Guo believes that lower registered capital requirements enable more institutions to enter the rural financial market. The competition among them may promote survival of the fittest so as to increase the quality of financial service. Entrance of all types of capital and institutions is also beneficial to establishing a competitive mechanism.

"The CBRC's new policy opens a large door to the rural financial market," said Shen Minggao, a Beijing-based economist with Citigroup.

According to Shen, allowing private capital to establish village and township banks and credit cooperatives has legalized some private loans. The competition between these new banking institutions and the existing rural credit cooperatives will help boom the rural financial market.

Tang Shuangning, Vice Chairman of the CBRC, disclosed that the commission is striving to create a favorable environment for financial service development in rural areas by adopting preferential tax policies and establishing a credit system covering all farming households and rural enterprises.

Although the threshold of registered capital is quite low, risks of village and township banks will not be high, since the CBRC will uphold the principle of "low threshold but strict supervision," requiring that at any time, the capital adequacy ratio shall not be lower than 8 percent and that the asset loss reserve rate shall not be lower than 100 percent.

Moreover, in order to prevent congenital deficiency of newly born village and township banks, the CBRC's policy demands that at least one banking institution should be enrolled as the sponsor. "It is an important measure to ensure that newly established banks have a sound basis from the beginning," Zang said.

Foreign banks and investment companies such as Citibank, the Hong Kong and Shanghai Banking Corp., Actis and Softbank Asia Infrastructure Fund told Beijing Review that they are quite interested in village and township banks but will make further decisions after the rules for implementation are released.

Promising future

In China's rural areas, financing problems are prevalent. According to Liu Mingkang, a major problem in rural financial service is the limited number of financial outlets. Hence, there is a vast market space for village and township banks, and competition in rural areas is less intense than that in cities.

According to Guo Tianyong, a county-level village and township bank may need only three or five managers and 20 to 30 business staff for absorbing deposits and granting loans. If a bank of this kind can absorb 100 million yuan of deposits and grant 40 million yuan in loans a year, it can make an annual profit of 2 million yuan.

Statistics from the People's Bank of China (PBC) show that at present, deposits in China's rural areas stand at 4 trillion yuan. That is to say, by simply absorbing one 40,000th of present rural household deposits, a village and township bank may gain 2 million yuan a year, and it is easy to grant 40 million yuan of loans.

Figures from the PBC show that at present, 120 million rural households need loans, but less than 60 percent of them can be satisfied, with most of the capital coming from small loans provided by rural credit cooperatives. In addition, only 50 percent of small rural enterprises can be granted the loans they need.

Existing rural financial institutions still have great business volumes. The PBC statistics indicate that in the first 10 months of 2006, small loans granted to farming households amounted to 187.3 billion yuan, up 17.42 percent from the same period a year earlier, and loans granted to groups of farming households surged 37.47 percent over the beginning of 2006 to 118.5 billion yuan. By the end of September 2006, the balance of loans granted to small rural enterprises by major commercial banks had reached 2.7 trillion yuan.

Du Xiaoshan, Deputy Director of the Rural Development Institute of the Chinese Academy of Social Sciences, said that thanks to preferential state policies, the agricultural, industrial and service sectors in rural areas have flourished. This provides a good chance for the development of village and township banks.