Building Pro-rural Economic Institutions in China

1
Building Pro-rural Economic Institutions in China
What Can the Reforms of Rural Credit
Cooperatives Achieve?

• Yuk-shing CHENG
• Department of Economics
• Hong Kong Baptist University

2
Introduction (1) Rural unrests

• There has been growing rural unrests since the
  early 2000s recurring farmers protests, riots
  and demonstrations.
• Major causes
• Falling agricultural prices for consecutive years
  starting from late 1990s
• Excessive tax burdens of peasants
• Excessive expropriation of farmland without
  sufficient compensation
• Financial disintermediation due to outflow of
  funds to urban areas.
• There has been a change of the policies sine 2003
• Channeling more resources to rural areas
  relatively easy
• Building pro-rural institutions take longer time

3
Introduction (2) Objectives of this presentation

• Analyze the problem of rural finance in the past,
  with special attention to rural credit
  cooperatives (RCCs)
• Analyze and evaluate the RCC reforms started in
  2003-04

4
Financial disintermediation (1)Rural financial
system in the 1980s

• Loans for agricultural uses and for rural
  enterprises came mainly from the Agricultural
  Bank of China (ABC) and the rural credit
  cooperatives (RCCs).
• RCCs are not really cooperatives. They were run
  more like the branches of the ABCs.
• Due to bad managements and policy factors, both
  ABC and RCCs have high ratios of non-performing
  loans.

5
Financial disintermediation (2)Commercialization
of state banks

• China introduced reforms to its state banking
  system.
• Policy banks were established while the major
  state banks were required to commercialize.
• ABC reduced its county-level branches and offices
  from 60,000 to 44,000 during 1998-2001.
• Loans
• Total 1,367 billion (98) ? 1,858 billion
  (02)
• Agricultural use 178 billion (98) ? 124
  billion (02)
• Rural enterprises 190 billion (99) ? 154
  billion (02)

6
Financial disintermediation (3)Outflow of
capital to urban sector

• Encouragement of postal savings
• 128 billion (96) ? 442 billion (02)
• RCCs were required to put reserves and deposits
  in the central bank and to purchase government
  bonds.
• Total outflow of capital from rural to urban
  areas
• 328 billion (97) ? 447 billion (02)

7
Major Objectives of the RCC reform started in
2003-04

• The first objective is to clear the financial
  burdens of the RCCs that have been historically
  accumulated.
• The second one is to establish a system of RCCs
  that could serve the rural areas. This system
  should be operated in a new fashion that can
  guarantee its financial viability.

8
Major measures

• Inject funds to the system (with incentive
  mechanism for the RCCs and local governments to
  improve the financial performance)
• Change the governance structure
• Allow the RCCs to transformed into different
  legal entities
• Shareholding banks
• Cooperative banks
• RCCs merged into single legal persons at county
  level
• Designated the responsibility of administering
  the RCCs to provincial governments.

9
Progress and Problems

• Big improvement of financial performance of the
  RCCs shortly after the start of the reforms
• Bureaucratization of the RCC system or improved
  governance structure?
• Long-term problem RCCs could become an easy arm
  of the provincial governments to channel credits
  to its bet projects?
• Suppressing or facilitating new forms of rural
  financial institutions?