Guizhou Huaxi Rural Cooperative Bank was officially set up recently in southwest China's Guizhou Province, setting a new model for the reform of rural credit cooperatives on which the government has laid great expectation.

Following Huaxi's emergence, dozens more rural cooperative banks will gradually open for operation in eight pilot provinces. In addition, in the later half of this year, reforms will also be expanded to some other regions outside the eight pilot ones.

"This indicates the reform of the rural financial service system has been launched full-tilt," said Liu Naiyun, chairman of the provincial-level union of rural credit cooperatives in Guizhou.

Difficulty in getting loans has long been a lingering problem for farmers in China. Economists agreed that the lack of a rural financial service network constituted one of the major problems hindering further growth of rural economy and the income increase of farmers.

Statistics show that agriculture accounted for 14.8 percent of China's gross domestic product (GDP) in 2003, but it only used no more than six percent of outstanding loans released by all China's financial institutions.

In the past decades, in a bid to sharpen the competitiveness in the face of fierce foreign competition, China's four state-owned commercial banks, namely the Agricultural Bank of China, Bank of China, China Construction Bank and the Industrial and Commercial Bank of China, have withdrawn from most counties and rural areas to re-focus on more profitable operations in big cities.

This has left the burden of financing agricultural needs with rural credit co-operatives.

The rural credit cooperatives were already in dire straits because of their low efficiency and poor management. Their non-performing loans stood at 515 billion yuan (US$62 billion) at the end of 2002, a staggering 37 percent of their total outstanding loans.

China now has more than 3,5000 rural credit cooperatives. Most of them were set up in the beginning of the 1950s on the basis of farmers voluntarily holding shares. These cooperatives aimed to serve the farmers and their leaders were elected by farmers. But afterwards, most of the cooperatives became the grassroots of state banks and lost their advantages to serve farmers.

Through reform, the Chinese government is striving to let the former rural credit cooperatives play a vital role in rural economy and help tackle problems which made rural areas lag behind. The pace began in the late 1990s and sped up since August 2003 when the country launched a pilot reform scheme in eight provinces and municipalities, including Shaanxi, Jiangxi, Zhejiang, Shandong,Jilin, Guizhou and Chongqing.

The key policy is to reform the ownership of the cooperatives in support of the multiple investment mechanism, according to Liu Mingkang, chairman of the China Banking Regulatory Commission (CBRC).

In the scenario, the government's role is to create a sound environment for rural credit cooperatives, safeguarding the market order, cracking down on debt evasion, providing information and helping reduce financial risks, said Liu.

To ensure the reformed cooperatives could really improve their service to farmers and promote efficiency, local governments also set different demands on them.

Like in the Huaxi case, the Guizhou banking regulatory commission regulates that in the beginning of operation, the loans flowing to the agriculture sector should be no less than 50 percent of the total. In the second year of operation, the proportion should not be less than 40 percent.

Besides the model of Huaxi, there are other models on trial in other areas of the country.

"No matter what kind of model, if it's conducive to serve the farmers, the government should encourage them to reform," said Han Jun, director in charge of agriculture under the State Development Research Center.

(Xinhua News Agency June 24, 2004)