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

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 . Introduction (1): Rural unrests.

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

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  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?

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