Prosper or Perish: Credit and Fiscal Systems in Rural China

2. The Rural Financial System and Rural Development in China

27 2 THE RURAL FINANCIAL SYSTEM AND RURAL DEVELOPMENT IN CHINA Drawing on secondary and some primary data, this chapter situates rural credit cooperatives (RCCs) in the context of China’s rural financial landscape in order to highlight their significance to the rural economy and households. China’s rural financial system serves roughly 800 million people, constituting 70 percent of the population. These people live in large swaths of hinterland in the central and western provinces and in rural and peri-urban locales in the eastern coastal provinces. Despite a diverse range of credit demands, the official rural financial sector has been largely monopolized by RCCs and, until the late 1990s, the state-owned Agricultural Bank of China (ABC). Rural savings were behind the spectacular rural industrialization of the 1980s and early 1990s. However, this feat was achieved primarily through funding collective township and village enterprises (TVEs) rather than private enterprises (as a recent study has claimed).1 Hence, understanding how RCCs work is essential to understanding industrialization in China’s countryside. The Rural Financial Sector Rural credit cooperatives (RCCs) are the backbone of official finance in rural China. They collectively account for over 80 percent of rural deposits and loans (figure 2.1). With respect to agricultural loans, the Agricultural Bank of China (ABC), one of the four big state-owned banks, has only one-tenth of the total, compared to over 80 percent for RCCs (figure 2.1). 28 PROSPER OR PERISH As table 2.1 indicates, there were about 24,600 credit cooperatives scattered around rural areas as of 2005, covering about 60 percent of townships in the country.2 RCCs’ networks have been shrinking since the late 1990s due to ongoing efforts by the central government to save costs incurred in the RCC system. As part of this effort, the central government abolished village RCCs in the 1990s, reducing the number of RCCs from over forty thousand in the late 1990s (about one RCC in every township) to thirty-three thousand in 2003. Institutional reforms between 2003 and 2005 further reduced the number of RCCs to 24,600 in 2005. Some of the state-owned commercial banks and commercial shareholding banks have branches in the peri-urban areas, but not in remote rural areas, since such presence is costly to maintain. For savings accounts, RCCs’ only real competition is the Postal Savings Bank, which has networks throughout both urban and rural areas. RCCs 82% ABC 11% Other 7% RCCs 83% Other 17% FIGURE 2.1 (left) Share of rural households’ deposits by financial institution (2006). Total size: 2.88 trillion yuan. (right) Share of agricultural loans by financial institution (2006). Total Size: 1.32 trillion yuan. TABLE 2.1 Rural credit cooperatives system by type (2005) NO. OF UNITS NO. OF WORKERS Township RCCs 24,596 627,141 County unions 2,415 Provincial unions 25 Rural commercial banks 12 19,278 Rural cooperative banks 58 29,294 Total 27,106 675,713 Source: Almanac of China’s Banking and Finance (2006). Source: Almanac of China’s Banking and Finance (2007). THE RURAL FINANCIAL SYSTEM AND RURAL DEVELOPMENT IN CHINA 29 To put this in a national perspective, the financial sector is still dominated by the four state-owned commercial banks, which have about 60 percent of total deposits and loans nationwide (table 2.2). The shareholding commercial banks, such as the China Merchant Bank and the Shanghai Pudong Development Bank, collectively have about 16 percent of total loans and deposits . Smaller in scale, RCCs have 10 percent of total loans and 12 percent of total deposits nationwide. Despite its rural reach, the Postal Savings Bank’s total loans and deposits nationwide are less than half of those of RCCs (table 2.2). The Agricultural Bank of China (ABC) Despite its name, the ABC is relatively detached from agricultural households. The ABC was established by the central government in the 1950s to support agricultural production and to manage the RCCs that pre-dated it.3 It took over the People’s Bank of China (PBoC)’s rural branches in 1979 and assumed a range of policy and commercial functions, including lending to rural industries, financing state procurement of agricultural products, and managing the RCC system.4 During the 1980s, it served mainly to finance the central government’s projects in the agricultural sector. Before the Agricultural Development Bank of China was set up in 1994...