savings banks flow to the city for investment, which reduces the amount available for rural construction. Other forms of financial institutions are not prevalent in rural areas. Therefore, rural credit cooperatives have become the major force for rural financing, and in many places, they are the only institutions from which farmers can get loans.

Yet rural credit cooperatives are also beset by major problems.

"It's not that we don't give loans to farmers," said Li Haisheng, director of the rural credit cooperative located in the area where Zhang lives. "The credit cooperative is faced with many troubles."

Li explained that according to state policy, credit cooperatives do have small-loan programs to resolve farmers' problems in production and living. However, each loan may not exceed 5,000 yuan. Further, another problem is a great shortage of capital. Li's rural credit cooperative can only give 10 million yuan worth of loans in total, but the overall loan demand from local farmers is about 40 million.

Aside from the small-loan programs that rural credit cooperatives offer, in 2005 China established, on a trial basis, seven small-loan companies that only issue loans. They are not allowed to attract public deposits and are funded by private capital from a small number of shareholders. Therefore, their money supply is also limited.

Even the state-owned Agricultural Development Bank is faced with a money shortage.

"The bank has 12 years of history, but the Ministry of Finance didn't inject money into the bank in these years," said Zheng Hui, President of the Agricultural Development Bank. "Therefore, the bank has problems in capital adequacy."

Lacking trust

The lack of money is one thing. The other thing is that even though there is money out there to make loans, the debtor farmers have a hard time finding something they can mortgage to the bank. Therefore, rural financial institutions are suspicious and are reluctant to give loans to farmers.

"They don't trust us," complained Zhang. As a result, many of those who need loans will turn to loan shares.

"The current development of rural credit cooperatives can no longer satisfy the financing needs from rural areas," said Wang Sangui, a research fellow with the Chinese Academy of Agricultural Sciences.

Wang pointed out that most of the operational scale of rural credit cooperatives is small with a large proportion of non-performing loans and low capital adequacy. Some of the cooperatives cannot even make ends meet.

The inefficient loan management pattern of rural credit cooperatives makes them passive to marketing themselves and slow in developing new businesses. The common practice of rural credit cooperatives is to give loans in spring, have them paid back in autumn and hibernate in winter. This traditional way of operation fails to meet the demand stemming from current rural economic development.

Awaiting a breakthrough

In China, about 750 million people live in rural areas, accounting for 57 percent of the total Chinese population. The current backward financial service, however, is curbing the farmers' efforts to build a new countryside.

"There must be a breakthrough," said Wang.

Wang argued that the government should encourage rather than restrict rural financial institutions and gradually form an integrated rural financial system that promotes greater choice and flexibility in obtaining loans. In this way, farmers could have diverse options to obtain loans.

Secondly, interest rate marketization is a necessary condition for the sustainable development of the banking business in rural areas.

"The experience of many developing countries shows that a large number of middle- and low-end rural clients have a great variety of financial needs," said Wang. "But the problem is that the cost to grant those clients loans is high and requires a more flexible interest rate so that the rural financial institutions can set reasonable interest rates according to their costs."

Wang believes the ultimate objective is to form a sound rural financial environment that would include more flexible policies, easy market access and flexible interest rates.

Confronted with the financing problem in rural areas, the Chinese Government has begun to carry out reforms.

Liu Mingkang, Chairman of the China Banking Regulatory Commission, stated that China is working to promote rural financial reform in many aspects, such as encouraging more capital to flow back to rural areas and optimizing commercial banks' services.

"I hope more people will come here to set up banks and ease loaning procedures so that I won't be worrying about where to get loans in the future," said Zhang.