ExplainerChina economy: why are small rural banks important, and what problems do they face?

Central government’s message to China’s rural banks is clear – support the financial needs of counties and agricultural areas, and manage risk more effectively

President Xi Jinping says ‘a historic shift’ is underway to ‘comprehensively improve’ rural China, which accounts for more than 40 per cent of the nation’s population

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China’s rural banks are required to focus on supporting the financial needs of counties and rural areas, particularly small companies and farmers. Photo: Shutterstock

Published: 12:00pm, 6 Feb 2021Updated: 11:40am, 9 Feb 2021

China’s smaller commercial banks in rural areas have come under increasing scrutiny by federal banking regulators. This is not only because of their vital importance in funding the rural economy, but also because their balance sheets have become weaker due to mounting loan losses.

Rural commercial banks are unique to China’s state-dominated banking sector. According to the latest figures from the China Banking and Insurance Regulatory Commission (CBIRC), there are 1,641 rural banks in China.

However, in terms of size, they represent only 12 per cent of the banking system’s total assets, with most rural banks being small county-level entities, according to a report by US rating agency Standard & Poor’s last year.

The Chinese government has set a clear role for China’s rural banks – they are required to focus on supporting the financial needs of counties and rural areas, particularly small companies and farmers.

Why are rural banks important to China’s economy?

Rural banks have been responsible for supporting China’s rural economy since the 1990s and are integral to the development of the agricultural sector and county-level economy.

Despite decades of rapid urbanisation, the rural areas of China still account for more than 40 per cent of the country’s total population of 1.3 billion. Rural China has become a focus of President Xi Jinping’s push to boost domestic consumption and development under the new dual-circulation strategy to make the Chinese economy more self-reliant and insulate it from external uncertainties.

At the conclusion of the two-day central rural work conference in December, Xi said the government would undertake “a historic shift” to focus on “comprehensively improving” the rural economy in 2021, largely by boosting rural incomes and spending power.