December 13 proved a unique day to Yang Yuguo, an all-powerful official extending credit at Sanligang Rural Credit Cooperative in Cengdu District of Suizhou City of Central China's Hubei Province.

Each day, Yang would make about 20 small loans or collections in his spacious three-desk office with local individuals and village enterprises from seven neighboring villages. But that day, he thought he might lose some clients to a formidable competitor.

The new lender, small as it was now, was HSBC Rural Bank, a wholly-owned subsidiary of British financial giant Hong Kong and Shanghai Banking Corporation Limited (HSBC). The subsidiary opened for business that day, marking the first entry of an overseas bank into a rural area of China.

In October, the China Banking Regulatory Commission (CBRC) lifted restrictions for overseas financial institutions on the regions where village and township banks could be established. Instead of the six previous pilot provinces, such banks could now be established in any rural area.

HSBC, with experience of running rural banks in Brazil, India, Indonesia, the Philippines and Mexico, showed great enthusiasm for doing business in rural China.

With a staff of 22 and an initial capital of 10 million yuan ($1.36 million), HSBC Rural Bank offered deposit services for local businesses and individuals and helped businesses raise funds. It also provided trade financing and settlement services for export-oriented rural enterprises.

Tucked away in northeast Hubei, Suizhou now had 21 financial outlets, mainly rural credit cooperatives and postal banks. These serviced its 1.81 million rural residents, about 88.7 percent of its total population.

"The weak presence of financial institutions and the inadequate, inefficient services they offered in rural China would allow foreign banks to do more business with less competition," said Du Xiaoshan, deputy head of the Rural Development Institute of the Chinese Academy of Social Sciences.

Historically, Chinese farmers had long been neglected by the country's banks because of the higher risks of lending to them. This was compounded by greater operating costs and lower returns.

Traditionally, rural borrowers could only obtain loans from the Postal Savings Bank and local cooperatives. Official figures indicated farmers could rarely obtain loans of more than 5,000 yuan.

A report by Beijing's prestigious Tsinghua University revealed that China had at least 120 million farmers who needed loans. However, only 60 percent were able to obtain financing. The situation was worse for small rural enterprises, with only 50 percent able to get the loans they needed.

The huge business potential in the country's rural market was the carrot that has attracted the foreign banks. Similar to HSBC, Citibank, Standard Chartered and some other foreign-funded banks have also shown interest in expanding to China's rural areas.

The go-to-the-countryside strategy mirrored the steady business expansion of overseas banks in China since last December when the country fully opened its banking sector to foreign competitors.

Total assets of overseas banks in China hit $153.9 billion by the end of October, a 41 percent increase from the same month last year, said Qi Jianming, deputy director of CBRC's Banking Supervision Department III, which oversees foreign banks in China. The figure accounted for a 2.24 percent share of all financial institutions in the country.

QUALITY OVER QUANTITY

The banking sector, and the service sector at large, unfolded China's ever-expanding opportunities for overseas investors.

"China will gradually scrap restrictions on the destination, stock ownership and business scope of foreign investment in the service sector," said Zhang Mao, vice minister of the National Development and Reform Commission (NDRC), the country's industry watchdog.

"China will stick to the open-up policy and promote a quantity-to-quality transformation in attracting foreign investment," said the senior economic planner.

So far, an overgrowth of trade surplus and forex reserve have brought the country a huge amount of foreign exchange, exceeding $1.4 trillion. It had incurred worries that China would narrow the range of its opening-up policies.

Chinese Vice Premier Wu Yi brushed aside such worries, and said the country would not change its stance in expanding the use of foreign capital. "China's door has been and will be resolutely opened to the outside world," she said.

Since the start of the reform and opening up in the late 1970s, China had stuck to the guideline and policy of actively, reasonably and efficiently attracting foreign investment. This had boosted the leapfrog development of the country's economy. Actively attracting foreign investment was its long-standing policy.

In the first 11 months, China utilized $61.674 billion of foreign capital, 13.66 percent higher than a year earlier, the Ministry of Commerce (MOFCOM) said.

The faster growth in foreign investment showed China's booming economy and investment environment remained attractive to overseas investors, said experts.

