Korea’s FDI at all-time low

Do foreigners view Korea as unsuitable ground for investment?In what has been noted as an alarming trend, direct investment foreign investment in Korea has hit an all time low. The Net FDI in Korea, showed a drop of US$9.25 billion in 2004 from previous years and the consecutive three years till 2007 have also shown a steady decline. In fact in 2007 the net figures for foreign investment totalled a drastic $1.58 billion.

In 2008, the amount of FDI that left Korea in the first three months was $670 million, higher than figures that came in. Plenty of foreign companies withdrew their investment from Korea. This is an unhealthy trend for the Korean market in the investment market. Some of this could be attributed to excessive government regulations, labour unions problems, high living costs and lack of proper education for children.

According to the Organization for Economic Cooperation and Development, Korea is the only country in the 30 member nations of the OECD where FDI shrink has been noticeably low for the past three years.

Other countries in this region like, Malaysia, Indonesia, India, Brazil, and China or Vietnam, have not shown such alarming figures in foreign investment. Vietnam’s FDI rise was more than eight times, from $2.1 billion to $17.9 billion. India saw a rise from $2.6 billion to $15.7 billion.

It is alarming to see that not only are new investors not investing in the country, but alarmingly those who have already invested in this country have not shown any positive growth or reinvestment.

The past few years have seen many a foreign businesses withdrawing their investments from Korea. Companies like Nokia transferred some of its facilities in South Gyeongsang Province, Masan to China and India. Motorola is another company that has also moved its plant in Icheon, to China. Yet another big name in this trend is that of Philips, which withdrew its investments from a joint venture with LG in Korea.  Following the trend, Wal-Mart and Carrefour have ended their business transactions with the country.

The trend has given rise to alarming trends of economic slowdown and rising unemployment in Korea. The youth and the workforce are those who are directly affected.

M’sia investment inflow undaunted by political climate

Fresh reports from Kuala Lumpur, suggest that Malaysia is seeing plenty of investment from foreign shores in spite of its unstable political conditions. An example of this is Vivo Bio Tech Ltd, an Indian firm case which plans to invest $140 million in Malaysia. The investment is for building a research and manufacturing plant in Malacca. Confirming this Malaysian news sources add that this is in addition to Japanese, German, and American direct foreign investments worth 16.6 billion that have taken place since March.As per reports of the Malaysian Industrial Development Authority the country’s FDI inflow will surpass last year’s 33.4 billion ringgit. This comes as much awaited good news to the Malaysian troubled people.

Ex Mida director-general R. Karunakaran, says that the first four months of 2008 has seen investment worth 23.9 billion ringgit. These investments include projects by Germany’s Q-Cell, Japanese Ibiden Co Ltd, and US-based SunPower Corp and Honeywell International Inc. This is expected to raise the investment figures to nine billion ringgit.

Malaysia attracted a large number of foreign investors from countries like Saudi Arabia, Bahrain, Qatar, Kuwait, etc belonging to the Gulf Cooperation Council.

Malaysia faced the ides of March in the form of an election upset wherein the ruling Barisan Nasional (BN), a conglomerate of the three main ethnic groups, lost its traditional two-thirds majority support in parliament.

Amidst political turmoil and rising oil prices there was enough speculation about the investment figures, but this has been proved wrong much to the relief of the financial leaders. Much required global approval in the form of the Global Competitiveness Report of 2007-2008, which placed Malaysia in the 19th position from that of the 23rd in 2007 has been timely indeed.

In another achievement of sorts Kearney’s 2007 Global Services Location Index (GLSI) indicated that Malaysia was one of the top three best destinations in the world for investment in terms of outsourcing business.

