The opening of a rural bank by a primarily foreign lender gives hope to the great number of small rural businesses in the country, marking the government's latest drive to provide farmers with easier access to small loans.

In mid-December, HSBC, Europe's largest bank, opened a wholly owned subsidiary in rural Suizhou, in central China's Hubei Province. Other significant foreign lenders including New York-based Citigroup and Asia-focused bank Standard Chartered are preparing to open rural banks as well.

The establishment of village banks will help meet farmers' financial needs by providing loans to agriculture companies, local businesses and individuals.

Realizing the urgency of building a system of rural finance that can stimulate growth, the Chinese government has pledged to introduce new types of rural financial institutions and reform rural finance.

"To improve overall financial services in rural areas, we will continue to carry out rural financial reforms and introduce more types of financial institutions to advance the comprehensive development of rural China," said Jiang Liming, vice director of cooperative finance supervision department with the China Banking Regulatory Commission.

The country's rural financial market has long been underdeveloped, especially since China's major State banks retreated from rural finance in the late 1990s because of high costs and small business volumes.

Currently, the main financial sources serving the rural economy are policy-oriented Agricultural Development Bank of China, Agricultural Bank of China and more than 30,000 rural credit cooperatives.

CBRC statistics show that farmers were responsible for only 15 percent of the country's total bank loans and deposits even though they account for more than half of the country's population.

At the end of 2006, per capita loans available in rural areas were around 5,500 yuan, compared with nearly 40,000 yuan in cities.

Villages account for less than one-sixth of all bank branches around the country, and there are just 1.26 outlets on average available to every 10,000 people in rural areas compared with two in cities.

The inadequate supply of financial services has long troubled the rural economy's development. The government has stepped up efforts to reform rural finance and build a system that can stimulate development.

The CBRC issued a regulation to encourage private investment in the rural financial sector in 2006.

And the government launched a pilot scheme, which was planned in six provinces and autonomous regions including Hubei, Jilin, Sichuan, Qinghai, Gansu and Inner Mongolia, encouraging individuals, private companies and all financial institutions to get involved in rural financing.

"The past few years witnessed significant progress in the reform and development of rural finance," Jiang said.

CBRC statistics show that by the end of June 2007, there were 111,302 financial outlets in rural China, accounting for 57 percent of the country's total.

The government also lowered the rural banking threshold at the end of 2006. The registered capital threshold was lowered to 3 million yuan for banks in counties and 1 million yuan in villages and towns.

Last year, tens of village banks, with the Huimin village bank in Yilong County of Sichuan Province as the first, were approved by the CBRC to open for business in the pilot provinces.

China Postal Savings Bank, which was established last year, is also expected to play a significant role in serving the rural areas.

While recognizing the necessity of introducing new types of rural financial institutions, experts said the government should do more and offer a supportive policy for rural finance.

The low profitability of rural financial institutions has hampered the development of rural finance.

Experts said a cut in rural financial institutions' corporate income tax and business tax would help them improve their balance sheets.

They also suggested legislation for rural finance, saying a sound law could help ensure rural financial institutions provide quality financial services while serving rural businesses effectively.

(China Daily January 10, 2008)