The People's Bank of China has approved the first pilot city to conduct rural financial reform, Lishui in Zhejiang province, in what analysts consider an effort to build up a modern rural financial service system catering to increasingly sophisticated demand from the region.

In a statement published on Thursday on the central bank's website, it said it has approved the Lishui government's application to explore rural financial reform. The request was filed last September.

Lishui is a relatively underdeveloped prefecture-level city in southwestern Zhejiang.

An official from the press office of Lishui government, who declined to be named, told China Daily that the central bank picked Lishui because rural financial institutional reform was more advanced there.

The central bank and Zhejiang provincial government jointly worked out the Overall Plan for Lishui Rural Financial Reform. The statement said the reform should be conducted in accordance with the plan. Issues that are "significantly innovative" should be approved by the central bank on a case-by-case basis, according to the statement.

The plan said the government would accelerate the development of village and township banks, companies offering small loans and financial mutual-aid societies.

Nongovernmental funds are welcome to participate in the sector. Various small and medium-sized financial organizations such as community banks, financial leasing companies and pawnbrokers are encouraged where the conditions are mature, according to the plan.

The plan pledged to raise the ratio of direct financing of agriculture-related companies, and the leading ones would be encouraged to issue short-term financing bonds.

"As China's rural area is increasingly urbanized and the agricultural sector is increasingly modernized, how our financial services adapt to this tremendous shift is a big question. Lishui can explore more in this field," said Zhao Xijun, vice-dean of the finance school of Renmin University of China.

Data from the central bank showed that as of the end of 2010, the amount of agriculture-related loans had reached 11.77 trillion yuan ($1.86 trillion), accounting for 23.1 percent of total loans.

However, Zhao cautioned that the burgeoning financial institutions that are expected to follow the pilot program should stick to their original purpose, which is to serve the interests of agriculture, farmers and rural areas.

"We've had lessons on that. For example, rural credit cooperatives evolved into commercial banks with all-round business, which deviated from their original purpose," Zhao said.

Contact the writers at zhengyangpeng@chinadaily.com.cn and zhangjianmin@chinadaily.com.cn