The Chinese economy is having both macro and micro headaches,
most of which may deal heavy blows to the national interest if not
resolved. Among these problems, rural access to financial
institutions is especially urgent.
According to statistics from the China Banking Regulatory
Commission (CBRC), the State watchdog for the financial sector, at
the end of November 2006 some 70.7 million rural families had
access to microcredit and other forms of loans designed for
farmers. In other words, nearly two-thirds of the rural population
do not have any possibility of getting loans from financial
institutions.
Recent moves taken by the government suggest that breakthroughs
will probably take place in rural finances this year.
On December 31, the CBRC formally approved the launching of the
China Postal Saving Bank, to provide financial services for urban
and rural residents.
In late January, the authorities decided at the high-level
national financial work conference that a restructuring of the
Agricultural Bank of China would start soon and reform of the rural
financial system would be furthered.
The People's Bank of China, or central bank, and the CBRC also
made major revisions to rural financial system regulations at the
end of January.
As a matter of fact, reform of the rural financial system had
been started in the 1990s. After several ups and downs, the rural
financial system is still troubled by several long-time thorny
problems.
A major problem, financial outlets are not extensive enough to
satisfy the needs in rural areas.
In recent years, the Industrial and Commercial Bank of China,
the Agricultural Bank of China and China Construction Bank
dramatically reduced the number of outlets. The more than 30,000
outlets erased from the three banks' business scope were mostly
located in rural areas.
Meanwhile, the already limited financial service suppliers
usually offer far less diversified products in rural areas than in
cities.
Not just a problem of not enough banks, the core difficulty for
the reformers of the rural financial system is the issue of
microcredit.
The loans needed by rural consumers fall into two categories:
small loans needed by rural families and larger loans needed by
businesses based in rural areas.
The standard measuring the development of rural finance is
whether rural families have convenient access to the small loans
they need and how many rural families enjoy such benefits.
Without a proper solution to help needy rural families get small
loans, reforming the rural financial system will be far from a
success.
Rural financial service suppliers are mostly under a management
model of traditional financial institutions. In other words, they
have a relatively long process of risk control and decision-making,
which leaves them limited room for making profits from loans as
small as 10,000 to 20,000 yuan (US$1,282 to 2,564).
For the same reasons, these institutions are unable to make
flexible and timely decisions for would-be clients across the vast
areas of rural China.
Therefore, it is not wise to expect the commercial banks to be
the main force in developing rural microcredit since microcredit
offers less profit and more risk for them.
At this year's central financial work conference, Premier Wen
Jiabao stressed that various forms of organizations supplying
microcredit should be nurtured. The central bank and the CBRC have
since issued policies to promote rural financial services.
These policies have done quite a lot toward solving rural
financial problems: establishing truly localized financial
institutions that can make flexible responses to demands from rural
families for microcredit.
One of the practical steps is to allow more qualified businesses
into the microcredit business.
A deeply entrenched misunderstanding is that microcredit aims at
eradicating poverty. Actually, microcredit should be targeted
toward business development, enabling businesses to remain in
operation and increase profits.
The loans offered by microcredit institutions in Pingyao, Shanxi
Province, had an annul interest rate as high as 18 percent. But
even though the rate is about three times higher than bank loans,
it did not devastate the borrowers. On the contrary, there were no
records for default last year.
By contrast, the low-interest microcredit promoted by local
governments between 2000 and 2003 had to be suspended because of
the huge proportion of bad debts.
The reason for such a dramatic difference is that the
microcredit institutions carefully select clients who are able to
repay the loans. If the lenders only eyed the loans as a form of
eliminating poverty, there would be a much higher rate of
default.
Part of the big picture, the legal system needs to lay out
specific terms relating to microcredit, including the institutions
qualified to deal in microcredit.
The author holds a PhD in economics from the Institute of
World Economics and Politics of the Chinese Academy of Social
Sciences
(China Daily March 19, 2007)