**Experience and Challenges of China's Rural Finance**

**Zhou Qingyu**

**Agricultural Bank of China**

Ladies and Gentlemen. It is my great pleasure to have this opportunity
to exchange our views on the topic of rural finance with experts and
professionals from China and the United States. Our experts from MOF,
CBRC, and CIRC have just given you an overview of China's rural finance.
I would like to share with you our understanding over the practice and
challenges facing China's rural finance based on our own experiences.

In the first place I would like to give you a brief introduction of the
Agricultural Bank of China. ABC is one of the four biggest state-owned
or state-held banks. Since established, the bank has committed to
delivering premium financial services to the biggest client group in the
urban and rural areas. As of the end of March 2008 we have 25000 banking
offices and 448000 employees nationwide. The total assets of the bank
stood at 6.3 trillion yuan, which is equivalent to USD 900 billion. Our
total deposits amounted to 5.6 trillion yuan, which is equivalent to USD
800 billion. Our loan balance totaled 3.60 trillion yuan, which is
equivalent to USD 513.7 billion. In terms of resources allocation, 51%
of the total banking offices, 44% of the employees, 36% of the assets,
39% of the total deposits and 30% of the loan portfolio was from our
business in the county-level rural areas. Consequently ABC is the bank
that is most deeply involved in agriculture-related business and serving
the biggest group of clients in China. It is also the only bank that has
set up a sound operation and management system for rural finance. In
2007 the Bank ranked in the 65^th^ place among the Banker's Top 1000
banks and ranked in the 277^th^ place in global Fortune 500.

Whilst maintaining the strong growth momentum, we focus on stock-holding
reform with key efforts to improve corporate governance mechanism and
enhance operational and risk control measures capabilities.

Secondly I would like to brief you our practice of the commitment to
financial services to the peasants, the rural areas and the agriculture
sector.

ABC was re-established in 1979 after a few intervals of shutdown and
revival. Since 1979 the bank had been a specialized state bank engaged
in delivering financial services and managing funds supporting
agriculture and agriculture-related business. Its clients include
peasant households, farms, township enterprises and purchasing
cooperatives. In the late 1990s, in line with financial reforms launched
by the government, we finished the transformation from a specialized
policy bank to a comprehensive commercial bank. As a result we saw
strong growth in our urban finance business and substantial structural
and dimensional changes in our rural finance. During this period there
were profound structural changes and reforms of rural economic model,
causing systematic risks in the client group dominated by township
enterprises and purchasing cooperatives. Consequently our bank suffered
heavily from the loss and accumulated huge stressful assets. As
requested we withdrew our business from micro-finance in the rural areas
and part of this market was shifted to rural cooperatives. Our business
focus was shifted to leading livestock breeding enterprises,
agriculture-industrialization projects, urbanization projects, and
poverty alleviation funds.

Recent years our agriculture-related business enter into a new phase
because of the following two reasons. First, the government set the tone
for the market position and responsibilities of ABC, that is to be
pillar and pivot in the rural finance system and to further strengthen
its roles and functions as a leading provider of agriculture-related
financial services. We are urged to play a bigger role in supporting the
rural finance by leveraging our resources, expertise, and networks.
Another important reason is that the new concept of agriculture, peasant
households, and rural areas is different from the old ones in that there
has been profound progress in rural economy and agriculture development.
At present it is the country's top priority to solve the problems of
agriculture, peasant households, and rural areas. The central government
continued to launch a number of differential policies targeted to
improve the conditions of agriculture-engaged business. Meanwhile, along
with the on-going new rural construction as well as the deepening of
agriculture industrialization, commercialization, urbanization and
integration of urban and rural areas, there exist enormous needs for
large-scale, extensive and efficacious financial services. The rural
areas have become a fast-growing but under-developed blue sea market
with huge development potential.

Therefore, our bank has promulgated guideline policies that emphasize
synergy between development of urban and rural business. While
strengthening our presence in the urban areas, we increased our
commitment to the blue sea market and probed into new business model
that would satisfy efficiency and quality at the same time and combine
the agriculture commitment and commercial practice together. Having
studied the unique features and needs of agriculture-engaged clients, we
have launched pilot experiments in system, procedures, products, and
mechanism in a number of our branches.

Our agriculture-related services shall include the following four
dimensions. The first dimension is about the daily life facilities,
which means to innovate practical and accessible products and services
to the peasants including those peasant workers. The second dimension is
to help small and medium sized enterprises to grow and expand. The third
dimension is to support agriculture modernization including
agriculture-engaged dragonhead enterprises, key agriculture base
construction, and logistics and circulation system building. The fourth
dimension is to support rural infrastructure construction including
water, power, and gas supply projects, and roads and bridges building as
well as small town construction. On top of these we also provide agent
and settlement services to other rural financial institutions.

