Financial package to boost China's rural growth

As China looks to ways to unleash growth potential, it is targeting rural areas with more financial aid.

A set of policies, including trimming reserve requirement ratio for rural banks, nurturing the capital market in the countryside and pushing for innovation for rural financial products were unveiled in a State Council document on Tuesday.

"These measures show that the government aims to guide more capital into rural areas to strengthen the agriculture sector, and push for structural adjustment in the Chinese economy," said Kuang Xianming, an economist at Hainan's China Institute for Reform and Development.

The agriculture sector grew only 3.5 percent year on year in the first quarter, far below the country's overall growth rate of 7.4 percent.

Meanwhile, China's first quarter growth of 7.4 percent marked the lowest quarterly expansion rate since the third quarter of 2012, fueling concerns of a slowdown.

MORE ACCESSIBLE

Ma Jiujie, deputy director of the Institute of Rural Economy and Finance at Renmin University of China, said the financial package will make services more accessible to farmers and rural companies who have struggled to obtain financing for sustained growth.

Chinese banks have always neglected rural areas due to high costs and modest returns.

"There is a big gap between the urban and rural areas despite years of financial development, "said Du Xiaoshan, a researcher on rural development at the Chinese Academy of Social Sciences.

According to the document on rural banking, the use of state capital will be encouraged in setting up guarantee agencies in the countryside, in an effort to make it easier to obtain loans for farmers who usually have few hard assets or property that can be used as collateral.

China also promised to encourage the use of venture capital and private equity funds in rural projects to nurture innovation in new products.

Other supportive measures include corporate bond sales by rural companies, better agricultural insurance services, and a pilot program to mortgage rural land-use rights.

Ma said the measures will address farmers' capital needs, increase agriculture-related investment and serve rural development.

AGRICULTURE IMPORTANT

"As farmers get more job opportunities and their incomes improve, domestic demand in the countryside will be further unleashed," said Kuang.

According to authorities, China is unlikely to unveil any large scale stimulus package this year. Instead, growth will rely on domestic demand to boost consumption.

Echoing the document, the People's Bank of China announced on Tuesday that it will lower the reserve requirement ratio for county-level rural commercial banks by up to 2 percentage points.

Analysts estimate the cut will release around 50 billion yuan (8.1 billion U.S. dollars) to 150 billion yuan to the rural market.

Kuang said the move does not mean a shift in China's prudent monetary policy, as the amount is small given the size of the economy.

The "targeted" move will increase liquidity supply to rural areas, add new momentum to agricultural growth, and help rebalance the country's economy, said Kuang.