The country, however, remained in need of foreign investment. Despite that, it was the largest recipient of foreign investment among all developing nations for 15 successive years. It had also attracted per capita foreign investment of $53, less than one third of the world average and 1/12 that of developed nations, according to MOFCOM.

But changes were needed. The current policies to attract foreign investment were made 28 years ago when China was desperate for money and foreign currency. As the average foreign investment size expanded, it was seeking to boost foreign capital utilization quality.

"It's time China starts to be more discerning with foreign investment," said Justin Lin, director of the China Center for Economic Research under Peking University.

"Our priority now is not to attract as much foreign investment as possible, but to bring in new high-tech industries that we currently don't have. I have no doubt that preferential policies will only remain for certain kinds of foreign investors."

FAIR COMPETITION

As a step to put domestic and foreign firms on an equal footing to promote fair competition, China enacted a new corporate income tax law that comes into effect on January 1, 2008. Such an effort was the first time since 1978.

According to the law, the income tax rate for foreign companies in special bonded zones, which previously enjoyed a preferential rate of 15 percent, would rise in stages to 18 percent, 20 percent, 22 percent, 24 percent and finally 25 percent, the same as domestic companies, over five years.

The arrangement would apply to such bonded zones as the Shenzhen Special Economic Zone, economic development zones set up in coastal cities such as the Hongqiao Economic and Technological Development Zone in Shanghai, and high- and new-tech development zones, including Zhongguancun Science Park in Beijing.

However, foreign companies that have tax holidays, which provided for five tax-free years and another five years of up to 50 percent reduction, would retain those concessions for the full 10 years before facing the new higher rates.

The 15 percent rate would be retained until 2010 for foreign companies that invested in the central and western regions of China, an apparent effort by the government to re-address regional economic imbalance.

The regulations would include new criteria for high- and new-technology firms that could enjoy a lower 15 percent rate.

In addition to the income tax, China was set to quintuple tax on the use of arable land for non-farming purposes. It would also charge foreign-invested companies as much as their domestic peers in a bid to protect farmland and better control land supply, according to an ordinance released by the State Council.

Signed by Premier Wen Jiabao, the instrument would take effect as of January 1, 2008, and replace the 1987 edition that had allowed foreign-invested companies to be exempt from the land use tax.

Aside from the tax instrument, China revised the "Catalogue of Industrial Guide to Foreign Investment", effective from December 1, 2007, to redirect foreign investment.

The revision listed all contents concerning access by foreign investment into the catalogue, forming a standardized and transparent access policy for foreign investment.

According to the new 28 page guide, China would curb the expansion of export-oriented industries to reduce ballooning trade surplus. This had stirred protectionist sentiments among major trade partners.

"The category of encouragement of 'Foreign-invested projects with all products directly exported' in the 2004 version of the 'Catalogue of Industrial Guide' has triggered disputes among WTO members, and in connection with China's large trade surplus and rapid growth of forex reserve. The revision, this time, has abolished this category," said Wang Xinpei, Ministry of Commerce (MOC) spokesman.

China was to prohibit foreign investors from exploiting "important and non-renewable" mineral resources, and to restrict energy-consuming and highly-polluting projects.

Foreign companies were restricted from entering "strategic and sensitive" industries relating to the national economic security.

Foreign investment in traditional manufacturing industries in which China already had "mature technologies and relatively strong production capacity" was not encouraged.

But the manufacturing sector in high-tech, equipment manufacturing and new materials industries were open to foreign investment.

Meanwhile, foreign investors were invited to join efforts to promote the recycling economy, clean production, renewable energy utilization and ecological environment protection.

Amid growing domestic concern that surging foreign trade was failing to benefit people in central and western China, investment regulators were focusing on upgrading industries in the poorer areas of inland China.

The government would also introduce a revised version of the guide for foreign investors in the central and western regions, NDRC said.

Seeing the bright prospect, Peter Wong, board chairman of HSBC Rural Bank, said he expected the bank to reach a balance of income and expense within the next three years. He said the lender attached importance to "accumulating the experience of running a rural bank and cultivating a rural financial pattern applicable across China".

If all went smoothly, an HSBC executive states that it would open six to 10 sub-branches in the inland rural areas in 2008 and 30 in the coming two to three years. It would expand its services to include agriculture-related loans to individual farmers later in 2008.