Rising Inflation Rates

In what is being seen as a worrying phenomenon in the entire South East Asian region, inflation rates have shot up like never before. Countries like India and China have been at the butt of such astronomically high inflation rates. With the continuously rising oil rises to be primarily blamed for this state of affairs there have been demonstrations and protests by the masses all over these countries. In tune with this, China’s premier called the nations attention to a strong vigilance against inflation which he said ‘has reached 12-year high’. Meanwhile a state-run news agency, commented that the government would in all likelihood try to ensure that price increase in different quarters are accepted by the masses.China’s top economic official, Wen Jiabao tried to remind local officials that they should not be complacent about the rising inflation rates and take all necessary measures to control the situation in hand. Although fast developing nations, both India and China are rightly worried over the situation especially with the constant trend in rising fuel prices world wide.

Inflation rates in India jumped to 11.6% in late June, with the increase in sectors such as food, oil and cement prices, this in comparison to inflation rates at a 4.32% just a year ago.

Most economists and manufacturers in the area are concerned that if inflation continues to rise it will push up production costs and diminish the competitiveness of exports, leading to massive business loss.

However financial analysts are positive that the rates in the United States should come down soon, this is in reference to the fact that most Southeast Asian currencies are closely connected to the dollar. Speculations are on that Indonesia, Thailand, Philippines and Vietnam have also starting feeling the impact of inflation.

In a bid to reduce inflation rates the Malaysian Government has launched an anti- inflation drive. The bid tries to exert strict surveillance on excessive profiteering, liberalization of food imports, and warning that more goods will subject to price controls.

Confirmation of a high rate of inflation in Vietnam has been reported as well. Authorities in Vietnam conceded that the country had exceeded its full-year target of less than 10 percent inflation just in five months. Shortage of agricultural products, particularly rice in various countries, leading to floods, drought and poor condition of farm lands have given rise to more of such conditions.

Finding Hope In Asia For Global Economic Recovery

With the economic sentiment in the usual financial Western greats at a low, the world is looking East to help boost global economic growth. Last year’s subprime crisis has hit the U.S. and is spreading to Europe, and this year’s World Economic Forum (WEF) on East Asia has brought attention to how Asia is a contrasting spark of hope in the “gloom and doom” felt in the West. This was a view echoed by the WEF Panellists such as Lord Levene, Chairman of Lloyd’s, and Jamshyd Godrej, Chairman and Managing Director of Godrej & Boyce, India. But is this view premature in these times of rapid and somewhat uncertain economic change?

Asia’s phenomenal growth has of late outstripped that of the West consistently — by large margins. And though Asia is gradually being affected by the reverberations of Wall Street’s losses, the region’s growth figures do not appear tainted at all. Its largely-emerging economies attract exponentially increasing inflows of Foreign Direct investment (FDIs) and are hotbeds for fund managers and Western investors. In today’s WEF on East Asia, Vietnam’s Deputy Prime Minister Hoang Trung Hai mentioned the FDIs his country was receiving — $20.3 billion in 2007 and $15.3 billion from January to May 2008.

Any reasonable person would look at these figures in a reflection of how investors have started to channel their funds to the East, thereby acting as a catalyst to Asia’s accelerated economic growth.

Even if we assume that Asia can keep up its growth momentum in future years, however, we must not overlook other macroeconomic measures of the Asian hotbeds such as Vietnam, China and India. Inflation, overall macroeconomic stability and social safety are concerns which the respective governments face. Inflation, for

Then there are the long-haul effects of globalization. Asian governments in previous years have actively promoted their production exports with a good degree of success. But this has led to a higher external risk exposure in the form of vulnerable price indices. The U.S. and Europe have been large consumers of Asian exports, and with the economcic downturn at home, they are not buying as much from Asia. As such, Asian countries with high net exports will tend to suffer from significantly weakened demand.

Making the situation worse are higher prices of fuel and food prices, which has resulted in protests in affected countries. Demonstrations and civil unrest have since occurred in the Philippines and Indonesia, which present a worry for their politicians.

