Capital squeeze sows seeds of discontent

China's famous township and village enterprises are being squeezed by a shortage of capital which is helping to depress incomes amid warnings of an impending rural crisis.

Loans granted to township enterprises shrank from 10 per cent of total loans in 1995 to a mere five per cent last year, the Economic Research Journal reported.

The downturn started after 1995 when the central Government took steps to cool an overheated economy. In key rural provinces such as Henan, Shaanxi and Hunan, the downward trend has continued this year as local governments struggle to raise more money after running up substantial debts.

Many rural governments raised money outside the state banking system by attracting investment by promising high interest rates to lenders. However, the investment funds made loans to many real estate and manufacturing projects which failed. Many of these quasi-legal and unregulated investment funds, or zijinhui, have collapsed, leaving investors angry and broke.

The Economic Research Journal called on state banks to make lending to rural enterprises easier, arguing that reform of the banking system should promote the growth of medium and small-sized financial institutions in the countryside.

To breathe new life into rural enterprises, it also proposed creating regional share markets and small securities markets.

At the same time, the People's Daily reported that a regional upturn had helped lift township enterprises' exports by 16 per cent to 342.6 billion yuan (HK$318 billion) in the first half of the year.