China's financial sector is picking up momentum, but weak rural financing is still stretching the nerves of policymakers. To solve the intractable problem, the country needs to loosen regulations, and at the same time hand out generous policy incentives.
China has relied on state-owned commercial banks and rural credit cooperatives as a source of funding for agriculture, farmers and rural businesses. But those financial institutions face many bottlenecks such as a lack of market sensitivity, rigid management, as well as weak risk-control policies. That is why they lack the capacity to provide the expected financial services.
China has made some progress in soothing the thirst for capital in rural areas. The Agricultural Bank of China (ABC) has recently gone through a shareholding reform, but its service capacity remains limited. The country has successfully established a multi-level rural financial system, including the ABC, rural credit cooperatives, rural banks, asset management firms, micro-credit companies and the Postal Savings Bank of China.
However, that is far from enough to meet the need for funds in the countryside. Data from the Ministry of Agriculture showed that Chinese farmers relied on bank loans to obtain 20.31 percent of their capital in 2010, up 6.45 percentage points from 2003. But underground banks remained their largest source of financing, contributing 52.91 percent to their funds. Moreover, there were not any financial institutions at all in 2,312 towns across the nation at the end of 2010.
Worse still, structural problems are threatening to undermine the government's efforts to ease rural financing woes.
First, after listing its shares in Shanghai and Hong Kong, the ABC may have to focus on more profitable wholesale businesses, leaving agriculture and farmers in dire straits.
Second, a number of rural credit cooperatives have been transformed into rural commercial banks in recent years. The reorganization delivered a strong boost to the management prowess and the war chest of those financial institutions and helped them gain market share, but their support to agriculture and rural businesses may decrease as they increasingly commercialize their operations.
In December 2010, the Chongqing Rural Commercial Bank successfully debuted on the Hong Kong Stock Exchange. Since then, a large number of its domestic counterparts have applied to list on the domestic A-share market. Once that happens, the banks would face huge pressures from shareholders to reduce their less profitable rural businesses.
To tackle this problem China must strengthen efforts to increase the profits of rural banking. For instance, it would help if policymakers could allow more room for rural financial institutions to decide their own lending rates and service charges. Meanwhile, it is necessary to allow a favorable reserve requirement ratio and hand out tax waivers and subsidies to rural financial institutions.
In 2009, the country set a target of setting up 1,027 new rural banks by 2011. But the actual number established was only 726 at the end of last year. That means China still has a lot to do to loosen its financial regulations and should take more flexible measures to fulfill rural demands for funds.
This is an edited excerpt of an article recently published in the Securities Times
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