http://www.washingtonpost.com/wp-dyn/content/article/2007/02/18/AR2007021801474.html

ZHUOZHOU, China - Zhang Yulong and his brothers thought they'd be rolling in cash if they'd been able to borrow from a bank to finance a string of business ideas.

Instead, the farmers-turned-entrepreneurs leant on family and friends to build a business that used to specialize in stationery and now sells burial robes and paper offerings for the afterlife.

In Zhuozhou, a county town a couple of hours' drive southwest of Beijing, few manage to borrow from local banks, which prefer to lend to state firms or well-connected clients.

Turning to unlicensed lenders would have meant paying far higher interest rates than Zhang, 56, could stomach.

"We've missed out because we had few places to go for funds. If we'd been able to borrow from a bank, we could have struck gold by now," he said.

Similar complaints are heard across rural China, a loose phrase that encompasses dirt-poor villages and townships as large as mid-sized European cities. The collection of towns and villages that make up Zhuozhou, little more than parched farmland a decade ago, has a population of more than half a million.

China has long struggled to channel lending to rural China, from which mainstream banks have largely retreated.

But now that the big city-oriented state banks have been more or less nursed back to health, the ruling Communist Party is switching gears and backing an array of initiatives to build a system of rural finance that can stimulate jobs and growth.

The role of financial institutions in building a "new socialist countryside," with the aim of narrowing an alarming income gap between town and country, will feature prominently during next month's annual session of parliament.

There is much to do: rural China is home to less than one sixth of all bank branches, which accounted for 15 percent of the nation's combined deposits and loans as of late 2006.

Cities get 10 times more loans per head than the countryside, where more than 60 percent of China's 1.3 billion people live.

In Zhuozhou, the appetite for loans is evident. Liu Boxin, a peasant, says he'd gladly add to his sole pig and three grubby goats if only he could raise the funds.

LANDMARK CHANGES

To address the issue, the government has begun to overhaul Agricultural Bank of China, one of the country's biggest commercial lenders, and is setting up a new postal bank with a remit to lend principally to farmers and rural enterprises.

Beijing will also do more to revamp debt-laden rural credit cooperatives, now the brittle backbone of rural finance.

But the biggest difference to people like Zhang could flow from policies unveiled in December that aim to bring into being new types of rural financial institutions.

In a pilot scheme planned in six provinces, individuals will be allowed for the first time to set up privately owned credit cooperatives and other types of financial firms.

Policy makers hope commercial banks will team up with other private shareholders to set up lenders at county level or below and that farmers or small firms will band together to create new kinds of credit cooperatives, even in small villages.

The six provinces and regions -- Hubei, Jilin, Sichuan, Qinghai, Gansu and Inner Mongolia -- will also experiment with new lending companies under a relaxed regulatory framework.

"These measures will bring enormous change to China's financial landscape by allowing masses of small institutions to emerge," said Yuan Dejun, an economist with Galaxy Securities who advises the banking regulator on rural finance.

While some analysts think profits won't come easy, others see money to be made if loans are priced right and risks are prudently controlled.

"You can also be profitable operating in rural areas," said Wang Jun, a financial sector specialist with the World Bank, who warns of the blurred definitions of "rural" in China.

STEP BY STEP

While the trials could bring newcomers into the market, other steps are needed to galvanize lending to rural areas.

To really arouse the interest of commercial banks and private investors, China may need to free up interest rates for rural lending and build up a credit bureau, experts say.

It may also need to enforce penalties on defaulters and promote agricultural insurance schemes that can protect lenders in the case of natural disasters.

"More incentives have to be introduced, including favorable tax rates and fiscal subsidies in the form of interest discounts," said Song Hongyuan, an expert on the rural economy with a think-tank under the agriculture ministry.

Dai Hui, who heads Dutch lender Rabobank's Beijing office, thinks it will take time for changes to take root.

"I don't expect that things will be completely changed within a very short period of time as the sustainability of a financial institution can only be assessed over the long term," she said.

The peasants-turned-businessmen of Zhuozhou are skeptical.

"Of course we'd like more access to funds, but we don't really believe that can happen," said Zhang's brother, Yukun.