They're not very sexy and if you mention them as a possible investment to most bankers you'll likely get sniffed at and dismissed. China's debt-ridden rural banks and credit co-operatives have attracted very little attention from foreign investors so far but one bank sees them as a foothold in a potentially lucrative market. Rabobank's Dutch roots are firmly planted in agriculture and the businesses that go with it and its Chinese expansion strategy is keeping the bank in the territory it knows best. It is buying stakes in rural Chinese banks in the hope that as agribusiness grows it will be the bank that finances it and helps the companies expand overseas. The central government has been putting increasing pressure on domestic banks to provide more services to rural consumers even as many banks are trying to close loss-making rural branches and focus on more lucrative urban markets in the more affluent eastern parts of China. China's insurance regulator plans to force insurers to follow local banks out of the cities and into the hinterland to offer country folk insurance products such as health and unemployment coverage. While many rural banks have expanded their customer base beyond the farming community, they are still the best avenue for a company such as Rabobank to expand its global agribusiness network. China's agribusiness sector is made up of countless small businesses in niche markets with only a handful of national or international players. Small soyabean crushers and ramshackle farms with a handful of livestock far outnumber the companies with a national, or even regional, presence. Few of the bigger companies, or rural banks that serve them, are publicly listed, making it a hard market to crack for bankers seeking new clients. Small and ignored they may be, but they're in need of financing, and the rural banks can't do it on their own. 'There is clearly pent-up demand. In most rural areas banking is not competitive. A lot of the good, growing small and medium-sized enterprises can't get bank loans. It's almost like there's a vacuum to be filled,' said Wang Jiansheng, principal investment officer and head of financial services at International Finance Corp (IFC), the commercial lending arm of the World Bank. For many small rural companies, access to the expertise a foreign bank offers could help them reach distant markets or realise dreams of building a national or international presence. Most foreign investors have been betting on China's US$2 trillion of household savings instead of its farmers. They hope to get a share of the market for savings plans and credit cards as well as financing its booming industrial, capital markets and real estate sectors. Citigroup and its partners in November signed a US$3.1 billion deal to take control of state-owned Guangdong Development Bank, becoming the first overseas financial-services firm to manage a Chinese bank. Bank of America has tied up with China Construction Bank, HSBC found a fit with Bank of Communications and Royal Bank of Scotland invested in Bank of China. Several years ago, before the rush of foreign banks into China had started, Mr Wang approached Rabobank and proposed a strong city bank for investment but Rabobank declined, saying they would rather focus on rural agribusiness and banking. In many cases, rural banks are the only lender in town, which suits Rabobank just fine. And while small to medium-sized companies are unlikely to generate the financing fees of a big Shanghai property developer, they're more likely to keep coming back to the same bank for all their needs, from deposits to insurance to loans. 'In rural banking there is often much less competition, and that, together with the fact that you sell clients many different products, means margins can be a bit higher even if the loan sizes are much smaller,' said Patrick Vizzone, head of advisory and research for Asian food and agribusiness at Rabobank. Serving the food and agribusiness sector means being a jack-of-all-trades, just like the farmers themselves. Bankers need to understand the businesses of seed, fertiliser, chemicals, food processing and packaging, retail and of course farming itself. Rabobank is keen to help Chinese companies in this sector expand internationally and hopes to be the matchmaker between its European and Chinese clients when that happens. 'In the past five years you're seeing more and more focus on Chinese companies going out and buying companies overseas or locking in resources from overseas to bring back to China,' Mr Vizzone said. Rabobank in July teamed up with the IFC to buy 15 per cent of United Rural Cooperative Bank of Hangzhou for 266 million yuan, marking the first foreign equity participation in a Chinese rural co-operative bank. The bank is also working on deals with Tianjin Rural Co-operative Bank and Liaoning Rural Credit Union. When asked if there are many more deals to come, Mr Vizzone would say only that it wouldn't surprise him if there were. Mr Vizzone offers up some compelling statistics in support of his bank's strategy. Chinese consumers spend 1.2 trillion yuan on food each year and this is forecast to rise to between 4.5 trillion and five trillion yuan in the next 20 years as consumers eat more and better-quality foods. Some two-thirds of the country's workforce is employed in the production and processing of food, while 42 per cent of all companies in China are involved in the food business. Rural incomes are also rising faster than those in the cities. It may not be as sexy as real estate deals but agribusiness is no passing fad. The China Banking Regulatory Commission (CBRC) says the rural per capita loan balance is less than 10 per cent that of urban areas and that rural transactions account for only about 15 per cent of China's total deposits and loans. Agricultural Bank of China does only 10 to 15 per cent of its lending to the agricultural sector. The CBRC plans to force banks that want to open city branches in the relatively poor provinces of Sichuan, Qinghai, Inner Mongolia, Jilin, Gansu and Hubei to open at least one other branch at the county level, according to the head of the regulator's integrated finance department, Zang Jingfan. The policy will later be extended to the rest of the country. 'It is their social responsibility to support rural development and the construction of the new socialist countryside,' Mr Zang said. CBRC has taken foreign banks on several tours through China's rural, undeveloped heartlands in an attempt to encourage investments in rural banks. Tours to the west have included banks in Xinjiang and Sichuan provinces, while tours to the northeast covered some of the most important crop growing regions. The most recent tour took bankers to the central provinces of Shaanxi and Henan provinces. But it's a hard sell. Russell Kopp, a banking analyst at HSBC, said the structure and client bases of these banks is 'like something from the 1950s' and they are not commercially attractive to foreign banks. 'It's not even on the radar,' said Mr Kopp. Investing in Chinese banks is risky at the best of times but it's even more uncertain with rural banks weighed down by bad loans in areas with struggling economies and an underdeveloped credit culture. Mr Wang said credit quality at rural banks was worse than at city banks on average. 'It may become an important investment target or opportunity in the future but I have a feeling it won't be in the very near future. A lot of the RCCs are still in very poor financial conditions,' Mr Wang said. 'If you look at the big four state-owned banks, the Agricultural Bank of China has the worst quality of them all. Agriculture is a sector that's risky on its own and the economic growth in China has meant more profits for the industrial areas.' However, Mr Wang said the Hangzhou bank that IFC and Rabobank invested in was in much better condition than the average rural bank and its loan portfolio was even better than many city banks. Zhejiang province, of which Hangzhou is the capital, in 2004 was selected as one of eight test provinces for restructuring and recapitalising the credit co-operatives. Rabobank is not the only foreign investor taking a second look at rural banks, although it is hard to find others that are looking at the banks from an agribusiness angle. ANZ, an Australian bank well versed in rural banking, in November agreed to pay US$252 million for a 20 per cent stake of Shanghai Rural Commercial Bank which converted from a co-operative union to a bank last year. While the Shanghai bank may have grown up on the farm, these days very little of its business is related to agriculture. However, it shows that reformed co-operative financial institutions have appeal to a broad range of investors eager to get a foot into China's banking sector. Alistair Scarff, Merrill Lynch's head of financial institutions research in Asia, said the aggressive expansion of foreign banks in China is coming to an end, with newly reformed and recapitalised state banks set to start their own expansion. 'The golden years, quite frankly, are over. Going forward it will become far more competitive,' Mr Scarff said. Now that every sizeable western bank has a 'China strategy', sticking to your roots may be what it takes to beat the competition.