China to allow farmers to use land as collateral for loans

BEIJING • China is to launch a pilot programme allowing farmers to use their land and property as collateral for loans - the latest step to bolster support for the cash-starved farm sector.

The move is aimed at deepening financial reform and stepping up financial support for farmers, the State Council, or China's Cabinet, said yesterday.

China's farm sector employs almost a third of its 1.4 billion people, but its share of gross domestic product has declined over the years and productivity on the country's tiny farms is low. Beijing has repeatedly called for larger, more modern farms, but farmers struggle to get loans to expand as they have no assets to use as collateral. All land in China is owned by the state.

Heilongjiang province, China's breadbasket in the north-east, and eastern Shandong province have already begun experimenting with the use of land rights as collateral.

Under the new project, both land-use rights and property can be pledged to secure bank loans, said a council document, which added that farmers' interests will be strictly enforced.

"We will steadily and appropriately conduct the pilot programme on the use of the two rights (land and property) as collateral, on condition that risks will be controlled and on the basis of relevant laws and policies on rural and reforms," said the council.

It added that the central bank will encourage financial institutions to participate in the pilot and step up support for qualified institutions through re-lending, while the banking regulator will study "differentiated" policies in setting capital adequacy ratios.

The council will also maintain the "red line" in arable land, a minimum area mandated by the government to be reserved for growing crops to protect food security.

However, some experts argue that farmers should be allowed to use their contracted land rights as collateral, rather than their operating rights. Contracted rights are derived from the collective land owner or local government to households for 30 or 40 years. The households can then lease the right to use the land to others.

"Operating rights are only awarded for a few years, and this doesn't earn much income," said Dr Cheng Enjiang, a senior research fellow at Victoria University in Australia who specialises in rural finance in China. "Contracted rights are more long-term and can generate an income stream."

Professor Dang Guoying, a senior researcher at the Chinese Academy of Social Sciences, said banks will be cautious in taking land and property rights as loan collateral as such rights cannot be traded freely.

"Banks are reluctant to take them (land and property rights) as collateral. The most important step is allowing them to be traded freely," Prof Dang said. REUTERS

A version of this article appeared in the print edition of The Straits Times on August 25, 2015, with the headline 'China to allow farmers to use land as collateral for loans'. Print Edition | Subscribe