Thursday, February 9, 2012

Mortgages for Peasants

A Xinhua News Service article describes Chongqing municipality's campaign to give mortgage loans to rural peasants secured by their use rights to their farmland, houses, and forest land. 

There have been experiments with this type of mortgage lending since at least 2008. Some of the experiments were sponsored by the Peoples Bank of China, others by local officials like the mayor of Zaozhuang City in Shandong. The Chinese leadership seems to be cautiously gearing up this type of lending--perhaps propelled by the Wukan confrontation in December 2011--but this does not appear to have full endorsement by central authorities yet. 

Rural mortgage lending seems to be another step forward in the Chinese version of "socialist market economy" in which nearly everything is allocated by markets, sometimes in adventurous ways, but always in a controlled, ordered manner. The fundamental idea of the "three rights" is to carve up the rights to rural property, separating the rights of ownership from the rights to use the property and the rights to the income or products yielded by the property. For example, a plot of land is owned by the village collective, but the rights to plant crops on it and the rights to the crops produced by it are contracted out to village households. The communist leadership has stressed that ownership of rural property still belongs to the ill-defined "collective" and cannot be sold or mortgaged. However, rights to use and benefit from property are in play. The contracting household can sublease the rights to use and profit from the land to someone else, but he can't sell the ownership of the land. Now he can also borrow against the value of this stream of income or rice. In 2008, after the 3rd plenum of the 17th party congress, the communist leaders gave a vague endorsement of transferring rights to farmland. Mortgaging rights was more controversial. Forest rights--which in most cases are not the main source of sustenance for rural households--have been the first to be marketized. Experiments with leasing, other transfers and mortgaging of rights to farmland and houses have been more tentative. 

The article illustrates the campaign with the example of Huang Huayin, who wanted to go into the rabbit-raising business. In February 2010, Huang mortgaged his family's 500-square-meter 3-storey house to borrow 320,000 yuan (about $50,000) which he used to buy 5,000 rabbits (expensive rabbits). He claims to have made net income of 100,000 yuan last year. 

The goal of Chongqing's mortgage initiative is to "enliven" rural assets and inject cash into rural areas. The article notes that urban residents have become accustomed to owning their dwellings and obtaining mortgage loans. However, rural people had few assets to secure loans and little cash to invest in agriculture. The article explains that the government has the responsibility to determine whether or not rural property can be used to secure loans, how loans can be made and repaid, and who will bear the risk. The new campaign is said to be ushering peasants "into the era of mortgage lending."  

This is another step in the transformation of rural land from liability to asset. Ten years ago farmers viewed their land as a liability because they were assessed taxes based on their land holding. Many farmers let neighbors cultivate their land for free as long as the neighbor paid the taxes. With the elimination of agricultural taxes between 2004 and 2006, replaced by subsidies based on the same land that used to be taxed, land became an asset with an income stream attached to it. As land became more scarce, its value increased to the point where rural mortgages are a real possibility.

A leader of Huang's county explained that previously, when land and houses could not be mortgaged, farmers could only get micro-loans of up to 30,000 yuan. With the mortgage program they can get larger loans with a longer payback period and he adds that the mortgage loans are more often paid back. No indication of how the bank forecloses on rural families who don't pay.

What if Huang's rabbits die or rabbit prices sink? Who bears the risk if Huang can't pay back his loan? The article emphasizes that the risk of loans is spread among banks, government, and rural household borrowers. Chongqing set up a fund that partially compensates banks for 20%-30% of the loss when the borrower is "unable" to pay back the loan. 

As of November 2011, Chongqing had given out 9.95 billion  yuan ($1.6 billion) in collateral loans to rural families. Chongqing ultimately plans to give 100-billion-yuan in loans: 6.8 million loans secured by farmland, 7.1 million secured by houses and 3 million secured by forest rights. 

The article reports that Guizhou Province also has had a morgage loan program since 2009 which has lent out 450 million yuan. Hunan, Shanxi, Zhejiang and Inner Mongolia also have programs. Shandong has an adventurous program that permits mortgaging of all sorts of rural property, including ocean fishing rights, claims on water management projects, hillsides, embankments, large farm equipment, fishing boats, as well as farmland, forest land, and houses. Shandong has various schemes for guaranteeing loans by individuals, group-lending, guarantees of farmer loans by agricultural companies and loan guarantee companies. 

The article implies that there are still some issues to be ironed out. It concludes by asserting that the government has a responsibility to clarify whether or not the "three rights" can be used as collateral, how to make loans and how to distribute risk [of default]. 

More adventures in capitalism with Chinese characteristics!

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