PBOC floats trial scheme enabling farmers to mortgage their land, in effort seen as helping to boost rural economy

Trial mortgage programme to be introduced in selected regions nationwide, according to PBOC

PUBLISHED : Thursday, 24 March, 2016, 9:56pm
UPDATED : Friday, 25 March, 2016, 3:36pm

In a historic first, China will allow farmers to use their land as collateral for bank loans, potentially enabling the country’s more than 600 million rural residents to tap the credit markets as part of an easing of restrictions on land use and financing.

The People’s Bank of China announced the plan in a statement on Thursday, saying a pilot programme would be conducted in selected regions across the country.

Banks should determine the rates and credit details and make the procedure simplified for borrowers while strengthening risk controls, the PBOC said.

“It is a very important step towards liberalisation of rural land and building use, which was illiquid in the past. Allowing these usage or operation rights to be mortgaged could increase financing capability of those living in the rural areas and hopefully boost the economy,” Mizuho Securities analyst Alan Jin said.

Farmers in China are not allowed to buy or sell the land they sow, under a system dating back to the Mao Zedong era where collective ownership is overseen by the village party branch and the village committee. The system has long been criticised as limiting farmers’ income and holding back the rural economy.

Some analysts praised the trial programme, saying it was a major step towards a market-oriented reform of rural land.

Still, some economists expressed concern about the ability of rural residents to repay what they borrow.

“The repayment of the loan would be a problem as the income of farmers is very limited,” Haitong Securities chief economist Li Xunlei said. “They may use the loan to buy flats in cities, which are very expensive, but how do they pay back then?”

Li said the policy could be “flawed” if the government did not find ways to help farmers improve their income and social security.

About 46 per cent of China’s population live in rural areas, according to the World Bank.

Meanwhile, others said it would take banks some time to learn to handle this new business.

“How willing are banks to lend money to these assets? It is totally new and would be difficult for banks to liquidate the mortgaged houses if the loan goes wrong,” Jin said.

He added that it would be challenging to give a fair valuation for village houses as the quality of rural properties could vary wildly. And it remains unclear if banks have enough in house expertise to carry out this business.

The new policy is also believed to be part of the central government’s move to help reduce stockpiles of unsold homes in smaller cities.

Housing minister Chen Zhenggao said earlier this month that rural residents had increasingly become a driving force for the property market in some smaller cities.

“Farmers buy homes for their own use, and the purchases pave the way for their relocation to cities,” Chen told a press conference during the National People’s Congress, adding that the migration also benefited the mainland’s efforts to clear excessive stockpiles of unsold homes.

In January, Agricultural Bank of China issued mortgage loans worth 17 billion yuan (HK$20.25 billion) to 54,000 households in rural regions for the purchase of city homes.

Chen said at the time that financial institutions would continue to support rural residents who wish to buy homes in urban areas.