Loans path eases for China's farmers
By Olivia Chung
HONG KONG - China, concerned about rising food costs, a growing rural-urban
wealth gap and the ability of the country to feed itself, is making it easier
for lenders ranging from HSBC Holdings to mini-lenders such as UA Easy Lenders
to operate.
That will help the country's 700-million strong farming community secure more
loans, boosting the opportunities for stronger growth in agricultural output
and so adding even more muscle to the country's fast-growing economy.
Agriculture, along with other primary industries of forestry, animal husbandry
and fisheries, accounted for almost 12% of the country's gross domestic
product in 2006.
Better access to loans may also help ease the drift of young people from farm
areas to big-city factories, and brake the consequent disintegration of rural
communities and infrastructures.
At one extreme, the government plans to ease curbs on how international banks
such as London-based HSBC can operate in rural areas, Bloomberg reported this
week, citing two people with knowledge of the matter.
Other regulatory changes will now allow small-loan operators such as UA Easy
Lenders, an outfit based in Shenzhen, near Hong Kong, to raise money from
banks, rather than just from shareholders and donations.
That will strengthen their ability to lend money to farmers whose limited needs
and lack of assets for collateral often leave them shunned by bigger lenders.
More loans should mean more investment in modern machinery, higher spending on
better seeds and fertilizer, so improving output and farmers' incomes.
Growth in rural per capita income, while apparently strong at 9.5% last year,
lagged the near 12% expansion in the economy as a whole in 2007.
The government's efforts to boost access to funds in the countryside come as
inflation is hitting near 12-year highs of 8.5%, led by increases in food
prices, which in April were 22% higher than a year earlier. Farmer's are
meanwhile having to rebuild after much of the countryside was hit earlier this
year by the worst snowstorms in five decades.
HSBC, which set up a rural bank in Suizhou, central Hubei province in December,
2007, is so far the sole foreign-owned countryside lender in China. Citigroup
said in October last year it would set up at least 10 rural banks and loan
firms in China.
The country first allowed foreign firms along with local investors to establish
rural banks and loan companies in selected areas in December 2006. Up until
now, overseas banks have had to oversee these businesses through offshore
entities with separate teams for each unit.The rule change would let them
operate through a single unit or a China-incorporated subsidiary, according to
Bloomberg. That would cut costs and the problems of finding numerous
experienced branch-management teams.
Greater impact might be felt by the changes covering companies such as UA Easy
Lenders that lend out small sums to businesses, operations sometimes referred
to as micro-finance. Rates charged are high, but access to funds to support
lending has until now been severely restricted.
Micro-finance, with small-volume lending to farmers or laid-off workers to help
them start up their own businesses, has increased in importance as Beijing
seeks to improve rural development and reduce the widening wealth gap between
city and countryside. Such loans have historically been granted via specialized
agencies such as rural credit co-operatives.
To expand the sector, the People's Bank of China in early 2006 began a loosely
regulated pilot scheme in some of the more agricultural provinces such as
Shaanxi, Shanxi and Sichuan, involving establishment of seven small-loan
companies. Their number has since grown to about 300.
Faster expansion has been hindered by the absence of official policy to define
the nature of such lenders, their funding resources and such issues as
bankruptcy processes.
"Also,given that the central bank has no rights to grant licenses, small-sum
loan companies have been shut out of the [official] financial sector," said
Zeng Gang, an economist with the Research Institute of Finance under the
Chinese Academy of Social Sciences.
The China Banking Regulatory Commission (CBRC) and PBoC recent issue of
guidelines go some way to removing these hindrances.
Under the new guidelines, the small-loan companies can now raise funds from not
more than two banks, in addition to existing channels such as shareholders and
donations. Zeng believes this will encourage establishment of more small-loan
companies.
Along with the new funding opportunities, limits have been set on rates lenders
can charge their customers. To encourage better pricing of credit risk,
small-loan lenders can set rates with an upper maximum of four times the rate
offered to the small-loan company by its funding bank. As a lower limit, they
must charge at least 0.9 times the one-year lending rate set by the PBoC, at
present at nine-year high of 7.47%.
UA Easy Lenders, one of the pilot companies, offers loans at an interest rate
of 27.6% per annum. The country's benchmark one-year lending rate is at a
nine-year high of 7.47%.
"The release of the new guideline is surely a good thing for the small loan
lenders. Now we can officially operate on the mainland," said Li Jie, director
and general manager of Zhongan Xinye in Shenzhen, which offers financing for
small business owners.
Wang Tao, a farmer-turned-businessman, said he is going to buy two more
machines for making furniture after receiving 40,000 yuan loan from Zhongan
Xinye. This is the second time he has borrowed money from the local lender.
"With the immediate cash, I now can meet increased spending for the machines
and pay for new hires," he said on the phone.
At the beginning of the year Wang received his first loan of 20,000 yuan from
Zhongan Xinye and paid it back six months later. He said he will continue to
apply for loans from Zhongan Xinye if he needs money again.
"For small businesses like us, it is hard to apply for loans from the large
banks such as Bank of China and China Construction Bank. However, at privately
owned small-loan lenders, we get immediate money to smooth out our cash flow,"
he said.
The transformation in recent years of big national banks into commercial banks,
bringing an increased focus on cutting costs and making profits, has cut
financial support for small businesses in rural areas. Farmers largely depend
on rural co-operatives for financing. These control about 10% of the mainland’s
42.9 trillion yuan in deposits and tend to make small loans of 500 yuan to
20,000 yuan. By the end of July in 2007, there were 80,692 credit co-ops, with
an overall a capital adequacy ratio of 8.38%. Loans granted were worth 2.16
billion yuan, of which 56% was for agricultural purposes. The bad loan ratio
was below 2%, from 14.8% as of the end of 2005.
In July 2006, Agricultural Bank of China started to be restructured to promote
rural finance and at the end of last year the CBRC approved the creation of a
postal savings bank to develop retail and intermediary businesses.
About 60% of farmers and half of small business owners in rural areas have no
access to banking services, according to recent research by Beijing's Qinghua
University, which also find high demand for loans from these sectors.
A researcher said inadequacy of rural financial services has hindered
development of the Chinese government's san nong policy of "agriculture,
villages and farmers", which aims to better balance rural and urban development
and revenues.
About 60% of the country's 1.3 billion population live in rural areas. Fast
economic growth and social development over the past decade has been led by
eastern coastal areas and industrial centers, with the vast countryside left
far behind. That has also hindered the country's efforts to build a harmonious
society.
Yi Xianrong, a researcher with the Institute of Finance and Banking under the
Chinese Academy of Social Sciences, said the guideline on small-sum loan
companies will still leave unresolved issues for small lenders.
"These companies are only given licenses to offer loans but they are not
allowed to take deposits from local residents - different from many small-loan
companies in the world, which grant small loans to poor people without taking
collateral," he said.
He said the restriction on taking deposits will affect the sustainability of
these projects because they might lack the capital to grow. He called for the
government to allow micro-credit institutions to take deposits and develop
micro-finance projects such as those set up by the 2006 Nobel Peace Prize
winner Muhammad Yunus, a Bangladeshi economist and founder of Grameen Bank.
Olivia Chung is a senior Asia Times Online reporter.
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