Gao Yujun secured a bank loan of 50,000 yuan (US$7,353) in early May. Unlike previous small credit loans, he used his farmland as collateral this time.

"This is something we imagined before, but didn't think was possible," he says.

Gao, a 42-year-old farmer who grows melons in greenhouses in Shuangtaizi township, Faku county in northeast China's Liaoning Province, put up his farmland use right on 35 mu (2.3 hectares) for 10 years as collateral.

Gao used the loan to add another 20 greenhouses to expand his melon cultivation. For each greenhouse, Gao needs to put in 7,000 yuan.

"Together with the money I made last year, which is more than 100,000 yuan, the 50,000 yuan loan helped me expand my business this year," Gao said.

Under China's existing land ownership structure, rural collectives own rural land. The collective, often a village committee, distributes land-use rights to households on 30-year contracts. Farmers are allowed to contract, rent, and exchange or transfer their land use rights. But China's Property Law and Guaranty Law prohibit them from putting up farmland use rights as collateral for loans from financial institutions.

However, that is changing since the People's Bank of China, the central bank, endorsed a pilot project to promote new financial services.

"We hope this experiment will solve the old problem in rural China of farmers lacking assets as collateral for loans," says Feng Shouquan, head of the county.

According to the Ministry of Agriculture, more than 1.4 billion mu (93.3 million hectares) of farmland is contracted to more than 300 million rural households.

The ban on using farmland use rights as collateral stems from fears over rural social stability. Farmland is a means of social security. If farmers use their farmland use right as collateral and cannot repay loans, they will lose their land. Authorities fear social unrest if farmers lose their land and cannot find other jobs.

But Feng says rural China needs investment more. Farmland use rights account for the majority of assets owned by farmers. The inability to obtain loans hinders investment in agriculture and keeps production low.

"Allowing farmland use rights as collateral will speed up the reasonable reallocation of land and labor so that agriculture will develop, boosting the rural economy," Feng said.

Farmers in Faku County are only allowed to use 70 percent of their farmland use rights as collateral. "If a farmer defaults on a loan, he still has 30 percent of the farmland, 1.5 mu (1,000 square meters) on average, to survive," Feng says.

The county's land transfer trading center, an organization under the county agriculture department, evaluated Gao's farmland as 100,000 yuan. The county's rural credit cooperatives issued a loan for half the value of the land, 50,000 yuan.

"I don't think the land is under valued," Gao said. "The point is we can use our land to get loans now and the amount is much more than we could get before by small credit loans."

Gao used to borrow from the county's rural credit cooperatives but could only get as much as 20,000 yuan.

Gao laughs at the thought that he could lose his land if he defaults the loan. "I am not at all worried about it because I am quite confident in my greenhouse cultivation expansion and I'm very confident that I will pay back the loan next May."

Two other farmers were also granted loans of 50,000 yuan each, in recognition of their farming abilities.

"Because this is a pilot project, we want to select well farmers who have excellent farming capabilities and make profits as good examples as borrowers," says Liu Jun, head of the township.

In fact, only those who can contribute to the county's industrialization of agriculture will get a loan using their farmland use rights, says Liu Hongyi, head of the county agriculture department.

That's why the first loan on farmland use rights in Faku county was issued to Changgangzi village chili cooperative, which exports its produce to Japan and the Republic of Korea.

The cooperative composed of 151 rural households obtained a loan of 300,000 yuan using their five-year right to farm 992.37 mu (66 hectares).

"We have signed contracts with companies that deal directly with us, so that we, as a cooperative, save on agents and transportation," says Li Lishan, head of the cooperative.

"Had it not been for the new policy, we don't know how we could have raised enough money for our large cooperative production."

Li estimated the cooperative would rake in 1.8 million yuan for this year's production, a guarantee to repay the loan on time. However, a continued drought hit north and northeast China in the summer and affected crops.

"I'm afraid the harvest won't turn out as predicted but there is no problem for us to pay back the loan," Li says.

"Even if the loan cannot be paid on time, it can be extended for another year. If the loan is still not repaid in the second year, the rural credit cooperatives will retract the land use rights of five years in this case and transfer it to others," says Wang Wei, director of the rural credit cooperatives that issued the loan.

Similar trials on the use of farmland use rights as collateral have been carried out in Shandong, Fujian and Henan provinces. Faku's trial stands out because of the official endorsement from the People's Bank of China and China Banking Regulatory Commission.

The People's Bank of China and the China Banking Regulatory Commission jointly issued a document, which aimed to promote new rural financial services on October 15, 2008, three days after the close of the Third Plenary Session of the 17th Communist Party of China Central Committee, which focused on rural reform and development.

Many places in rural China suffer from a dearth of credit, as well as a lack of efficient financial services, the document said.

A survey conducted in 2005 by the State Council Development Research Center found farmers had sources of credit: formal and informal. The informal being friends, relatives and nongovernmental financial organizations and the formal being the rural credit cooperatives, which have been issuing small loans to farmers since 2001, with no collateral required.

However, the survey showed that small credit loans range from 3,000 yuan to 5,000 yuan, which cannot fund large production. Meanwhile, 42 percent farmers surveyed said that the procedures to get loans from the rural credit cooperatives were too complicated and wished the process simpler and quicker.

According to China Banking Regulatory Commission, by the end of 2007, 120 million rural households needed loans out of some 230 million rural households and more than 78 million got small loans.

Statistics for last year from Faku county rural credit cooperatives show that 32,000 households were granted a total of 340 million yuan in small loans, an average of 1,062.5 yuan per household.

"About a fifth of our members already have small loans and are ineligible for further credit," says Li Lishan.

Farmers complain that small credit loans are indeed too "small". "Only those big farming families can get loans as much as 20,000 yuan, for ordinary farmers, they only get a few thousands," Li said.

Chen Xiwen, director of the Office of the Central Rural Work Leading Group, worries the evaluation of the land is too low, meaning farmers take greater risks than the banks. If the farmers fail to pay the loan, the bank gets the land use rights.

However, Faku County Rural Credit Cooperative is also concerned. "Because there are legal restrictions, we must reduce our risks to the minimum. That's why the amount of loans we have issued is not very big," says Wang Wei, director of the cooperative.

Faku County Rural Credit Cooperative and the county's Postal Savings Bank issued 62 loans worth of more than 2.19 million yuan in 2009.

"Farmers with little money or farmland with geological disadvantages are those hard to get financial services, formal or informal," said Li Changping, who was a former village official and now an expert on rural China matters.

A supporter of allowing farmland use rights as collateral, Li warns that involving commercial banks in the practice will eventually lead to the privatization of land.

"Commercial banks will not accept use rights of farmland at disadvantaged locations because they banks don't farm on the land and their ultimate goal is not to serve the farmers," Li said.

Han Jun, director of the State Council Development Research Center's Rural Economy Department, says the real solution to rural financial difficulties is to build up a sound credit system.

"We can explore using farmland use rights as collateral, but we cannot count on this to solve the problems of farmers getting loans," Han said.

(Xinhua News Agency January 1, 2010)