Less competitive market

Some analysts said foreign banks might be turning to rural areas since it was difficult for them to compete with Chinese rivals in cities. Instead, they turned to the rural areas that domestic banks had largely abandoned.

"They [the state banks] retreated from the rural market, creating a void, which was a good chance for foreign banks," Li Jing said.

Yin said foreign banks were implementing a long-term strategy by going into rural areas, which offered more room for growth than the competitive urban markets.

The HSBC source said the Chinese rural market was underdeveloped but was experiencing rapid growth. The bank saw tremendous potential in the rural market as the government stepped up agricultural reform and gave priority to rural development, the source said.

Some analysts said it was likely that foreign banks would experience setbacks and perhaps lose money in their rural ventures, as they were not familiar with the rural market and had few outlets.

The HSBC source said that initially, rural banks would not contribute to profits. But the bank looked to rural banking in China as a long-term business, he added. The bank forecast its business would be profitable in three years.

Standard Chartered Bank said its first micro-finance program in Xinjiang had provided loans at floating interest rates for more than 600 cotton farmers within a year and all the principal and interests had been collected by the end of 2008.

Yin said that in the long run, foreign banks would find rural lending to be as profitable as urban business because of their professionalism in risk control and credit management, as well as the country's reliance on the rural market for sustainable development.

Underdeveloped, great potential

Yin said it wasn't just that there was a shortage of banks in rural China: it was also that much of the savings in such areas flowed to the cities. He said this had created a void in the rural area, as banks used deposits from farmers to lend in cities.

Tsinghua University in Beijing has estimated the capital gap in the rural financial market at 1 trillion yuan in 2008, and China Development Bank has forecast the capital gap in rural areas would hit 5.4 trillion yuan by 2010 and 7.6 trillion yuan by 2015 if the situation didn't improve.

Tsinghua researchers have also found that in 2008, about 120 million rural households needed loans but 60 percent were able to borrow. Only about half of rural agricultural enterprises could get bank loans.

China has been trying to channel lending to the countryside to boost rural development and narrow the growing urban-rural income gap.

The moves it has taken to accomplish that goal include the regulatory changes by the CBRC in 2006, which allowed investors to set up new types of rural financial institutions such as township and village banks and rural mutual cooperatives.

Also, in October, the Communist Party of China (CPC) Central Committee issued a directive during the Third Plenary Session of the 17th Central Committee on steps needed to establish a modern rural financial system. It encouraged the creation of more new types of rural financial institutions to provide small loans and more financial services tailored to rural needs.

As of the end of 2008, there were 105 new rural financial institutions, which included 89 village banks, six lending companies and 10 rural mutual credit cooperatives, according to the CBRC. Most of those were in western China's least-developed regions.

Among the 105 institutions, 77 were in un-banked and under-banked areas.

These new financial institutions had extended loans of 3.97 billion yuan by the end of 2008, of which 96.8 percent went to rural enterprises and households.