Chinese farmers secure loan using land rights as collateral

By George Scott.

Chinese state run news agency, Xinhua, reported on the 10th of April, in Liaonin province 151 farmers secured a collective loan of 300,000RMB from a rural credit cooperative, using 60 hectors of their collective land and their right to farm it as collateral.

This action, as presently described by Chinese law, is illegal. The sale of land or it’s use as collateral is forbidden. However, Faku county in Liaoning has been chosen for an experimental rural financial scheme with the full backing of the Peoples Bank of China, the Central Bank and the Chinese Banking regulatory Commission. If successful, the scheme could be extended to include over 350,000 households over the next two years.

Back in September, during a visit to the historically significant village of Xiaogang in the eastern province of Anhui, President Hu reveled an important new and encouraging policy direction which would allow farmers to freely transfer their land-use rights – effectively allowing farmers the freedom to trade or dispose of land contracts issued to them by the government, either by re-contracting them or selling them. He was quoted by state media as saying, "Not only must the current farmland contract system be kept stable and permanent, we must also grant farmers more rights and protect their rights to contract and manage land," he went on to say. "At the same time, if farmers want to, we'll allow them to transfer land contracts and management rights through various means to appropriately develop larger-scale operations.”

The revealing of this important step in rural policy came just short of the 17th Central Committee of the Chinese Communist Party (CCP) which began on the 10th October 2008. The village of Xiaogang was particularly significant as it was the home of 18 farmers who in 1978, in direct contradiction of communist ideology, signed a contract to divide up the People’s communally owned farmland into individual pieces called household contracts, for each family to cultivate.

From a purely a historical perspective rural reform is a crucial move politically. The rise and fall of almost every dynasty has been related to farmers and land. More recently illegal land seizures have been a major source of rural instability. According to official statistics, there were 74,000 "mass incidents" or public protests in 2004, with 3.7 million people taking part. In 2005, the number of protests with at least 15 participants totaled 87,000, growing to 90,000 in 2006. Many such protests have been sparked off by land requisitions.

Another important factor to consider is the potential financial boost this could give the rural economy, and the knock on effect that would have unlocking domestic demand. Lu Xueyi, a retired professor at CASS was quoted as saying; "There is a lot of demand in the countryside but 70% of the population is too poor to afford things like television sets, clothes, and so forth,". "Only when reform is carried out and rural income is increased and development speeds up, will you generate internal demand."

What does this mean for the Chinese microcredit industry? One of the needs driving microcredit is that for collateral free lending, if farmers will be able to secure loans on their land or farming rights then this could drastically reduce this need. With the recent surplus of cash provided as a result of recent policies by the government microfinance it would be possible for provide a fuller and more effective service, ensuring that help reaches all of those who need it.

SCAMP  - Farmers are finally allowed to use land rights as loan collateral.
Asia Times - Oct 10th 2008, Chinese Farmers can bank on Farmland.

Comments

[Sam L]

A recent news Chinese article on the risk of pushing rural land reform too quickly. The main concern is the estimated value of the land might be too low.

http://news.sina.com.cn/c/2009-05-09/014617775925.shtml