English | 中文版 |  Русский

Breaking News:

Source: www.asiaecon.org |

CHINA WILL LEGALIZE PRIVATE LENDING TO HELP RURAL AREAS


China has announced plans to legalize private lending in an effort to alleviate the credit crunch pressures in the country's rural areas. The country's private lending market has been often limited due to its “unauthorized” status, although it is estimated at about $292 billion a year, and is frequently the only source of credit for rural regions. The development of private lending as a major player in the rural market is essential, particularly in a time where the global financial crisis has severely impacted employment, agriculture, and capital shortages in China's rural areas.


China has announced plans to legalize private lending in an effort to alleviate the credit crunch pressures in the country’s rural areas. The country’s private lending market has been often limited due to its “unauthorized” status, although it is estimated at about $292 billion a year, and is frequently the only source of credit for rural regions. The development of private lending as a major player in the rural market is essential, particularly in a time where the global financial crisis has severely impacted employment, agriculture, and capital shortages in China’s rural areas.

China’s rural area has experienced constant capital shortages since the 1990’s, where the country underwent an economic reform aimed at creating a market-oriented system, resulting in the withdrawal of most state banks from rural areas. Currently, the rural area counts only with the Agricultural Bank of China, postal saving banks and rural credit cooperatives, all of which have limited lending due to fear of low profits and bad debt.

China’s agricultural sector has been significantly harmed by the economic slowdown, with an estimated 20 million rural workers losing their jobs. China’s worst drought in half a century has also severely slashed grain output numbers for 2009. Analysts expect income growth in 2009 for rural workers to be less than growth in 2008, which reached 8%. While the government has encouraged unemployed workers to become entrepreneurs, it has become increasingly hard for the rural population to obtain loans.

Entrepreneurs in China’s rural areas have resorted to pawnshops, unauthorized private money lenders, underground banks and for-profit guarantee providers, in an effort to obtain a loan. These institutions have a lower lending standard but also demand higher interest rates. According to The People’s Bank of China, underground banks have been known to impose interest rates of 200% to 300% on loans, while commercial bank loans have a current interest rate of 5.3%.

According to China Daily, around 69% of households in eight rural provinces had made loans from private lenders in 2008. Moreover, the newspaper also stated that out of 120 million farmers looking for loans, only 40% were able to successfully borrow money.

China’s Development Bank has forecast that “the capital shortage in rural China would hit 5.4 trillion yuan by 2010 and 7.6 trillion yuan by 2015 if the situation didn’t improve.

The legalization of private lending has followed several efforts made by the government to improve capital liquidity in rural areas during the past couple of years. In 2006, the government facilitated the entry of banking institutions in rural areas by easing the established conditions. China has also raised the numbers of micro-lenders in rural areas. Last year, private-sector and foreign institutions became able to take part in rural finance.

The new private lending policy would primarily benefit small business that have been hurt by the difficulties of obtaining credit from state-owned banks due to the financial slowdown and subsequent credit crunch. It would also make it easier for farmers to take out small loans.

Additionally, it will allow the government to regulate private lending, protecting the legitimate interests of borrowers and lenders, as well as preventing the financing of money laundering and illegal activities, often associated with underground private lending.

China’s government hopes that the new policies, along with already established efforts in the last two years, will substantially ease the credit pressure and boost growth in the country’s slumping rural sector.

Source: www.AsiaEcon.org
Please send comments and constructive suggestions to feedback@AsiaEcon.org

Source: www.asiaecon.org |


More Special Articles - Asia Business & Economy Articles