Are China hinterlands fertile for foreign banks’ money plant?

HSBC is on a tight schedule as it works to open rural subsidiaries around China and tap the long-neglected but now fast-growing rural economy. HSBC got approval in August from China's banking regulator to open a wholly owned subsidiary in Cengdu County of Suizhou City, Hubei Province.

HSBC Rural Bank, the subsidiary, which is expected to open for business next month, will make the British financial giant the first foreign bank to expand into China's hinterlands. Recently, it sent experts to Kaixian County, in southwest China's Chongqing Municipality, preparing to open another village bank, according to the county government.

The Chongqing subsidiary will offer tailored lending, payment and settlement services to local individuals and village enterprises, similar to those to be provided by the Hubei operation, the county government said. “It may be possible for local farmers to withdraw money from an automatic teller machine, pay electricity and water bills or even buy treasury bonds through the bank, just as many urbanites do.’’

HSBC plans to set up six to ten rural subsidiaries in China in 2008. Citibank, Standard Chartered and some other foreign-funded banks have also shown an interest in expanding to China's rural areas. “The huge business potential in China's rural market is the major attraction to foreign banks,’’ said Du Xiaoshan, deputy head of the Rural Development Institute of the Chinese Academy of Social Sciences (CASS).

Guo Tianyong, head of the China Banking Research Center at the Beijing-based Central University of Finance and Economics, said that it was a long-term strategy for foreign banks to invest in rural areas. “To set up rural banks may help them burnish their image, but may not help them earn profits in a short period. It may be acceptable to them to suffer certain losses in the short term,’’ Guo said.

Farmers have long been neglected by China's banks because of the higher risks of lending to them, compounded by greater operating costs and lower returns. Official figures indicate that farmers could rarely obtain loans of more than 5,000 Yuan (666.7 U.S. dollars).

In October, the China Banking Regulatory Commission (CBRC) decided to lift restrictions on the regions where village and township banks could be established. Instead of six provinces, such banks can now be established in any rural area. At the end of 2006, the CBRC lowered the registered capital threshold to 3 million Yuan for banks at the county level and 1 million Yuan for those at the village and town levels.

The question is how will the foreign banks invasion be received by the local banks of China?