As such, the overall ability of Asia to maintain its strong growth and resilience against falling demand from the West, exceedingly high price indices and inflationary pressures has been called into question. Despite its contentious position, the general consensus at the WEF on East Asia is that Asia will retain this much-needed ability.

This stems from a number of factors. Domestic demand in Asian countries has been consistent in and healthy in recent years. Intra-Asian trade is increasing faster than the region’s international trade with the rest of the world. Asian corporations boast healthy balance sheets. In essence, the hope placed on Asia to lift the global economy out of its gloom is not unfounded.

Asia will continue to see economic prosperity should it contain the negative macroeconomic side-effects. Given a sound balance of the two, Asia’s economic dynamism will undoubtedly lighten much of the burden on the global economy, albeit not being a cure-all.

Asia’s Food Woes

In Thailand, supermarkets have placed large “warning” signs limiting the amount of rice that shoppers are allowed to purchase. This, in a country which produces 10 million more tons of rice than it consumes and is the world’s largest rice exporter. But this is just the tip of the iceberg of the Asian food crisis.

A hungry man is an angry man, indeed. In Asia, the food crisis has incurred the wrath of commonfolk, putting pressure on respective Asian governments to relook their budgets. Their people have an increasing need for food subsidies and a higher likelihood of civil unrest.

H.S. Dillon, former adviser to the Indonesian Ministry of Agriculture, has previously said that a major concern in Indonesia is food riots. In January, a spike in soybean prices created ripples of protests throughout Indonesia, albeit controlled. “I don’t see an immediate danger right now, but it has happened in the past and can happen again,” Dillon said.

In Indonesia, the government recently revised its 2008 budget, increasing the amount it will spend on food subsidies by 2.7 trillion rupiah, or about $290 million. Total government spending on fuel, electricity and food subsidies this year will total $20 billion.

A large majority of Malaysian voters, in the country’s March elections, cited skyrocketing prices of fuel and food as “the most important problem in the country” in a postelection survey carried out by the Merdeka Centre, an independent polling agency.

If Prime Minister Abdullah Ahmad Badawi steps down, which many members of his party are pressuring him to do amid postelection turmoil, he will be the region’s first high-profile political casualty of fuel and food price inflation.

Grain prices including rice, the staple food for half the world, have surged this year on concern there’s a shortage in the international market, prompting some growers to impose export curbs. The price of rice has been closely monitored by think tanks as a gauge of potential political unrest.

“Rice is a political commodity,” said Kwanchai Gomez, the executive director of the Thai Rice Foundation, a research center. “It’s not only an economic one.”

In the Philippines, the government has mobilized police officers and soldiers to supply the poorest Filipinos with subsidized rice in recent weeks. The rice, much of which was imported from Vietnam, sells for 18.25 pesos a kilogram, or 20 cents a pound, half the price of the cheapest commercially sold rice in the Philippines.

The surge in prices has prompted governments in Asia to adopt measures to raise output. China, the world’s biggest rice producer, will boost the subsidy on the grain, according to a report today from the China National Grain and Oils Information Center.

The Philippines plans to spend more than 39.5 billion pesos ($948 million) through 2010 to help boost rice output, its Agriculture Secretary Yap said April 4. The funds will be devoted to improving irrigation and farm-to-market roads.

Malaysia will spend at least an additional 6 billion ringgit ($1.9 billion) to increase production, Bernama reported April 11, citing Agriculture Minister Mustapa Mohamed.

The rise in prices affects consumers differently across Asia. For the wealthiest in Singapore, Hong Kong or Kuala Lumpur, food inflation can engender a political backlash, but it is not a life-or-death problem. But for the poorest across Asia, rising prices mean the prospect of increasing rates of malnutrition.

“Food price increases are especially regressive,” said Paul Risley, the spokesman in Asia for the World Food Program, the UN agency that feeds the world’s destitute.

