Big gaps

RURAL MARKET POTENTIAL: A clerk of the Hubei Suizhou Cengdu HSBC Rural Bank Co. Ltd. consults with a client (XINHUA)

Rural credit cooperatives are the primary financial institutions in China's rural areas, implementing both commercial and policy functions. Since the government stresses agricultural reform and production, it presses many non-business tasks, regardless of profits, on the rural credit cooperatives. Moreover, since rural credit cooperatives only have credit operations but no risk-control and human resources divisions like ordinary commercial banks, many rural credit cooperatives face poor management and high ratios of non-performing loans. Capital fund restrictions on China's 32,000 rural credit cooperatives also make it difficult for them to satisfy rural financing demands.

According to the general arrangement of modern rural financial institutions in 2009-11 formulated by the CBRC, 1,294 new rural financial institutions are planned all over the country from 2009 to 2011, of which 1,027 are community banks. The number of community banks opened now is far behind the target of the CBRC.

Major Chinese commercial banks, restricted by their own mechanisms, have been slow to establish community banks. Thus far, China Construction Bank has set up nine community banks, Agricultural Bank of China has four, Industrial and Commercial Bank of China has two and Bank of Communications has three. This suggests there's ample opportunity for foreign-funded banks to enter the community bank market.

"At present China's rural financing is weak and market gaps are prevalent. By entering the rural market in good time, foreign banks will gain the initiative," Guo said.

China has more than 700 million farmers. With accelerated urbanization process, many of them and rural businesses are seeking financial services. Since China is vigorously supporting the rural financial market, there is potential for community banks to develop and flourish.

BOC Fullerton Community Bank has seen these prospects. Its services are specially designed for small enterprises, individual clients and rural families. Single loan ranges from 5,000 yuan ($764.53) to 10 million yuan ($1.53 million), among other options in smaller amounts.

Opportunities ahead

"Foreign-funded banks looking to set up community banks see this as an opportunity to get a license and develop long-term investment targets," Guo said.

Petty loans for rural families will not lead to large amounts of non-performing loans. Since the expansion speed of community banks established by foreign-funded banks is much slower than that of the overall assets of foreign-funded banks on the Chinese mainland, community banks will not have significant influence on their mother companies in terms of profits and loan quality during the first few years after community banks are established.

Business operation of community banks won't be a worry to the bankers. Information from HSBC shows that Hubei Suizhou Cengdu HSBC Rural Bank Co. Ltd. has already realized balanced income and expenditure. Among the 16 HSBC community banks, the earliest established three have realized balanced incomes and expenditures. This indicates that with big market demand, bankers won't need to worry about losses to open community banks in China.

The key now is to be one of the first banks to establish a foothold, since the first one to enter the market and establish a network will win out overall among future competitors.

But, foreign-funded banks have further consideration when expanding in China's rural areas. "In one or two decades, the present village or county may become a city, and the present community bank may be upgraded to a branch of the commercial bank in the future," said Peter Wong Tung-shun, CEO of the HSBC, Asia-Pacific.

An insider from Temasek Holdings told Financial Times today's village may be tomorrow's city, and a prosperous city at that. Wealth is also spreading from cities to the countryside, reducing the dangers for community banks and increasing the land value for those banks.