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
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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
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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
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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 nonperforming loans.
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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)
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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)
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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.
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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.
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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?
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