China's Rural Financial System

Yuepeng Zhao

• Publisher: Routledge
• Year: 2010
• ISBN:
  9781136929915
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Mikroökonomie

This book examines the credit needs and the borrowing behaviour of rural households in China in recent years. It is based on in-depth analysis of the status of households' indebtedness and borrowing behaviour; the performance of Rural Credit Cooperatives (RCCs), as well as resources of informal finance. Before 2006, RCCs are virtually the only source of formal credit for rural households in China and were subject to a series of reforms from 1996 to 2003. The reforms aimed to transform RCCs into market-oriented institutions and, more importantly, help them meet the increasing demands of farmers for varied financial services, and thereby contribute effectively to economic transformation in rural China.

Based on a micro-study of three villages, at different stages of development with dissimilar economic characteristics in Jiangxi province, this book investigates the sources of finance, formal and informal, in rural areas and the different types of credit that farmers require. It examines the patterns of credit required by rural households at different stages of agricultural processes, and the institutions from which they obtain loans. It demonstrates the importance of innovative institutional arrangements in rural China and new instruments that give farmers access to formal rural financial markets and enable them to utilize credit effectively, concluding that further reforms to RCCs are necessary for RCCs to be truly effective.

1
San nong problems and the challenges of the rural financial system in China

Introduction

Since the economic reforms and opening up of trade with the world initialized by Deng Xiaoping three decades ago, China has made great achievements in various aspects of her economy. Nonetheless, compared with the speedy development of urban areas, progress in rural areas is lagging behind and needs much support.

Indeed, san nong problems, including nong ye (agriculture), nong cun (rural areas or villages) and nong min (farmers), have played a very important role in China’s economic development. In recent years, the Chinese government clearly understands the significance and urgency of this issue, and its policy emphasis has been consistently addressed to san nong problems.

Among various issues related to san nong, rural finance is vitally important. Since the late 1990s, along with China’s ongoing rapid economic growth and entry into multilateral agencies, especially the World Trade Organization (WTO), a considerable number of rural households, in particular small-scale farmers and private or newly private rural enterprises owned by individual households, have expressed their great concern at the increasing difficulty in obtaining credit¹ (Nyberg and Rozelle, 1999; Brandt and Zhu, 2002). According to the Organization for Economic Cooperation and Development (OECD) (2004: 7), a national survey of rural families revealed that only 16 per cent of farmers had access to formal or informal institutions² by 2003.

By considering the significant role that rural credit played as an essential instrument in stimulating rural development and achieving economic spin-off for rural residents (Zoetelief, 1999), it is vital for financial institutions to provide adequate loans to satisfy farmers’ credit demands (Brandt et al., 2005). Furthermore, following the development in Chinese agriculture from traditional to modern methods, as well as the structural transformation of the entire economy from an agricultural base to a non-agricultural base, farmers’ demand for credit is shifting away from the traditional context of rural credit. Therefore, on the basis of providing adequate credit to farmers, it is also of critical importance for rural financial institutions to understand the differences in the types of credit and financial service demanded by farmers.

Beginning with a brief introduction to the rural financial system before the economic reforms in 1978, this chapter outlines the major experiences of the development of the rural financial system in China, specifically with an emphasis on Rural Credit Cooperatives (RCCs) and their three-stage reforms during the last three decades. It will give a general picture of the supply-side of the rural credit market which is offered to rural households.

Rural financial systems in China and the reforms of Rural Credit Cooperatives

Since the founding of the People’s Republic of China (PRC) in 1949, the Chinese government has attempted to build a sound rural financial system, in particular, with Rural Credit Cooperatives as its grass-roots units, to promote the development of the rural economy. Although a series of reforms has been conducted in this sector, it seems that the Chinese government has not yet found an effective solution to all the problems of the system (Cheng, 2006: 25, 26).

The rural financial system of China, 1949–78 and the history of the RCCs

In the 1950s, the financial system in China was simply based on a mono-bank.The People’s Bank of China (PBOC) functioned as central commercial bank and provided agricultural loans (Meyer and Nagarajan, 2001). Together with the establishment of agriculture-production cooperatives, RCCs, which were established for the purpose of preventing the exploitation of farmers and usury by local moneylenders (a serious problem which was prevalent in rural areas in pre-Liberation China (Cheng, 2006)), were encouraged to set themselves up to be responsible for providing loans to households.

From the opening of the first National Rural Financial Meeting of the People’s Republic of China in 1951 to 1957, the rural cooperative system in China had developed very quickly and achieved an outstanding performance. By 1957, around 103,000 RCCs had been established with some 0.1 billion households holding membership (Jiangxi provincial RCCU report, 2005: 8). However, while the RCCs were collectively owned by their members, they did not carry the true nature of cooperatives in China even since their foundation (Xie, 2003). This is evident because, first, they were not established on a voluntary basis: ‘[Being] similar to the agricultural producers and marketing cooperatives [in China], RCCs were created by administrative forces, with the wishful thinking of mutual help and mutual benefits among farmers. Members do not have the freedom to quit the cooperatives’. Second, RCCs were not subject to control by their members (they did not have full autonomy). Even at this early stage of collectivization, the management of the RCCs was appointed by local party governments (Cheng, 2006, citing Shang, 1989).

Between the establishment of rural people’s communes (1958) and the 1970s, mainly owing to the unsystematic political and economic environment of China, the development of the RCCs experienced a chaotic period: RCCs first acted as administrative subordinates to the people’s communes, then were transferred to communes, production brigades and later, in the 1970s, to the People’s Bank of China.³ The cooperative nature of the RCCs was further weakened – i.e. they became a sub-branch of the local party and political organization (IFAD, 2001: 7).