Singaporeans on average spend only 8 percent of their income on food, compared with 15 percent in Malaysia, 26 percent in Indonesia and Thailand, 28 percent in China, 33 percent in India and around 40 percent in Pakistan and Vietnam, according to the U.S. Department of Agriculture.

Those likely to be hurt the most by the sharp increase in food prices are the urban poor, the residents of Asia’s sprawling megacities, Risley said. People in rural areas may have less cash, but they can resort to hunting and gathering.

Slum dwellers in the Philippines, the world’s largest rice importer, are among the worst off in the region. Even before the spike in food prices this year, poverty and food insecurity were on the rise. According to a government report released in March, the number of people who do not have enough income to meet basic food needs in the Philippines rose to 12.2 million in 2006 from 10.8 million three years earlier, an increase of about 13 percent.

Waiting in line outside a warehouse last weekend to buy government-supplied rice was Julieta Casanova, 60, who lives with her two children and eight grandchildren in Tandang Sora, a slum outside of Manila.

“We can’t survive without rice,” Casanova said. The government rations the rice to five kilograms per person, which Casanova said would last two days.

Arroyo, the Philippines’ president, and many other leaders across the region have blamed hoarding by traders and millers for the price increases. Thai Grade B rice, a widely traded variety, reached $854 per ton last week from $322 a year ago, a rise that appears speculative as much as driven by market fundamentals.

Bad weather and increased consumption have caused rice supplies to shrink, experts say, but the world is not in immediate danger of running out. Indonesia is in the midst of a record harvest this year and after years of importing rice will have a surplus of 1.2 million tons, according to Bayu Krisnamurti, deputy for agriculture for the Coordinating Ministry of Economic Affairs. The Food and Agriculture Organization, a United Nations agency, predicts that an overall good harvest this year will increase rice production by 12 million tons, or about 1.8 percent globally.

Yet this news has been overshadowed in a generalized atmosphere of soaring prices for gasoline and economic uncertainty stemming from the U.S. subprime mortgage crisis. In Hong Kong and other Asian cities, some shoppers have panicked, emptying shelves of rice as news of rice prices became a front-page story.

The Downside of Growth & Globalization

What could you do with $1– buy half a bar of chocolate, or one-fifth of a Starbucks latte? Consider yourself incredibly fortunate. More than 600 million people in Asia-Pacific struggle to make ends meet with less than a dollar a day.

So much has been said about rapid Asian economic growth and the stark difference in GDP growth between Asian countries and First World countries. The Asia-Pacific region has seen an average of 6 percent year-on-year growth in the past few years, making it easy to overlook the widespread poverty present in the region.

China and India in particular, are at the forefront of Asian economic growth. Funds expound the massive potential returns from investing in their industries. Little do we know the alarming facts: 452 million people in China and 868 million people in India earn below $2 per day.

Low-income Asians have a common fear of globalization, the same vehicle of progress which might have boosted their income in recent years. Their outputs have since grown more closely correlated with foreign demand, and in turn provided them with higher living standards. However, as an impending U.S. recession looms, they are fearful that their economic gains would be undermined by a worldwide fall in demand for their produce.

Till date, Asia has remained relatively unscathed from the U.S.’s subprime crisis. As the U.S. and Europe revise their economic growth forecasts downward, analysts aren’t too sure the situation will continue for long. Even the most optimistic of economists believe that Asian figures will get shaken sooner or later.

This will exacerbate the conditions of low-income Asians who are vulnerable due to exports to Western countries. When effects of the global downturn are eventually felt by them, it could possibly result in more poverty in the region.

Trade and development units are closely watching the effects of international trade on emerging economies’ exports, and hence, the poverty situation. While global demand has fallen on the whole, the trade surplus in heavily-exporting Asian economies might not suffer, given their shift from exporting to the U.S. or Europe to the Asian region.

Further, big infrastructure plans in India, the Philippines and other Asian countries are providing fiscal help to uphold the economies.

