By Zhu Dantao, Development Research Center of the State Council

Research Report No.277, 2006

As rural finance has been playing a key role in promoting bank deposits, allocating funds and diversifying risks, it has arousedgreat concernfrom various sectors and many reform measures have been introduced. In our opinion, any reform on rural finance must be based on a deep understanding of its characteristics, structures and development trend. The demand analysis must be specially emphasized in the overall study of rural finance. We need to base our study on well-grounded surveys which can help make our study more comprehensive, systematic and insightful.

This study on demand for rural finance is mainly based upon three surveys on rural finance. The first one was a nationwide field survey conducted by the Research Department of Rural Economy of the Development Research Center of State Council (Hereinafter referred to as DRC Survey) in 2005, which covered 29 provinces (municipalities or autonomous regions). A total of 1962 valid questionnaires on peasant households were received, plus another 133 on villages and 206 on small and medium-sized enterprises (SMEs) in rural areas.The second survey was conducted by the Sichuan Academy of Social Sciences in Sichuan Province during 2003-2004 (Hereinafter referred to as Sichuan Survey). The survey was conducted in four counties from four areas(with one county from one area): plain area , hilly area, mountain area near the Sichuan Basin and the area inhabited by ethnic groups, covering 17 villages and 243 peasant households. The third is a field survey jointly conducted by China Agricultural University (CAU) and the Asian Development Bank (ADB) in Tongren of Guizhou Province (Hereinafter referred to as Tongren Survey) during July 2005, covering 502 peasant households in 39 villages of 4 counties. The three surveys are different in scope and emphasis, complementing and verifying each other, which helps to give us a comprehensive and objective understanding of rural financial demands in China.

I. Financial Demands in Rural Area AreDifferent from Those in Urban Areas

Generally speaking, as a result of different production and organization mode in the rural economy, the financial demands in the rural areas are different from those in the urban areas. The special economic development stage, social transitions and cultural traditions of the country have made rural financial demands even more unique.have madeer referred to asapacity The rural financial demands are those for credits, savings, insurance and other financial services, as will be discussed below.

1. Characteristics of loan demand

(1) Low yields and high risks

As China's agricultural production is characterized by small scale, low technology and poor market accessibility, the economic return on it is generally lower than on other industries and the yield from agricultural loans is thus at a relatively low level. If compared with urban or industrial & commercial credits, agricultural credit bears higher market risks as agricultural product has less supply elasticity and agricultural production is weak in self-adjustment and takes longer to react when price fluctuates. Furthermore, agricultural credit has to bear natural risks that are caused by agriculture's high dependence on nature. And natural risks are irresistibleforce and difficult to be foreseen. The characteristics of low yields and high risks of agricultural loans raises different requirements to rural financial institutions in terms of their commercialization, marketization and organizations in the rural financial market.

(2) Seasonality and timeliness

The widespread use of modern science and technology has not change the seasonality of agricultural production, which results in the seasonality of agricultural loan demand for the loan term needs to be the same as the cycle of agricultural production. Nonetheless, the Tongren Survey shows that among a total of 433 loans from 2002 to the end of June 2005, the loans with a term less than 1 year accounts for 93.1% and the loans with a term above 1 year occupies 6.9%.When asked about the desired loan term, only 57.7% of 499 valid respondents choose within 1 year and 42.3% choose above 1 year, which indicates that the actual loan term for farmers is much shorter than they have desired. The DRC Survey suggests that farmers do not expect the loan period to coincide with the calendar year. Rather, they prefer to take out a one-year loan in between March and May. If a loan is extended at the year beginning, they would expect the term to be 15 to 18 months. Besides, considering natural and market risks of agricultural business which lead to the uncertainty of production and sales, farmers need a flexible repayment schedule.

Rural businesses are mainly SMEs whose products are diversified and in small volume. Their funding demands are usually frequent, pressing and haphazardry, not as regular or well-planed as the large enterprises in urban areas. This makes the timing of rural financial demands even more complex.

(3) Small loans

The land contract system has been deemed as the starting point of rural reform in China. Though it helps to reconstruct the micro basis of the rural economy, small land acreage per household also leads to a small-scale peasant economy. As a result, most farmers prefer to take out small loans. The China Statistics Yearbook shows that by the end of 2005, the borrowing by a farmer household is less than RMB 10 thousand yuan on average. The DRC Survey has covered 1,899 loans, with each loan averaging RMB 8,244 yuan, and loans less than RMB 5,000 yuan accounted for 67.3% of all the loans.The borrowings by rural enterprises are also small. The DRC Survey shows that 251 loans, mostly small loans, were extended to the surveyed rural enterprises during 2001~2004, with 40.64% of them ranging from RMB 10 thousand yuan to 50 thousand yuan. And only 21 out of 251 loans are more than RMB 1 million yuan. Although the aggregate funding demands from rural residents and enterprises are huge, the demand from individual farmer or enterprise is relatively small. The small-scale demand pushes up operating costs of the financial institutions.

(4) Lack of traditional pledge

There is an acute shortage of pledges in rural areas which are commonly seen in a loan to urban residents and businesses. The land of collective ownership in rural areas cannot be used as a pledge, except for the land use right of collective-owned wasteland that farmers have contracted (provided, however, that the prior consent of the contract-awarding party is secured), or the land use right of collectively-owned land that is occupied by pledged buildings, like factory buildings of rural enterprises. A farmer's house is a basic necessity of his life and cannot be mortgaged in real sense and, what is more, the land his house occupies cannot be mortgaged either, which also poses a restriction for using the house as a pledge. Most of the farmer's productive properties can hardly be sold in the market, which makes them unacceptable as pledges. The Tongren Survey covers 501 loans in total, 433 or 86.4% of them unsecured. It is really an important issue for the rural finance sector to develop credit products that do not need traditional pledges and to expand the scope of acceptable pledges.

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