The rural financial system, 1979–2002

In 1979, China opened its economy to the world. Accordingly, two substantial transitions have taken place in its economy, including a transformation from a centrally planned economy to a market-based economy, and a structural transformation from an agricultural base to a non-agricultural-based economy (Meyer and Nagarajan, 2001). At the same time, the rural financial system has undertaken a series of reforms during the last three decades. In general, these reforms can be divided into three stages: the preliminary experiments in the 1980s, the national financial reforms from 1994, and the pilot program from 2003 (Cheng, 2006: 26).

Reforms in the 1980s

The first stage of the economic reforms in the 1980s focused on the institutional rearrangement of the banking system, creating a two-tiered banking system. A central bank was created from the People’s Bank of China (PBOC) and four specialized banks (namely, Agricultural Bank of China (ABC), Industrial and Commercial Bank of China (ICBC), Construction Bank of China (CBC) and Bank of China (BOC)) were established, owned fully by the central government (Meyer and Nagarajan, 2001).

In the rural sector, after the dismantling of the collectives and the initiation of the household responsibility system, there was a rapid increase in agricultural production and income, which led to a transition from subsistence farming to commercialized production in the rural areas of China. A number of township and village enterprises (TVEs) emerged and engaged in non-farming production activities. The demand for credit from rural household, township and village enterprises surged during this period. In order to accommodate such change, the Chinese government facilitated the ABC and RCCs as major credit suppliers in rural areas (Meyer and Nagarajan, 2001: 241).

In particular, along with the re-establishment of the ABC in February 1979,⁴ which was responsible not only for various rural savings and agricultural loans, but also for rural industrial loans, loans for procuring agricultural products and by-products, and loans for the cooperative supply and distribution system (IFAD, 2001: 7), the control of the RCCs shifted from the PBOC to the ABC.⁵

From 1982 to the early1990s, the RCCs had undertaken a number of reforms, in pursuit of the following fundamental objectives, including (Cheng, 2006: 28–32):

1 The government aimed to restore the ‘three characters’ of the RCCs, including the mass character of organization, the democratic character of management and the flexible character of operation.

2 The RCCs were to be responsible for their profit and loss, while being independent to run their businesses. Specifically, the RCCs could in principle decide to whom the money should be lent, provided that they deposited the required reserves in the ABC. To reduce the intervention of the ABC in the RCCs, the government established Rural Credit Cooperative Unions (RCCUs) at the county level to coordinate the member RCCs (Cheng, 2006: 27).

However, the performance of the RCCs seemed not to achieve those goals. Citing Shang (1989), Cheng (2006: 27) pointed out that the reforms at this stage were ‘reportedly more nominal rather than real’. In particular, the reforms were specifically confusing regarding the full autonomy of the RCCs, with respect to the issue of establishing RCCUs at the county level and their unclear role in operation. Although by the end of 1984 around 1,136 counties had established RCCUs (Shang, 1989), the ABC continued to intervene in the operation of the RCCs. Moreover, the RCCs also suffered from some other complicated problems, such as constraints on the flow of funds, the surrender of a significant share of deposits to ABC and an unreasonable interest rate structure (at many times – the lending rates were even lower than the deposit rates). Consequently, the performance of the RCCs was very disappointing. It was estimated that in 1989 over 40 per cent of the RCCs in China were loss-making (Xu et al., 1994).

Despite these problems with the RCCs, they still experienced rapid financial growth during this period. For example, from 1978 to 1990, the total deposits of RCCs increased from RMB16.6 billion to RMB214.5 billion; and the total loans supplied by RCCs expanded from RMB4.5 billion to RMB141.3 billion (Cheng, 2006: 27, quoting Xu et al., 1994).

During the same period, the ABC also experienced rapid financial growth. Its outstanding loans increased from RMB168.8 billion in 1985 to RMB377.4 billion in the 1990s. However, similar to the performance of the RCCs, the ratio of non-performing loans (NPLs) of the ABC was recorded as 17.5 per cent (Xu et al., 1994: 31).

In addition, due to an incredible demand for credit from rural households during the 1980s, various types of informal financial institutions were rapidly emerging in rural areas as an alternative to formal financial institutions. In the late 1980s, private lending in rural China was estimated to be between about RMB40 billion and RMB60 billion. Specifically, one type of institution – rural cooperative foundations (RCFs) – which were internal financial institutions of rural collectives (Cheng et al., 2003) were rapidly expanding. The funds gathered by them were estimated at between RMB8 billion and RMB10 billion in 1990 (Xu et al., 1994: 4). However, they suffered from the lack of proper supervision and the inability to ensure the quality of their loans. Those shortcomings led to their eventual closure in 1996.

National financial reforms and rural finance reforms, 1994–2000

After the experimental reforms in the 1980s, in 1994 the Chinese government launched a further essential phase of financial reforms – national financial reforms, with an aim to achieve two major objectives (Cheng, 2006: 28–32):

1 Institutional building of financial institutions, i.e. building up a new financial system characterized by differentiated roles of financial institutions.⁶

2 Management of the non-performing loans (NPLs).

Starting with the separation of policy and commercial lending activities, the first objective of the reforms focused on the commercialization of four specialized banks. The measures, such as ‘the attempt to reduce government intervention, the removal of credit allocation, a narrowing of the scope of business, interest rate and entry deregulations, and a gradual tightening of accounting and prudential regulation’ (Shirai, 2001: 50), had all been conducted to facilitate this goal. Regarding the second objective, the government adopted techniques such as ‘recapitalization of wholly state-owned commercial banks (WSCBs), the disposal of NPLs held by WSCBs, and the merger and closure of proble...