Who's going to lend to rural Chinese?

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Rural_chinese_2 Seven hundred and fifty million Chinese live in rural areas and most have a limited access to finance. The Enterprise Surveys found that in 2003 nearly 30 percent of firms named access to and cost of financing a "major or severe" obstacle. To address the situation, banking regulators in China began to loosen the restrictions on establishing of small rural financial institutions.

A new Wharton article analyzes the difficulties that for profit microfinance programs encounter. According to World Bank's Jun Wang:

There are still many people who hold the view that rural and microfinance cannot be commercially sustainable. They believe that farmers are a vulnerable group of society, they have limited means of production and opportunities, and deserve government support. Most of these people demand subsidized interest rates, which is problematic.

Li Yiqing, a researcher at the China Academy of Social Sciences and a microfinance manager tells about state-subsidized Rural Credit Cooperatives (RRCs) that "undercut" other lenders:

Sometimes [RCCs] act as if the village is their territory. We will go in to do a project, and then signs appear advertising a new 'model microcredit program' offered by the local RCC. But unlike most microfinance programs, many RCCs receive state subsidies and do not expect to turn a profit.

While parts of the rural population may require subsidized lending others may not. Mr. Want asks: "Why shouldn't the borrower be willing to accept interest rates around 20% to 30% per year if his profit margin is 100% or 200%?"

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