“I don’t think they will escape completely, even China will be affected, but Asian growth has been so strong in 2007 they have a lot of leeway

A related concern is the income divide, which has become more apparent with time. Economic growth has reduced overall poverty in the region, but it has also contributed to a widening gap between rich and poor.

President of the Asian Development Bank, Haruhiko Kuroda, said growth on its own was not enough to solve the Asia’s problems.

“Rapidly growing economies like China and India have shown that although absolute poverty has been reduced substantially, the income gap between the poor and the rich has widened,” he said.

“That means that in coming years many Asian economies must be mindful of this big problem.”

Mr Kuroda called on governments to spend more on health and education and improve conditions in rural areas to address the gaps between rich and poor.

Indeed, the spotlight on Asian economic growth has to be shared with its derivatives.

The Diamond In The Rough

Most people associate Bangladesh with catastrophic floods and chronic instability, as Ernst Herb notes in Switzerland’s Finanz und Wirtschaft. But it’s come a long way. According to the IMF, growth is set to reach 7% this year, a 30-year high. A military-backed government has pushed through a series of reforms, with 26 state-owned enterprises set to be sold off.”It’s a quantum leap in the mind-set of the government…that they’re embracing privatisation,” says Yawer Sayeed, CEO of the first and only private fund manager in the country. New-found political stability has encouraged foreign investment and consumption is also on the rise.

The Dhaka Stock Exchange Index has risen by about 80% this year amid these improved conditions. The market’s total value is a tiny $8bn, says Pooja Thakur on Bloomberg.com, but is expected to double to more than $15bn as privatisations provide further impetus and the market begins to appear on foreign investors’ radar screens. JP Morgan, Merrill Lynch and Citigroup - which last month became the first foreign lender to acquire a license to offer investment banking services - all reckon Bangladesh may be the “next Asian success story”, says Thakur.

Vietnam: Climate Change Threatens Economic Progress

When Hai Trai was growing up in Vietnam’s Mekong Delta, his family eked out a living on collective farms under the socialist system. While the soil was rich, Trai’s family, like most Vietnamese, lived in poverty.Today, Trai, who is reaping the benefits of free market reforms and rapid economic development, owns 10 hectares of rice paddy in Dong Thap province and produces three crops a year, which he sells to the highest bidder. He has a house, a new motorcycle, sends his children to school and puts a little money in the bank. But as the country braces for a new typhoon season, Trai fears all he has worked for could be blown away. 

Above: Truong Thi Nha takes a brief rest from hoeing a section of a cornfield in Xuan Canh, Vietnam

Across Vietnam, farmers such as Trai are feeling the effects of climate change. The typhoon season is lasting longer and storms are stronger. Flooding last year killed nearly 500 people and submerged 215,000 hectares of agricultural land, according to the Ministry of Agriculture and Rural Development. Low-lying fields have been inundated with salt water, destroying crops. Rising temperatures have even encouraged a plague of pests. 

“The warm weather has favoured the growth of the brown plant hopper,” said Trai, referring to the tiny insect that feasts on rice seedlings. “The pests have eaten up the plants and destroyed the crops.” 

Flood damage 

Flooding, contaminated fields and pests are increasingly making life difficult for farmers in the Mekong Delta, said Nguyen Chuoc Minh, director of natural resources and the environment in Dong Thap province. There have been dramatic shifts in weather patterns in the country’s rice bowl, said Minh. The rains are coming earlier and staying longer. The annual flooding is necessary to bring in alluvia and enrich the fields, he said, but now water levels are rising to dangerous levels because the land cannot drain fast enough. Ponds throughout the entire Mekong region are polluted, affecting food production. 

“Vietnam is one of the countries hardest hit by natural calamities and global climate change,” said Minh. “We need to have a plan.” 

This week, President Nguyen Minh Triet warned the population to prepare for the effects of global warming. He called for better dyke and flood management and ordered all ministries to beef up infrastructure to mitigate the damage. Officials in the 34 coastal provinces were also told to step up disaster preparedness, including stockpiling food and medicines. 

