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Yi Xianrong

 

The recently convened National Financial Work Conference gave priority to the development of a rural monetary system in the coming years.

 

In the absence of significant improvement in the rural monetary system, the backward rural economy is not expected to make any substantial progress. This, in turn, drags down the sustainable development of the Chinese economy as a whole.

 

The financial conference set two objectives in an effort to promote the progress of a monetary system in rural areas.

 

First, the Agricultural Bank of China is to be reorganized and its role redefined.

 

Second, new types of rural monetary institutions need to be introduced.

 

The reform of the Agricultural Bank of China faces three major questions.

 

First, how should its heavy baggage accumulated over the years be removed?

 

Second, how should its new role be defined after the historical burden is removed?

 

Third, on this basis, how can the agricultural bank be oriented toward commercial banking like other State-owned big banks?

 

The financial conference initially defined the agricultural bank's role as a monetary institution geared to serving county-level economies.

 

But this is not enough because the country's rural economy has undergone dramatic changes. This is where the crux of rural financial reform lies.

 

For example, rural areas in economically developed regions such as Jiangsu and Guangdong provinces have become fairly urbanized.

 

In addition, traditional farming is giving way to industry in these developed regions and in some areas in Central China.

 

Also, much of the rural labor force has shifted to developed coastal areas to engage in industrial production and services while the less competitive labor force is left behind, engaged in farming.

 

Finally, traditional rudimentary farming continues in poverty-stricken areas.

 

Taken together, a unified rural financial system is no longer capable of catering to the needs of the rural economy.

 

The reform of the Agricultural Bank of China and the redefinition of its role must adapt to the much altered and pluralized rural economy. Consequently, different financial patterns should be introduced to cater to different needs in different places.

 

The reform of the agricultural bank should no longer be focused on agriculture alone. Instead, the reorganized agricultural bank ought to switch the weight of its business to serving development in the economically developed areas and regions where farming is giving way to industry.

 

Meanwhile, new types of rural monetary institutions should be created to serve the backward areas.

 

The China Banking Regulatory Commission has made preferential arrangements for the introduction of such new rural financial institutions. This is encouraging news.

 

However, it is no easy job to push for overall development of such rural financial organizations across the country. Neither reorganization of the existing rural financial institutions nor establishment of brand-new bodies seems feasible, taking into account complicated situations in rural areas.

 

The best way is to clearly define the right of use for the land the farmers are currently tilling. (Note: In theory, all land is owned by the State. Farmers have only the right to use it.)

 

Why? First of all, we should ask: What is currently hampering the development of rural monetary business? The answer is that rural areas lack monetary tools and products that lessen or dilute the risks arising from rural financial business, which centers on credit extension.

 

In this scenario, we find it hard to introduce new mechanisms to the rural monetary system.

 

Think why the business of housing loans has become so prosperous in such a short time in Chinese cities. It is because housing is the banks' most valuable tool for mortgages. It is housing mortgages that have largely facilitated the booming domestic real estate market and housing-related monetary business.

 

Why are farmers unable to get loans from banks for the development of farming? Why cannot farmers get bank loans by mortgaging their own housing? Most important of all, they lack valuable properties to mortgage. Humble rural houses have very low commercial value and cannot be turned into valuable articles to mortgage.

 

Therefore, it calls for either quickening the urbanization process or directly and unequivocally endowing each farmer with the right to use the homestead and farmland.

 

When farmers have a clearly defined right of land use, they can use the land to mortgage when they need loans from rural banks. In this way, the channel for getting loans is opened up and various kinds of rural financial institutions become willing to extend credit to farmers.

 

In this sense, giving clearly defined land-use right to farmers may provide an effective way to address the chronic maladies haunting the rural financial business.

 

To sum up, the process of urbanization ought to be accelerated so that larger numbers of farmers will become urban citizens, helping downsize the rural population. At the same time, the right of land use should be clearly defined. In this way farmers can stand at the starting point of wealth and have valuable property to mortgage.

 

The author is a researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences

 

(China Daily January 30, 2007)