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

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 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 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?