Development agencies are also sounding the alarm. 

 

A Vietnamese rice paddy worker….

Threatening progress 

In its new Global Monitoring Report issued on 19 May in Vietnam, the World Bank warned that climate change, and the environmental damage it wreaks, threatened to undo many of gains achieved over the past two decades. Vietnam has made breathtaking progress on everything to improving literacy to lowering infant mortality. The poverty rate fell to 16 percent in 2006, down from 58 percent in 1993, according to the report, Millennium Development Goals and the Environment. In a single generation, some 34 million people have been lifted out of poverty. 

Despite these gains, the report named Vietnam as the developing country most vulnerable to rising sea levels and changing weather patterns. With its low-lying deltas and 3,200km of coastline, a 1m rise in sea levels would render agricultural land unusable and flood coastal communities. “[W]ithout adaptation efforts, more than 10 percent of Vietnam’s population would be affected, and the country would lose 10 percent of its GDP and 29 percent of its wetlands.” 

While scientists forecast different environmental scenarios - some far more ominous than the World Bank’s - all are in agreement that poor countries such as Vietnam will suffer the effects of climate change disproportionately. 

Softening the blow 

The science is incontrovertible, said Koos Neefjes, senior adviser for sustainable development with the UN Development Programme (UNDP) in Hanoi. Neefjes said now was the time to step up efforts to mitigate the impact of climate change on the most vulnerable populations. 

International aid agencies have started to work with governments to help communities analyse risk levels and brace for extreme weather, particularly typhoons and flooding. Communication systems are being beefed up so villagers get enough notice to reach permanent shelter or evacuate to higher ground. UNDP has distributed thousands of radios to fishermen so they can receive storm warnings. Programmes are under way to improve housing construction along the coastline and elevate schools and homes in the Mekong Delta so they are less vulnerable to flooding, said Neefjes. 

“The fact that Vietnam is one of the most affected countries is not in doubt,” says Neefjes. “We can see the effects. [We know that without swift measures] Vietnam’s human development - education, income, health - will be undermined by these vulnerabilities.”

Asia Hurt By Western Ageing Populations

The rapidly ageing population in the developed world could hurt Asian economies as precious funds are channelled to burgeoning pension budgets.How European countries and the United States especially respond to the challenges arising from their ageing populations will impact on the rest of the world including Asia, Richard Jackson, from the US-based Centre for Strategic and International Studies said.

“If the affluent economies fail to confront their own ageing challenge, the crisis could engulf the rest of the world,” Jackson told a forum on ageing organised by a Singapore think-tank, the Institute of Policy Studies.

“The course they choose will shape not only their own destinies but East Asia’s as well,” he said.

“East Asia may experience widespread capital shortages as funds are diverted from financing productive investments in Hong Kong and Singapore to financing pension deficits in Berlin and Washington.”

This would result in shrinking Asian exports to the developed economies which would lead to slower growth in Asia, Jackson said.

He told the forum the world cannot avoid the challenge of an ageing population, caused essentially by lower fertility rates and higher life expectancy.

“The world stands on the threshold of a great demographic revolution. It’s called global ageing and it is about to turn the world on its head,” he said.

“Over the next few decades, the rapid ageing of the developed world population will impose vast new costs on public budgets, bankrupting any government that fails to prepare.”

Failure to respond adequately would also have a huge impact on the global economy and the established world order, he said.

“It threatens to usher in widespread labour shortages and slower economic growth,” Jackson said.

“It could destabilise global financial markets and it may even overturn the geopolitical order.”

Jackson warned that time was running out for policymakers to deal with the issue.

“We can engage the challenge constructively or we can wait for the challenge to overtake us but we cannot avoid it,” he said.

The fallout from a failure to deal with a graying population could hurl the global financial markets into turmoil.

“Global ageing may also usher in an era of greater instability for world financial markets,” Jackson said.

