The China Banking Regulatory Commission has given top priority to rebuilding the rural financial system, which has become weaker in recent years despite efforts to reform it.

The commission was set up last month and took over some regulatory functions of the central People's Bank of China.

Feng Xingyuan, a researcher with the Agricultural Research Institute of the Chinese Academy of Social Sciences, said: "Inadequate credit support for county-level economies has been widespread in recent years, which has impeded the structural readjustment of the rural economy.''

In a bid to sharpen their competitiveness in the face of fierce foreign competition, China's four State-owned commercial banks -- the Agricultural Bank of China, Bank of China, China Construction Bank, and Industrial and Commercial Bank of China -- have withdrawn from most counties and rural areas to refocus on more profitable operations in the big cities. This has left the burden of financing agricultural needs with rural credit co-operatives.

But the rural credit co-operatives are already in dire straits. Their non-performing loans stood at 515 billion yuan (US$62 billion) at the end of last year, a staggering 37 per cent of their total outstanding loans.

Worse still is the situation with the widely scattered postal savings outlets. For historical reasons, these outlets have the privilege of redepositing funds with the central bank for a high rate of interest and they are siphoning a huge chunk of rural savings away from the countryside.

The central government has taken steps to remodel such co-operatives, reorganizing them into bigger co-operatives or into banks. The most recent step was the establishment in March of the first rural co-operative bank in East China's Zhejiang Province, a combination of a joint-stock structure and co-operative mechanisms.

However, Qin Chijiang, deputy secretary-general of the China Society of Finance, said: "The establishment of such institutions is just a good start. The issue of rural financing is a matter of overall economic policy.''

Industrial policies should be revised to enable the structural upgrading of the rural economy, he said, and preferential tax policies need to be formulated for farmers and businesses to support innovative agricultural technologies.

Economists have also called for tax incentives to redirect commercial loans to rural areas, further reform of credit co-operatives to enable them to play a stronger role in supporting farmers and agriculture, as well as a lower interest rate on redeposited funds from postal savings branches.

(China Daily May 10, 2003)