“I am a business woman, running a small shop and I have limited connections with the government or big companies. HSBC provided me with a loan quickly, based on my strong understanding of my business and proof that it could generate good return,” says Liu Xiaoping, who is currently running the ‘Pregnant Mother and Baby Grocery’ shop in one of China’s many rural areas.
China’s economic reform and opening up has been highly successful in supporting economic growth in the last decade. However, the benefits have not been equally spread across the country. The rural-urban income gap has been widening, with the annual per capita income for rural households only US$755, compared with US$2,516 for urban households.
The development of rural banking
According to the China Banking Regulatory Commission (CBRC), the Chinese government is planning to increase the number of rural banks over tenfold to 1,027 by 2011. This development will be particularly focused on countries in central and western China where most people are farmers with little access to financial and loan services.
To encourage local and foreign banks in China to extend their businesses to rural areas, the CBRC has lowered the capital requirement for rural banks to 11 per cent in order to free more capital for the rural economy. The regulator is also considering tax cuts and new incentive mechanisms.
The effort has not been wasted. Many Chinese banks, together with some foreign ones, have entered the rural banking business. The market is mainly served by four types of financial institutions: large commercial banks, in particular Agricultural Bank of China; policy banks, such as China Development Bank; and small and medium-sized rural financial institutions.
Other Chinese banks, such as Bank of China and ICBC, also operate in rural areas, but they are not considered major players because their current focus is on international expansion and diversifying their financial services offerings.
Local banks v foreign banks in rural China
Foreign banks in China – such as HSBC, Standard Chartered, ANZ, Bank of East Asia and Citibank – are gaining a wider exposure to China’s rural banking sector. HSBC is the pioneer. In December 2007, it became the first foreign bank to set up a rural bank in China. It currently has seven rural branches and the largest network among the overseas banks.
Richard Yorke, HSBC’s former China CEO, recently commented: “The rural banking sector is under banked, so we are seeing strong demand for the right product and for the right services. There is strong untapped demand in that market.”
Katherine Tsang, China CEO of rival Standard Chartered, has also said that her bank’s first rural branch in Inner Mongolia has been running better than expected. “Rural banking is a long-term commitment and we are not in a rush to make quick money. We will set up more rural banks, if the first one proves to be a role model.”
The challenges ahead
The truth is that there are still a lot of challenges facing firms operating in the rural banking market: lack of experience, lack of talent, and the high costs of building infrastructure and systems (to name but a few). That’s why strong support from the Chinese government and more incentive policies to support banks are needed to help them overcome these obstacles.
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