“As retiring baby boomers begin cashing out assets, some economists predict that the markets will experience a great depreciation,” he said.

“At the same time, government borrowings to finance retirement benefits could wreak financial havoc, widening pension deficits could shatter regional economic and monetary unions like the EMU (European Monetary Union).”

Even the social impact could be grave as companies sought to fill the gap in labour shortages by importing workers.

“One way or another, businesses will be looking for ways to tap into the developing world’s surplus labour,” he said.

“If they can’t import the workers, they will export the jobs. Now make no mistake, the potential labour shortages are large.”

Jackson said this could lead to conflicts between countries competing to get the best workers as developed countries increased their intake of skilled migrants.

It also raised the prospect of “a new colonialism in which an ageing developed world siphons off the best educated and the most ambitious workers from younger developing countries,” he said.

Ease In Lending to China’s farmers

China, concerned about rising food costs, a growing rural-urban wealth gap and the ability of the country to feed itself, is making it easier for lenders ranging from HSBC Holdings to mini-lenders such as UA Easy Lenders to operate.

That will help the country’s 700-million strong farming community secure more loans, boosting the opportunities for stronger growth in agricultural output and so adding even more muscle to the country’s fast-growing economy. Agriculture, along with other primary industries of forestry, animal husbandry and fisheries, accounted for almost 12% of the country’s gross domestic product in 2006.

Better access to loans may also help ease the drift of young people from farm areas to big-city factories, and brake the consequent disintegration of rural communities and infrastructures.

At one extreme, the government plans to ease curbs on how international banks such as London-based HSBC can operate in rural areas, Bloomberg reported this week, citing two people with knowledge of the matter.

Other regulatory changes will now allow small-loan operators such as UA Easy Lenders, an outfit based in Shenzhen, near Hong Kong, to raise money from banks, rather than just from shareholders and donations.

That will strengthen their ability to lend money to farmers whose limited needs and lack of assets for collateral often leave them shunned by bigger lenders. More loans should mean more investment in modern machinery, higher spending on better seeds and fertilizer, so improving output and farmers’ incomes.

Growth in rural per capita income, while apparently strong at 9.5% last year, lagged the near 12% expansion in the economy as a whole in 2007.

The government’s efforts to boost access to funds in the countryside come as inflation is hitting near 12-year highs of 8.5%, led by increases in food prices, which in April were 22% higher than a year earlier. Farmer’s are meanwhile having to rebuild after much of the countryside was hit earlier this year by the worst snowstorms in five decades.

HSBC, which set up a rural bank in Suizhou, central Hubei province in December, 2007, is so far the sole foreign-owned countryside lender in China. Citigroup said in October last year it would set up at least 10 rural banks and loan firms in China.

The country first allowed foreign firms along with local investors to establish rural banks and loan companies in selected areas in December 2006. Up until now, overseas banks have had to oversee these businesses through offshore entities with separate teams for each unit.The rule change would let them operate through a single unit or a China-incorporated subsidiary, according to Bloomberg. That would cut costs and the problems of finding numerous experienced branch-management teams.

Greater impact might be felt by the changes covering companies such as UA Easy Lenders that lend out small sums to businesses, operations sometimes referred to as micro-finance. Rates charged are high, but access to funds to support lending has until now been severely restricted.

Micro-finance, with small-volume lending to farmers or laid-off workers to help them start up their own businesses, has increased in importance as Beijing seeks to improve rural development and reduce the widening wealth gap between city and countryside. Such loans have historically been granted via specialized agencies such as rural credit co-operatives.

To expand the sector, the People’s Bank of China in early 2006 began a loosely regulated pilot scheme in some of the more agricultural provinces such as Shaanxi, Shanxi and Sichuan, involving establishment of seven small-loan companies. Their number has since grown to about 300.

Faster expansion has been hindered by the absence of official policy to define the nature of such lenders, their funding resources and such issues as bankruptcy processes.

