A pilot program will be launched allowing farmers to use their land and property as collateral for loans, according to the State Council, China's cabinet, the latest step to bolster support for the cash-starved farm sector.

The move is aimed at deepening financial reform and stepping up financial support for farmers, the State Council said on Monday.

The nation's farm sector employs almost one-third of China's 1.4 billion people but its share of GDP has declined over the years and productivity on the country's tiny farms is low.

The central government has repeatedly called for more modern, larger farms but farmers struggle to get loans to expand as they have no assets to use as collateral. All land in China is owned by the State.

Heilongjiang Province, the breadbasket in Northeast China, and Shandong Province in East China have begun experimenting with the use of land rights as collateral.

Under the new policy, land use rights and property can be pledged to secure bank loans, said a cabinet document, which added that farmers' interests would be strictly enforced.

"We will steadily and appropriately conduct the pilot program on the use of the two rights (land and property) as collateral, on condition that risks will be controlled and on the basis of relevant laws and policies on rural and reforms," said the State Council.

It said that the People's Bank of China, the central bank, will encourage financial institutions to participate in the pilot and step up support for qualified institutions through relending.

The government will also maintain the "red line" in arable land, a minimum area to be reserved for growing crops to protect food security.

Some experts have argued that farmers should be allowed to use their contracted land rights as collateral, rather than their operating rights.

Contracted rights are derived from the collective land owner or local government to households for 30 or 40 years. The households can then lease the right to use the land to others.

Dang Guoying, a senior researcher at the Chinese Academy of Social Sciences, a top government think tank, said banks will be cautious in taking land and property rights as loan collateral given that such rights cannot be traded freely.