NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

“In China, people try not to think about the countryside at all. When they do, it is not of a rural idyll, but a grim, dirty place where people are poor and life is harsh. In Britain the countryside is somewhere to escape to. In China it is somewhere to escape from.” I read these lines sometime ago on “China’s rural millions left behind,” a BBC news story. The author compares how in British people tend to see the countryside as an idyllic place where people aspire to move/ retire/ relax. This is definitely not the case in China, because of poor living conditions, the absence of good education, local political corruption, few doctors and a general lack of economic opportunities.

There are approximately seven hundred and fifty million Chinese who live in rural areas, and very few have access to finance. In an effort to serve an unmet need, the Chinese government began to give small loans through the Agricultural Bank of China beginning in 1999. The program’s focus is poverty alleviation through government action rather than a for-profit business activity. The journal Knowledge @ Wharton covers the program in a recent article, “Can Rural Finance Take Root in China? About 750 Million People Hope So.” I enjoyed the author’s analysis of difficulties that microfinance institutions are encountering.According to World Bank’s Jun Wang, “There are still many people who hold the view that rural and microfinance cannot be commercially sustainable. They believe that farmers are a vulnerable group of society, they have limited means of production and opportunities, and deserve government support. Most of these people demand subsidized interest rates, which is problematic.” And yes, Wang might be right and while Knowledge @ Wharton’s article states, “?microfinance programs are currently permitted to set interest rates higher than ordinary bank loan rates, there’s still an upper limit intended to prevent small farmers from usurious lending practices.”

While parts of rural China may still need subsidized credit, others may take loans from private banks. The article says that this idea is gaining momentum and that there is some hope on the horizon for profitable rural finance. There have already been some experiments with microcredit and rural finance programs over the past decade, though without much success.

But recently, China’s banking regulators have taken tentative steps towards promoting market-oriented rural financial institutions for the first time. Regulatory actions include relaxing restrictions on village banks, village mutual funds, and microcredit institutions. In addition, China is in the process of reforming existing institutions such as the Agricultural Bank (which plans an IPO) the Rural Credit Cooperatives. These are small but substantial changes in China’s rural finance sector. After all, it takes time to change and the Chinese government is making the first steps now. Interestingly, even HSBC has announced its launch of a new village bank in rural China.