State banks retreat

In the late 1990s, major state banks started retreating from rural areas, closing outlets after failing to turn a profit. Those areas were also growing very slowly at the time, compared with big cities and the east coast, and state banks were also being restructured.

The state banks instead sought to expand overseas to upgrade their competitiveness. As they pulled out of rural regions, they left behind mainly rural cooperative banks and postal savings banks.

Li Jing, a researcher at the Central University of Finance and Economics in Beijing, said their move worsened the situation.

As of the end of 2007, 2,868 counties or villages in China had no financial institutions, accounting for 7 percent of the total number of counties and villages, according to the People's Bank of China (PBOC, the central bank).

Of that number, 2,645 counties or villages were in the western regions. Another 8,901 counties or villages had only one financial institution.

A report from the PBOC showed that by 2007, the number of rural financial outlets nationwide had fallen by 9,811 from 2004.

But tough competition in over-banked cities and signs that rural areas are beginning to present opportunities for profit have led some domestic banks to take a second look at neglected rural regions. They've also noticed that foreign banks are moving into rural regions.

Foreign banks venture forth

Foreign banks, which provide high-end services in cities, saw an opening in the rural market after the China Banking Regulatory Commission (CBRC) in December 2006 revised regulations covering rural banking facilities. One of the CBRC's changes was to reduce the amount of capital needed to establish rural financial facilities.

The changes meant that foreign financial institutions such as HSBC and Citigroup, alone or in partnership with local investors, could establish rural banks and loan companies in selected areas.

In early 2007, the government chose 36 counties and villages in six regions, including the provinces of Hubei, Sichuan, Gansu, Jilin and Qinghai as well as Inner Mongolia Autonomous Region, as pilot locations for rural-finance reform. The pilot program expanded to 31 provincial-level regions on the Chinese mainland at the end of 2007.

UK-based HSBC was the first to test the waters, setting up its first rural bank in Suizhou County in central Hubei Province in December 2007. The bank aimed to lend to agricultural enterprises and farmers. So far, HSBC has opened five rural banks in the provinces of Hubei, Fujian and Guangdong as well as on the outskirts of Chongqing and Beijing municipalities, where farming continues.

Following HSBC, Citigroup and Standard Chartered Bank began to make their way into the hinterlands, establishing rural financial outlets.

Citigroup opened two lending firms in two counties of Hubei Province and plans a third in northeastern Liaoning Province.

After establishing its first micro-finance program in Xinjiang Uygur Autonomous Region, the one that made the loan to Sawut, Standard Chartered Bank opened its first village bank in Inner Mongolia in February this year.

An HSBC official who declined to be identified said in an email to Xinhua that setting up village banks was in line with the government's guidance to boost rural development, and the bank anticipated making a profit in the long haul.