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More private lending key to rural growth
By Cao Xiaofan |
March 6, 2009, Friday
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Print Edition
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CHINA'S private lending market is estimated at about 2 trillion yuan (US$292 billion) a year, and it's often the only source of credit in rural areas, but its growth has been constrained by its underground status.
However, private lending might soon occupy a more legitimate place in the country's capital markets, analysts said, with the People's Bank of China (PBOC) having decided to grant it legal status.
In a statement on its Website posted February 20, the PBOC - the central bank - said it would formulate regulations on private lenders and develop the sector into "a significant player" in the country's rural money markets.
It did not say when the new regulations would take effect.
Zheng Fengtian, vice dean with the Agriculture and Countryside Department of Renmin University of China, said the move was "absolutely necessary," since the economic slowdown would aggravate the perennial problem of capital shortages in rural areas and harm employment and agriculture.
The government has warned that this year would be "the toughest" since the turn of the century, with the global downturn having cost about 20 million rural migrant workers their jobs.
The government has urged laid-off workers to become entrepreneurs, but without access to funds, it's tough to start a business, said Zheng.
China's countryside has had chronic capital shortages since an industry reshuffle in the late 1990s forced most state banks to withdraw from rural areas, leaving behind only the Agricultural Bank of China, rural credit cooperatives and postal savings banks.
These institutions haven't filled the void, however, with many limiting lending for fear of bad debt and low profits.
Returns from rural lending are low, while risks are high. Some institutions even forbid rural outlets from lending without higher-level approval. As a result, most of the savings that rural residents put into financial institutions have been used to finance production and business in much wealthier cities.
"To some extent, they (local financial institutions) act like water pumps, exhausting local financial resources," said Zheng.
Noting the capital shortages in the rural market, the government took steps over the past two years to improve the situation.
For example, at the end of 2006, the China Banking Regulatory Commission relaxed the conditions of entry for banking institutions in rural areas.
However, rural financial reform is still at the experimental stage and more needs to be done to address capital shortages.
The national 4 trillion yuan economic stimulus plan, announced last November, won't do much to help individual farmers.
The plan allocates 370 billion yuan for rural investment, but it will go to livelihood and infrastructure construction over the next two years, according to researcher Li Jing with the Futures and Securities Institution of China's Central University of Finance and Economics.
"Legalizing private lending will help to revive the rural money market under the economic downturn," said Li.
Private lending is difficult to quantify or control. It refers to capital-raising activities outside of banks and financial institutions.
As loans by informal lenders are made to acquaintances, lenders could easily stay on top of borrowers' credit standing and payment ability.
In addition, simple and flexible lending procedures and low transaction costs could better meet small borrowers' needs, he said.
By contrast, borrowing from formal financial institutions would always require rural households to provide collateral.
(The author is a Xinhua writer.)
However, private lending might soon occupy a more legitimate place in the country's capital markets, analysts said, with the People's Bank of China (PBOC) having decided to grant it legal status.
In a statement on its Website posted February 20, the PBOC - the central bank - said it would formulate regulations on private lenders and develop the sector into "a significant player" in the country's rural money markets.
It did not say when the new regulations would take effect.
Zheng Fengtian, vice dean with the Agriculture and Countryside Department of Renmin University of China, said the move was "absolutely necessary," since the economic slowdown would aggravate the perennial problem of capital shortages in rural areas and harm employment and agriculture.
The government has warned that this year would be "the toughest" since the turn of the century, with the global downturn having cost about 20 million rural migrant workers their jobs.
The government has urged laid-off workers to become entrepreneurs, but without access to funds, it's tough to start a business, said Zheng.
China's countryside has had chronic capital shortages since an industry reshuffle in the late 1990s forced most state banks to withdraw from rural areas, leaving behind only the Agricultural Bank of China, rural credit cooperatives and postal savings banks.
These institutions haven't filled the void, however, with many limiting lending for fear of bad debt and low profits.
Returns from rural lending are low, while risks are high. Some institutions even forbid rural outlets from lending without higher-level approval. As a result, most of the savings that rural residents put into financial institutions have been used to finance production and business in much wealthier cities.
"To some extent, they (local financial institutions) act like water pumps, exhausting local financial resources," said Zheng.
Noting the capital shortages in the rural market, the government took steps over the past two years to improve the situation.
For example, at the end of 2006, the China Banking Regulatory Commission relaxed the conditions of entry for banking institutions in rural areas.
However, rural financial reform is still at the experimental stage and more needs to be done to address capital shortages.
The national 4 trillion yuan economic stimulus plan, announced last November, won't do much to help individual farmers.
The plan allocates 370 billion yuan for rural investment, but it will go to livelihood and infrastructure construction over the next two years, according to researcher Li Jing with the Futures and Securities Institution of China's Central University of Finance and Economics.
"Legalizing private lending will help to revive the rural money market under the economic downturn," said Li.
Private lending is difficult to quantify or control. It refers to capital-raising activities outside of banks and financial institutions.
As loans by informal lenders are made to acquaintances, lenders could easily stay on top of borrowers' credit standing and payment ability.
In addition, simple and flexible lending procedures and low transaction costs could better meet small borrowers' needs, he said.
By contrast, borrowing from formal financial institutions would always require rural households to provide collateral.
(The author is a Xinhua writer.)
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