"Rural credit associations have many features that need to be improved, the most obvious being the terms of the loans," says Du. The old "spring lending and autumn recall" regulation has been in effect for several decades, while the terms themselves differ in a thousand ways depending on the particular agricultural commodity involved. As a result, loans frequently cannot be repaid on time.

    Song Deshun began growing mushrooms in 1999, and in order to do so he obtained a RMB 3,800 loan from his village. But his lack of experience farming mushrooms eventually cost him even his original capital. "The loan was not paid off until 2002, with interest of over RMB 600," says Song. "Now, it is much more difficult to obtain a loan. Only able farmers are able to get them."

On the bright side, the underdeveloped state of China's rural financial market represents a golden opportunity for foreign-funded banks. Last December, HSBC Rural Bank, a British-based institution, opened a branch in Suizhou, Hubei Province, making it the first rural bank in China funded by foreign capital. With an upper loan limit to enterprises of RMB 500,000, it has greatly boosted China's largest xianggu mushroom exporting area, with proceeds from the export of primary products in Zengdu District, in Suizhou, totaling US $9 million in April 2007. HSBC Rural Bank has targeted not only agricultural products export enterprises, but also farmers toiling away on a shoestring budget.

In December 2007, the Chartered Bank and the Xinjiang Aksu Yida Agricultural Development Co., Ltd. jointly released a small amount of agricultural credit, the first instance in China that small loans to farmers have been extended by a foreign-funded bank.

In Du's opinion, what these banks value is the rural market's potential, "But for a long time, foreign-funded banks would not focus on the countryside."

An Enormous Rural Market

    In rural areas, people usually borrow money from relatives and acquaintances, and there are therefore no formal guarantees or witnesses. Often, transactions are performed without even the benefit of receipts. "Many unfortunate cases have shown that relationships deteriorate when money borrowed from relatives and friends is involved," says Song.

    And yet, China's rural financial market has enormous potential. According to Du Xiaoshan, 120 million farmers require loans, but only 60 percent of them are able to get the necessary credit from established banks. Furthermore, less than half of all small rural businesses are able to grant credits. Because of the inconvenience of applying for credit from large-scale financial institutions, some rich local families have begun offering loans, but annual interest rates are usually punishing, with RMB 1,000 in interest payments for every RMB 10,000 extended.

    The backwardness of China's rural financial market has its roots in the 1980s, when in accordance with China's development policies at the time, the countryside was enlisted in support of urban industrial development. The result was a dramatic disparity in prices between agricultural products and industrial products, and cities effectively absorbed the bulk of the country's financial resources.