According to analysts, the establishment of Yinzhou Rural Cooperative Bank, in Ningbo of East China's Zhejiang Province, on Wednesday marks a significant step forward in the reform of China's creaky rural credit cooperatives.

But whether such a move can help increase the flow of funds in the country's vast rural areas largely depends on the implementation of the new approach - a co-operative framework with joint-stock elements - in the coming days, and whether or not the funding needs of farmers are given priority.

For the new bank, which was transformed from a local rural credit co-operative, simply becoming a bank lifts many of the previous geographic and business restrictions.

China's rural credit cooperatives, most of them unprofitable, are barred from operating in cities and can only access the country's interbank payment and clearing systems through a correspondent bank acting as an agent on their behalf.

"The transformation into a cooperative bank is definitely an improvement," said Qin Chijiang, deputy secretary-general of the China Society of Finance (CSF). "The operational and management procedures should experience improvements while the transformation into a banking institution should lend the cooperatives an increase in status."

Qin added that the key to the success of these newly-established financial institutions lies in their sense of social responsibility and their commitment to the support of farmers and the rural community.

Increasing the availability of funds for farmers is at the heart of China's rural credit co-operative reform as banks have long been reluctant to provide funding for agricultural activities due to the high risks and lending costs.

Currently, credit cooperatives are the primary funding source in China's countryside, reportedly handing out 75 percent of all agricultural loans.

In 1998, under increasing pressure from foreign competition, the four State-owned commercial banks started to withdraw from rural areas to focus on big cities, leaving small co-operatives, which suffered from unclear ownership structures, low asset quality, bad debts and overall poor management, to carry the burden of financial support in the countryside.

The establishment of the new bank of Yinzhou, analysts say, aims to correct these deficits by bringing back profitability and keeping the priority on farmers' needs.

More than 10,000 farmers, businesses and employees of the former credit co-operative paid a total of 220 million yuan (US$26.5 million) to become shareholders in the bank. To guarantee farmers' interests, individual shareholders were given one vote for every 1,000 yuan (US$120), with corporate shareholders paying 10 times more per vote.

In another measure to protect farmers, the decision-making board of directors is to have four seats for farmers, three for bank employees and four for corporate shareholders.

"There are conflicts of interest after all," said Zhang Yuanhong, a researcher with the Chinese Academy of Social Sciences. "When dividends are allotted by shares and decision rights are given by heads, it's obviously unequal."

If the co-ordination between different shareholders is well conducted, Zhang said, the effects of such inequality can be reduced.

Zhang said it is likely that the new bank will direct a considerable part of its loans to fast-growing businesses in the region, but the development of the bank and the growth of its lending capacity will eventually benefit farmers.

Worries that the ultimate goal of helping farmers may gradually fall into oblivion were stronger in an earlier trial programme, where three rural commercial banks were established two years ago in East China's Jiangsu Province by restructuring credit co-operatives.

"The problem in rural finance lies in the overall economic policy," said CSF's Qin. "It cannot be solved by the establishment of a single institution."

For example, he said, farmers' taxes need to be reduced, and the government needs to play a bigger role in alleviating the burden of interest payments weighing down on rural credit co-operatives.

This was higher than a 15 percent value-added tax imposed in Germany, a 10 percent consumption tax and purchasing tax in Japan and a 6 percent sales tax in the United States.

(China Daily April 14, 2003)