Zhuo Guanghua builds his greenhouses out of bricks and plastic sheets, preaches the health virtues of organic food while smoking and dreaming of a stock market listing.
For HSBC, he was just the kind of client that the bank had in mind when it opened a branch two years ago in Miyun, a county one hour from Beijing.
After a local Communist party official arranged a meeting, HSBC lent Mr Zhuo 2 million yuan ($315,000). While the loan was tiny compared with the Rmb20bn Chinese government bond issue the bank recently helped co-ordinate in Hong Kong, Mr Zhuo became one of the biggest customers of HSBC’s Miyun branch.
Foreign banks trying to expand in China have long focused on the large cities and the big deals, taking stakes in domestic lenders, fighting for underwriting business and advising on global acquisitions.
In the fields of Miyun, however, HSBC is at the vanguard of foreign banks ploughing a new furrow. They are opening scores of branches in the towns of China’s vast, poor countryside.
The move into rural banking has been seen as a goodwill gesture, a cheap way to curry favour with regulators who have been making a big push to bring more financial services to rural communities and the agricultural sector, which larger banks have traditionally ignored, seeing them as both unprofitable and a major credit risk.
But foreign banks are discovering something unexpected. Despite financial troubles at countryside credit co-operatives over the past two decades, rural banking in China can actually be profitable.
HSBC, for example, thought its rural banks would break even after three years. That was too conservative.
“It’s not that difficult for a rural bank to start making a profit after one year,” said Elton Lee, head of rural banking in China for HSBC.
In 2007, HSBC was the first foreign bank to open a rural branch. It now has 17 outlets. Citigroup, ANZ and Standard Chartered have also opened banks in the Chinese countryside, although not as aggressively.
Two of the biggest forays into the field have come in the form of joint ventures. Temasek, Singapore’s sovereign wealth fund, has partnered with Bank of China to open a network of rural banks, while Banco Santander has teamed up with China Construction Bank.
As with HSBC, results have been surprisingly good. The Temasek venture’s first bank was set to turn a profit in August, 13 months earlier than expected, according to the branch head.
But rapid expansion is not easy. Each rural bank has to be established as an independent legal entity, and recruiting qualified staff in small towns is challenging, said HSBC’s Mr Lee.
“Rural” has multiple meanings in China. Some counties that are classified as rural have populations of more than a million. Banks in such locations can be very profitable, said May Yan, an analyst with Barclays Capital.
In sparsely inhabited rural areas, prospects are dimmer, but banks stand to reap other benefits. In exchange for venturing into such places, regulators may allow them to open more branches in the crowded, wealthy Shanghai market, added Ms Yan.
HSBC’s branch in Miyun fits the mould of not-so-rural rural banking. It is situated on a six-lane boulevard in the county seat across from a 20-storey building.
Nevertheless, it mainly serves agricultural customers, a point that is underlined by the bank’s promotional material. One brochure shows a smiling farmer with a straw hat in the foreground, while a businessman shakes hands with another farmer next to a stack of watermelons in the background.
The Miyun HSBC offers unsecured loans of as little as 10,000 yuan, the kind of small-scale financing that has traditionally been absent in the countryside and can help farmers manage the seasonality of their cash flow.
But the big catch is a client like Mr Zhuo, someone who offers banks direct exposure to China’s agricultural sector – a sector which has the potential to grow very quickly with food consumption on the rise and much scope for more efficient farming.
Mr Zhuo says he came to Beijing 29 years ago from the southern province of Fujian as “a vagrant”. After stints selling construction materials and running a lumber mill, he decided the future was in high-quality fruits and vegetables.
He founded Xiangheyuan Agricultural Technology Development Co in 2007 and has cobbled together a 176-acre farm, where he grows produce that includes peaches, grapes and tomatoes.