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Banks need to lend rural sector support
2006-03-01
China Daily
The financial support needed for building a "new countryside" involves more than just public funding. A functioning financial sector that can better serve the rural economy is a must as well.
While giving a hand to the less-developed rural sector, the country's financial institutions, those specialized in rural finance in particular, are increasingly exposed to fierce competition.
As China will fully open its banking sector to foreign competitors at the end of this year, all of the country's four major State-owned banks except the Agricultural Bank of China (ABC) have made remarkable achievements in their efforts to go public. Introducing strategic investors and external supervision has been generally viewed as a necessary step to turn them into viable commercial banks.
However, the lack of progress in ABC's joint-stock reform has reflected the huge difficulties this bank and all other rural financial institutions still face.
Drastic reforms are needed to transform these financial institutions into a growth engine for the rural sector.
To narrow the widening development gap between the country's urban and rural areas, the financial sector must assume a larger role in channelling social funds to raise rural productivity.
In the past, due to high cost of credit assessment and low returns on agricultural investment, financial institutions were either reluctant to provide services in rural areas or engage in absorbing farmers' savings for urban investment.
Now, as policy-makers call loudly for industry to feed agriculture and cities to support the countryside, financial institutions can no longer work that way.
A recent study by the People's Bank of China, the country's central bank, shows that, after years of efforts to strengthen rural finance, about one third of rural households have obtained loans from various financial intermediaries. Also, the aggregate amount of agricultural loans reached 17 per cent of the country's GDP between 2000 and 2004, a fairly high ratio compared with a number of other developing countries.
Clearly, financial support for rural development has been increased considerably and will continue to rise as the government decisively tilts policies and priorities to boost farmers' income growth.
Nevertheless, the efficiency of this financial input remains a cause for concern.
On the one hand, in the absence of financial innovation to meet the various financial demands of farmers, many financial institutions can hardly make enough profits from their services to sustain their businesses in rural areas.
On the other hand, many of these financial inputs have been in the form of a one-off stimulus to some rural programmes, thus failing to fuel sustainable development.
To revive its rural sector, the country has come up with a series of policies and measures to facilitate agricultural production, improve rural living standards and upgrade rural infrastructure.
A sound financial sector will be indispensable for the government to achieve all these goals. Only when social funds are effectively mobilized to enable farmers to labour in a more productive way can sustainable growth take root to gradually bridge the urban-rural gap.
There is an urgent need to sharpen the competitive edge of the domestic financial sector in face of intensifying foreign competition. The surging rural demands for financial services will be an opportunity Chinese financial institutions cannot afford to ignore.
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