million) today, outperforming the meagre bank interest rate of 2.25 per cent. Through compound interest, the fund has already doubled.

Such results attract attention: Officials and experts from all over China are flocking to the small county 76 kilometres away from Urumqi to study the "Hutubi model." Neighbouring Manasi County copied the idea in 2003 and counties in Jiangxi and Shanxi provinces have already decided to introduce the programme.

"It's the first project in China helping farmers build their assets with their own money," said Yang Tuan, professor of sociology and deputy director of the Social Policy Research Institute at the Chinese Academy of Social Sciences.

"The loan is really convenient," said Yuan Zhengnian, 64, owner of 140 sheep and 24 hectares of cotton and wheat, all of which promise an annual income of about 50,000 yuan (US$6,250) a year on top of his 1,600 yuan (US$200) old-age pension.

The key to Yuan's well-off situation is his old-age endowment insurance card, which for seven years has been used as a kind of informal credit card in Hutubi County. By pooling cards with neighbours and relatives, Yuan has been able to finance the purchase of a 41,000 yuan (US$5,125) bus for his son-in-law.

"It not only provides money for farmers to produce while they are young and to live off when they are old," says Zhang Shifei, a member of the Chinese Academy of Social Sciences, "but also harmonizes the relationship of neighbours and relatives when they share their old-age insurance cards, boosting the confidence of participants like Yuan."

Or, as Yuan puts it: "It's just like growing two melons from one seed."

Yuan has lent his card to others. With the new bus, his son-in-law will hand back more than 10,000 yuan (US$1,250) to him this year. Realizing suddenly that he has run out of fingers to explain all his various incomes, the 64-year-old breaks out into a broad grin: Nine years ago, his eight-member family together earned less than 30,000 yuan (US$3,750) a year growing corn on 11.3 hectares of land.

Back in 1997, Yuan did not even have enough money to deposit into an endowment insurance fund for his old age, the new national scheme that promised participants a pension at 60 through the accrual of generous compound interest on their deposits. After hearing that the central government had promised to underwrite the whole scheme at 12 per cent per annum, Yuan borrowed 13,000 yuan (US$1,625) from a local co-operative bank and deposited it with Guo Xincai, director of the Hutubi County Rural Old-age Insurance Office.

But the national pension scheme proved so porous and vulnerable to abuse by the local authorities that the central government abandoned its 12 per cent pledge in the summer of 1998, slashing the annual rate to 6 per cent.

Accounts were frozen: Nobody could open a new account or add to their old accounts. In Hutubi, farmers panicked. Within one financial quarter, more than 1,400 of 10,089 participants took their money out, removing 2.7 million yuan (US$340,000 million) in a stroke.

Yuan was an exception. He held out for a miracle.

The dilemma facing the Hutubi Rural Old-Age Insurance Office was what to do with the remaining money.

"If I just left the money deposited in a bank account, it was not only unhelpful to the farmers before they reached 60 and became entitled for their annual old-age pension, but it was also quite likely to depreciate in value," explained Guo.

"I couldn't just stand by and watch their money disappear." That was when Guo hit upon the first of two brilliant, yet simple, ideas: He would lend the money back to the farmers, at the standard bank rate of 7.665 per cent interest.

The only problem was that according to national law, only banks and co-operatives - not administrative units, such as the Hutubi Rural Old-age Insurance Office, were legally entitled to make loans. It had been local officials like Guo making unauthorized loans to their buddies that had jeopardized the whole scheme in the first place.

Thus the "Hutubi model" began in secret, far from prying eyes. On four occasions, Guo had to suspend the scheme when auditors came sniffing. Then, after he was fined 10,000 yuan (1,234), Guo hit upon his second bright idea.

First, he convinced his local bank to accept insurance cards as legal collateral for the fund. Second, he asked the local bank, as a legal entity, to administer the lending of all moneys from the Hutubi Rural Old-Age Insurance Office bank account. Now, at last, Hutubi was not just successful, but legal and its results could be reported.

In 1997, Asylbek Muhan was desperate. His 67-year-old father was sick with hepatitis and gall bladder problems. He had only 0.28 hectares of land. At the going rate for his land, he knew at best he could borrow 3,000 yuan (US$375) from the local bank. His father's treatment was going to cost at least 5,000-6,000 yuan (US$625-750) a year.

Then the 32-year-old Kazak heard stories about the Hutubi loan scheme run by Guo. By combining his own and his parents' insurance cards, Asylbek Muhan obtained a sizeable loan to buy more land. From the land, his family income increased, medical costs were covered and today, his parents enjoy an annual old-age pension of 200 yuan (US$25) each.

Asylbek Muhan is so happy that he wants more endowment insurance so as to "acquire more capital through our own cards." Both his brothers, who did not apply before 1997, want to join in, too. This year Asylbek Muhan borrowed three cards from his neighbours to get a loan of 10,000 yuan (US$1,233).

Guo has been relaxing the rules so that cardholders can borrow up to 90 per cent of their initial down payment, where once they could borrow only 50 per cent. But even this does not seem to be enough.

By June 30, the Hutubi Rural Old-age Insurance Office had lent 55.3 per cent of its endowment insurance cardholders amounts varying between 1,000 and 30,000 yuan (US$123 to US$3,750). On the rare occasion a participant could not repay the loan in full, he was punished with an interest rate of 9 per cent. But so far, none of the 4,516 participants has defaulted.

Almost 99 per cent of the 7 million yuan (US$880,000) lent so far has gone into boosting farm production, according to Zhang Shifei of the Chinese Academy of Social Sciences. For a year now, the academy has been watching the programme very closely indeed.

"Two problems in rural areas have been bothering policy-makers concerning insurance for old age: funding and how to maintain its value," said Yang with the academy, "and the Hutubi model has resolved them both."

For the experts back in Beijing, Hutubi could be the answer to other urgent problems. As Zhao Dianguo, head of the Rural Social Insurance Department under the Ministry of Labour and Social Security said, "This model could be used for farmers whose land has been expropriated, migrant workers and even laid-off urban workers."

(China Daily 11/05/2005 page3)