“Also,given that the central bank has no rights to grant licenses, small-sum loan companies have been shut out of the [official] financial sector,” said Zeng Gang, an economist with the Research Institute of Finance under the Chinese Academy of Social Sciences.

The China Banking Regulatory Commission (CBRC) and PBoC recent issue of guidelines go some way to removing these hindrances.

Under the new guidelines, the small-loan companies can now raise funds from not more than two banks, in addition to existing channels such as shareholders and donations. Zeng believes this will encourage establishment of more small-loan companies.

Along with the new funding opportunities, limits have been set on rates lenders can charge their customers. To encourage better pricing of credit risk, small-loan lenders can set rates with an upper maximum of four times the rate offered to the small-loan company by its funding bank. As a lower limit, they must charge at least 0.9 times the one-year lending rate set by the PBoC, at present at nine-year high of 7.47%.

UA Easy Lenders, one of the pilot companies, offers loans at an interest rate of 27.6% per annum. The country’s benchmark one-year lending rate is at a nine-year high of 7.47%.

“The release of the new guideline is surely a good thing for the small loan lenders. Now we can officially operate on the mainland,” said Li Jie, director and general manager of Zhongan Xinye in Shenzhen, which offers financing for small business owners.

Wang Tao, a farmer-turned-businessman, said he is going to buy two more machines for making furniture after receiving 40,000 yuan loan from Zhongan Xinye. This is the second time he has borrowed money from the local lender. “With the immediate cash, I now can meet increased spending for the machines and pay for new hires,” he said on the phone.

At the beginning of the year Wang received his first loan of 20,000 yuan from Zhongan Xinye and paid it back six months later. He said he will continue to apply for loans from Zhongan Xinye if he needs money again.

“For small businesses like us, it is hard to apply for loans from the large banks such as Bank of China and China Construction Bank. However, at privately owned small-loan lenders, we get immediate money to smooth out our cash flow,” he said.

The transformation in recent years of big national banks into commercial banks, bringing an increased focus on cutting costs and making profits, has cut financial support for small businesses in rural areas. Farmers largely depend on rural co-operatives for financing. These control about 10% of the mainland’s 42.9 trillion yuan in deposits and tend to make small loans of 500 yuan to 20,000 yuan. By the end of July in 2007, there were 80,692 credit co-ops, with an overall a capital adequacy ratio of 8.38%. Loans granted were worth 2.16 billion yuan, of which 56% was for agricultural purposes. The bad loan ratio was below 2%, from 14.8% as of the end of 2005.

In July 2006, Agricultural Bank of China started to be restructured to promote rural finance and at the end of last year the CBRC approved the creation of a postal savings bank to develop retail and intermediary businesses.

About 60% of farmers and half of small business owners in rural areas have no access to banking services, according to recent research by Beijing’s Qinghua University, which also find high demand for loans from these sectors.

A researcher said inadequacy of rural financial services has hindered development of the Chinese government’s san nong policy of “agriculture, villages and farmers”, which aims to better balance rural and urban development and revenues.

About 60% of the country’s 1.3 billion population live in rural areas. Fast economic growth and social development over the past decade has been led by eastern coastal areas and industrial centers, with the vast countryside left far behind. That has also hindered the country’s efforts to build a harmonious society.

Yi Xianrong, a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said the guideline on small-sum loan companies will still leave unresolved issues for small lenders.

“These companies are only given licenses to offer loans but they are not allowed to take deposits from local residents - different from many small-loan companies in the world, which grant small loans to poor people without taking collateral,” he said.

He said the restriction on taking deposits will affect the sustainability of these projects because they might lack the capital to grow. He called for the government to allow micro-credit institutions to take deposits and develop micro-finance projects such as those set up by the 2006 Nobel Peace Prize winner Muhammad Yunus, a Bangladeshi economist and founder of Grameen Bank.