VZCZCXRO1600
PP RUEHCN RUEHGH RUEHVC
DE RUEHBJ #1506/01 1090923
ZNR UUUUU ZZH
P 180923Z APR 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 6720
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC
UNCLAS SECTION 01 OF 02 BEIJING 001506
SIPDIS
SENSITIVE
SIPDIS
E.O. 12958: N/A
TAGS: EFIN ECON EAGR PGOV SOCI CH
SUBJECT: RURAL FINANCE INITIATIVES STILL STRUGGLING
REF: 07 BEIJING 6655
SUMMARY
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1. (SBU) New rural finance initiatives continue to struggle in
China's countryside one year after their introduction because they
are not commercially viable. Promoting private banks' involvement
in the rural sector through the establishment of Village Banks is
the right approach, by increasing competition, but the current
policy remains too restrictive according to Beijing-based contacts.
Financial policymakers in the provinces maintain that promoting
rural finance is an uphill battle, particularly because of the lack
of agricultural insurance. End Summary.
MEETINGS IN BEIJING AND HEBEI
-----------------------------
2. (SBU) Deputy Assistant Secretary of Treasury Bob Dohner met with
rural finance contacts on the margins of Secretary Paulson's visit
to Beijing on April 3. Econoff met with officials at the Hebei
Provincial Financial Securities Working Leading Group Office on
April 17 to hear their views on implementation of rural finance
initiatives.
RURAL FINANCE IN CHINA: FACING MAJOR CHALLENGES
--------------------------------------------- ---
3. (SBU) Sari Soderstrom, Rural Sector Coordinator at the World
Bank's Beijing Office, stated during her April 3 meeting with DAS
Dohner (outlining many of the same themes in reftel) that China's
efforts to reform its rural finance sector faces difficulties
because of farmers' inability to use land as collateral, the lack
agricultural insurance, and the continuing trend of farmers leaving
the countryside to work in cities. She said China's rural financial
sector also must overcome the legacy of the failed Rural Credit
Cooperatives (RCCs), and the Central Government continues to work
towards RCC reform. The reform faces an inherent conflict, as the
government wants the RCCs to become more commercialized while at the
same time better serve farmers, but in China's current environment,
most loans to farmers are not commercially viable, Soderstrom
stated.
4. (SBU) Tang Min, Deputy Secretary General of the China Development
Research Foundation and former Chief Economist at the Asian
Development Bank's Beijing Office agreed, stating that a purely
commercial approach in rural finance will not be successful,
especially since new financial institutions also will struggle to
break through the RCCs' monopoly in rural areas. Both Tang and
Soderstrom stated that the impetus for current rural finance
initiatives remains largely social stability rather than financial
reform.
NEW INITIATIVES: RIGHT DIRECTION BUT WRONG WAY
--------------------------------------------- --
5. (SBU) Tang said the Central Government's efforts to launch new
Village Banks are important in order to break up the RCCs' monopoly
and open up competition in rural areas. While Village Banks help
move rural finance reform in the right direction by promoting
private sector involvement, however, they are being introduced in
the wrong way because the policy is too tight, Tang said. He noted
that current regulations on Village Banks restrict their operations
to one county and require a commercial bank to serve as the main
shareholder in the Village Bank with 20 percent of the invested
capital.
6. (SBU) Since early 2007, 100 new Village Bank projects have been
launched in China, Tang said, but the coverage area remains small as
there are approximately 3000 rural counties. Tang believes HSBC's
decision to establish a Village Bank in Hubei Province last year was
motivated solely by political reasons to accelerate regulatory
approval of coastal and urban branches. It will be especially
difficult for Village Banks to earn a profit because interest rates
are capped at 15 to 18 percent, which Tang said is considered too
low for viable microfinance projects.
IMPLEMENTATION: THE VIEW FROM HEBEI
------------------------------------
7. (SBU) Fang Changkun, Vice Director of the Hebei Financial
Securities Working Leading Group Office, and Wang Liugen, Director
of the Leading Group's Finance Department, told Econoff on April 17
that Hebei has been quick to embrace the Central Government's new
rural finance initiatives, including establishing Village Banks and
promoting microfinance projects, but encouraging new institutions to
set up in rural areas or existing commercial banks to extend credit
to farmers remains an uphill battle. Hebei now boasts many
different financial institutions that offer financial services to
BEIJING 00001506 002 OF 002
farmers, including commercial banks, RCCs, and microfinance
organizations, and two Village Banks in Tang Shan and Zhangjiakou
that will come on-line later this year, but banks do not yet
understand the seasonal cycles in China's rural areas and the needs
of Hebei's farmers, Fang said.
8. (SBU) Wang said that the biggest challenge for rural finance in
Hebei is the low coverage rates for agricultural insurance.
Insurance companies remain wary of offering policies in rural areas
because of low profitability and high risk, but the government is
pushing those companies to be more responsive to farmers, Wang said.
Rural finance also is hindered in Hebei by a poor regulatory
environment and farmers' lack of access to financial information, he
lamented. (Note: Contacts at two microfinance NGOs that operate in
Hebei Province previously told Econoff that projects designed for
rural areas often are implemented in urban areas as it is easier for
microfinance organizations to identify urban shopkeepers as
potential loan applicants than farmers. End Note.)
COMMENT: MOVING SLOWLY
-----------------------
9. (SBU) Despite the fanfare with which the Central Government
unveiled new rural financial reforms in 2007 (reftel) we continue to
hear from contacts in Beijing and the provinces that rural finance
initiatives have made little progress. Rural finance projects
continue to face huge underlying challenges, and banks entering the
market do so largely for political reasons rather than profit
considerations. Rural finance was not mentioned prominently during
the March session of the National People's Congress, and financial
reforms continue to be much more focused on commercial banks in
urban areas.