China to allow farmers to use land, property as loan collateral

BEIJING (Reuters): China will launch a pilot program allowing farmers to use their land and property as collateral for loans, the State Council said on Monday, 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, said China’s cabinet.

China’s farm sector employs almost a third of its 1.4 billion people but its share of GDP has declined over the years and productivity on the country’s tiny farms are low.

Beijing has repeatedly called for more modern, larger 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 northeast, 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 could be pledged to secure bank loans, said a cabinet document, which added that farmers’ interests would be strictly enforced.

“We will steadily and appropriately conduct the pilot program 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 relending, while the banking regulator will study ‘differentiated’ policies in setting capital adequacy ratios.

It 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.

Some experts have argued however 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 Cheng Enjiang, senior research fellow at Victoria University in Australia specialising in rural finance in China.

“Contracted rights are more long-term and can generate an income stream (which could be more valuable to banks as collateral),” he said.

Dang Guoying, a senior researcher at the Chinese Academy of Social Sciences, a top government think-tank, said banks will be cautious in taking land and property rights as loan collateral given that 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,” Dang said.