In terms of credit management, we used to copy the practice of the urban
finance in our rural finance operation, which failed to address to the
features of rural finance business. And now we introduce a brand new
credit system under which the grassroots level branches are given more
authorities and flexibilities. At the same time we have revamped our
approval procedures and modified our rating methodologies, guarantee and
credit review approaches. I would like to elaborate on this topic in the
afternoon session.

Performance appraisal reform is very crucial to the successful shift of
our roles and positions. To give our branches incentive to realize the
changes we adopted a performance appraisal approach differing from urban
finance. The new approach is focused on the capabilities in service
delivery, risk control and sustainable development. We sought to give
full play of the initiatives by introducing the concept and practice if
performance-linked salaries and anticipatory income account.

In order to develop products and services that cater to the needs of
agriculture-related business and accelerate market responsiveness we are
working on a rural finance product development mechanism with which the
grassroots level branches are authorized to develop and launch new
products based on the local market needs and realities. We sought to
upgrade our rural finance service by enriching more financial products
including fund distribution, bank insurance, foreign exchange trading,
cash management, e-banking, etc. We launched the Green Homeland Loans,
Rural Cooperative Loans, and Express Loans for Small Enterprises and
issued Peasant-Benefit Card, a bankcard to provide micro-finance service
to the peasants.

Last but not least I would like to talk about risk management. Compared
with the urban finance, it is believed that rural finance tends to be
more risky. Our opinion is that the key challenges are how to identify
the risks by appropriate market entry definition, how to cover the risks
by proper market pricing, how to control the risks by rigorous
management, how to give early warning by using scientific methodologies,
how to transfer the risks by effective and proper guarantee, how to
offset risks by sufficient provisions for losses, and how to resolve the
risks by timely write-off. To mount these challenges we need to set up a
comprehensive system to address each problem.

That is all about our experience and practice over the years. I would
like to give you some important figures that is relevant to our
agriculture-related business. As of the end of March agriculture-related
loan balance stood at RMB 1.3089 trillion yuan, among which RMB 78
billion yuan was originated to agriculture industrialization, RMB 189.6
billion yuan was originated to rural infrastructure construction, RMB
106 billion yuan was originated to peasant households and RMB 116.5
billion yuan to county level commodities logistics and circulation, RMB
91.4 billion yuan to poverty alleviation, and the rest RMB 604.5 billion
yuan was to township enterprises and other organizations. Apart from our
commitment to funding needs we also expanded liabilities and fee-based
business.

Just now I introduced the development of our rural finance, the general
picture, realities and practice. However we also face big difficulties
and challenges due to lack of management experience and some restriction
from external factors.

In the first place we need to deepen our understanding in the business
pattern of agriculture-related financial service. We shall also improve
related policies and products and services especially in risk
management. Undoubtedly, the ideal scenario is, to achieve the goal of
commercial banking operation and commitment to agriculture-related
business at the same time. However, in general, we are still at the
early stage of coping the interaction between agricultural related
financial service and commercial banking operation and between
efficiency and risk management. In fact, the inconsistency and conflicts
between agriculture-related financial services and commercial banking
operation are practical issues for China as the rural economy is under
developed on the whole and agriculture-engaged clients are relatively in
poor conditions. Objectively speaking, since our bank undertook many
agriculture-related financial services, we have carried relatively large
burden in the competition with other commercial banks. In the near
future, we shall make more efforts on how to innovate new policy and
services pertinently and how to realize the consistency between
efficiency and risk control. Your kind advice and expertise will be
appreciated.

The second issue is to construct a sound credit environment for rural
finance. In other words, the priority is to construct rural commercial
environment based on good faith and to launch a comprehensive rating
system covering both individual household, village or town and to
optimize a system that encourages good faith and credit record and
punishes default or fraud. Secondly we need to optimize rural guarantee
and agriculture-related insurance system and enrich the categories of
collaterals that can be accepted. The agriculture-related insurance
companies need to play a pivotal role to diversify and transfer the
credit risks. The third issue is to strengthen policy support in
taxation, interest rate, and differential administration standards while
considering the full nature of agriculture-related business, which is
high operating cost, risky, and relatively low return. If a policy
support framework is well in place the rural financial institutions will
have greater incentive to intensify support to the agriculture-related
sector and clients