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 
------- 
 
¶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.