In spite of all his efforts, Zhang Zhibing failed once again to obtain bank loans to set up his poultry farm. He was unable to provide anything that could be mortgaged to the bank. Although he did live in a house, he didn't own it, as in the countryside farmers only have the right to use land but not own it.

Building a poultry farm is Zhang's dream. He had been working diligently to prepare all the building materials needed to set up a farm.

"According to my schedule, the poultry farm should be built by the end of February and the first flock of chickens should be born in March," Zhang said. "This fall, they can lay eggs and make a profit."

However, Zhang still needed much more money for his rural start-up-about 5,000 yuan-to hire workers to build the farm and for feed.

So Zhang's farm so far has only been a pipe dream.

For white-collar city workers, 5,000 yuan might not be a big deal. But for Zhang, it is the amount that separates a dream-come-true from the fantasy that he is destined to live with in his rural village in west China's Shanxi Province.

Zhang is not alone. Nearly all farmers in China's vast countryside have similar funding problems.

Statistics from People's Bank of China (the country's central bank) show that less than 60 percent of farming households can get loans from the banks, and the amount received was only a portion of what they had applied for.

The Ministry of Agriculture estimated that each year from 2000 to 2003, financial needs to the amount of 500 billion yuan from rural areas could not be fulfilled. That figure rose to 800 billion yuan in 2004 and 2005.

In a nation that is striving to improve living conditions for rural residents, the lack of loans is emerging as a major problem to reckon with.

Meager means

Zhang lives in a mountainous village in Shanxi Province where farmers use traditional methods and little is mechanized. Their farming income mainly depends on the weather. When the weather is good, they can harvest; when the weather is bad, they will be hit hard. There are numerous other rural villages like Zhang's in China.

In addition to farming, Zhang's folk villagers also take up sideline production. Zhang found that the egg price was rising and decided to raise chickens. The good thing about raising chickens is that he needn't worry about the feed because he grows corn and millet, which can feed 500 to 600 chickens. The profit gained from raising chickens would help maintain a sound living standard for his family.

But without proper financing, Zhang is doomed to suffer from the whims of weather.

The Chinese Government is pitching in to help, however.

There are at least seven financial institutions dedicated to rural financing, including Agricultural Bank, Agricultural Development Bank, Rural Commercial Bank, the postal savings system, and rural credit cooperatives.

But each financial institution has its own shortcomings. The banking business scope of the Agricultural Development Bank, a policy-oriented bank, is too small, mainly offering funds for the purchase, storage and transportation of grain, cotton and oil-bearing crops. The involvement of Agricultural Bank and Rural Commercial Bank in rural areas began to shrink in the 1990s. Further, although postal savings banks have a relatively big network in rural areas, their major business is to attract farmers' deposits and they are not responsible for issuing loans. Moreover, many farmers' deposits in postal savings banks flow to the city for investment, which reduces the amount available for rural construction. Other forms of financial institutions are not prevalent in rural areas. Therefore, rural credit cooperatives have become the major force for rural financing, and in many places, they are the only institutions from which farmers can get loans.

Yet rural credit cooperatives are also beset by major problems.

"It's not that we don't give loans to farmers," said Li Haisheng, director of the rural credit cooperative located in the area where Zhang lives. "The credit cooperative is faced with many troubles."

Li explained that according to state policy, credit cooperatives do have small-loan programs to resolve farmers' problems in production and living. However, each loan may not exceed 5,000 yuan. Further, another problem is a great shortage of capital. Li's rural credit cooperative can only give 10 million yuan worth of loans in total, but the overall loan demand from local farmers is about 40 million.

Aside from the small-loan programs that rural credit cooperatives offer, in 2005 China established, on a trial basis, seven small-loan companies that only issue loans. They are not allowed to attract public deposits and are funded by private capital from a small number of shareholders. Therefore, their money supply is also limited.

Even the state-owned Agricultural Development Bank is faced with a money shortage.

"The bank has 12 years of history, but the Ministry of Finance didn't inject money into the bank in these years," said Zheng Hui, President of the Agricultural Development Bank. "Therefore, the bank has problems in capital adequacy."

Lacking trust

The lack of money is one thing. The other thing is that even though there is money out there to make loans, the debtor farmers have a hard time finding something they can mortgage to the bank. Therefore, rural financial institutions are suspicious and are reluctant to give loans to farmers.

"They don't trust us," complained Zhang. As a result, many of those who need loans will turn to loan shares.

"The current development of rural credit cooperatives can no longer satisfy the financing needs from rural areas," said Wang Sangui, a research fellow with the Chinese Academy of Agricultural Sciences.

Wang pointed out that most of the operational scale of rural credit cooperatives is small with a large proportion of non-performing loans and low capital adequacy. Some of the cooperatives cannot even make ends meet.

The inefficient loan management pattern of rural credit cooperatives makes them passive to marketing themselves and slow in developing new businesses. The common practice of rural credit cooperatives is to give loans in spring, have them paid back in autumn and hibernate in winter. This traditional way of operation fails to meet the demand stemming from current rural economic development.

Awaiting a breakthrough

In China, about 750 million people live in rural areas, accounting for 57 percent of the total Chinese population. The current backward financial service, however, is curbing the farmers' efforts to build a new countryside.

"There must be a breakthrough," said Wang.

Wang argued that the government should encourage rather than restrict rural financial institutions and gradually form an integrated rural financial system that promotes greater choice and flexibility in obtaining loans. In this way, farmers could have diverse options to obtain loans.

Secondly, interest rate marketization is a necessary condition for the sustainable development of the banking business in rural areas.

"The experience of many developing countries shows that a large number of middle- and low-end rural clients have a great variety of financial needs," said Wang. "But the problem is that the cost to grant those clients loans is high and requires a more flexible interest rate so that the rural financial institutions can set reasonable interest rates according to their costs."

Wang believes the ultimate objective is to form a sound rural financial environment that would include more flexible policies, easy market access and flexible interest rates.

Confronted with the financing problem in rural areas, the Chinese Government has begun to carry out reforms.

Liu Mingkang, Chairman of the China Banking Regulatory Commission, stated that China is working to promote rural financial reform in many aspects, such as encouraging more capital to flow back to rural areas and optimizing commercial banks' services.

"I hope more people will come here to set up banks and ease loaning procedures so that I won't be worrying about where to get loans in the future," said Zhang.