August 30, 2007 -- On August 9, HSBC announced it had been given the green light from the China Banking Regulatory Commission (CBRC), the watchdog of China's banking sector, to set up a village bank in Zengdu County, Hubei Province. This makes it the first foreign bank to enter China's rural banking market.

The registered capital of the rural bank is 10 million yuan (US$1.3 million), fully owned by HSBC. The bank will initially have up to 25 staff and it is aimed to be fully operational by the end of the year.

"This [the investment] presents an excellent opportunity for HSBC to connect our considerable experience in rural finance with a wide range of models developed in a number of our other markets including Brazil, India, Indonesia, the Philippines and Mexico," Stephen Green, Group Chairman of HSBC Holdings plc, said in a statement.

The rural bank will be the bank's second subsidiary in China, which will adopt totally different strategy of that HSBC Bank (China). The first subsidiary of HSBC now has 40 branches and sub-branches in 15 major cities all around China.

"Zengdu has a dynamic rural economy and township industries, including the processing of agricultural products, food processing, machinery manufacturing and textiles. There is also a strong demand for exports," a spokeswoman for HSBC told Emerging China.

Zengdu is about 6,900 square kilometers in size and has a population of 2 million people. In 2006, its GDP ranked second among 71 counties in Hubei province with about 15 billion yuan (US$1.9 billion).

Rural areas have always been a hard area for banks to penetrate.

"It seems impossible for the banks to operate in the countryside and earn money at the same time," Professor Yuanhong Zhang from the Rural Development Institute of the Chinese Academy of Social Sciences, told Emerging China. "That's why the Agricultural Bank of China, the only state bank to focus on rural business, withdrew from the countryside when it started to pursue commercialization."

Last December, CBRC announced new rules to further expand market access for financial institutions seeking to offer services in rural areas in order to rectify the deficiency in banking resources in farming areas.

"That could end the near-monopoly in rural finance by introducing competition," said Professor Yuanhong Zhang. "Local rural credit cooperatives are almost the only financing establishments in most of China's villages, and even those branches of Agricultural Bank that have not withdrawn from the countryside only receive savings, they do not issue loans to the peasants."

The watchdog designated 36 counties in six provinces in the pilot program for rural banking. Among of them, 10 trial counties are in Hubei, seven in Gansu, six in Sichuan, five in Jilin, four in Qinghai and the other four in Inner Mongolia.

Until now, two such village banks have been set up in Sichun and Hubei by two local small city banks. HSBC is the third one to enter the countryside.

"China is different from other countries, and there are differences between regions and provinces within the country. Therefore HSBC is adopting a new model for rural banking in Zengdu," the spokeswoman said.

"It is more symbolic than substantial," said Zhang, on the three banks that have set up in the countryside. "But the vital step for rural financing is the reform of the rural credit cooperatives. About 80 to 90 percent of the loans in China's countryside are lent through the credit cooperatives."