China's Rural Financial System : Households' Demand for Credit and Recent Reforms [1 ed.] 9780203845813, 9780415547932

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China's Rural Financial System : Households' Demand for Credit and Recent Reforms [1 ed.]
 9780203845813, 9780415547932

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China’s Rural Financial System

This book examines the credit needs and the borrowing behaviour of rural households in China in recent years. It is based on in-depth analysis of the status of households’ indebtedness and borrowing behaviour, the performance of Rural Credit Cooperatives (RCCs), as well as resources of informal finance. Before 2006, RCCs were virtually the only source of formal credit for rural households in China and were subject to a series of reforms from 1996 to 2003. The reforms aimed to transform RCCs into market-oriented institutions and, more importantly, help them meet the increasing demands of farmers for varied financial services, and thereby contribute effectively to economic transformation in rural China. Based on a micro-study of three villages at different stages of development with dissimilar economic characteristics in Jiangxi province, this book investigates the sources of finance, formal and informal, in rural areas and the different types of credit that farmers require. It examines the patterns of credit required by rural households at different stages of agricultural processes, and the institutions from which they obtain loans. It demonstrates the importance of innovative institutional arrangements in rural China and new instruments that give farmers access to formal rural financial markets and enable them to utilize credit effectively, concluding that further reforms to RCCs are necessary for them to be truly effective. Yuepeng Zhao works in the Policy Research Department at the China Banking Regulatory Commission, Beijing, China. She was formerly Research Fellow at the University of Cambridge, UK.

Routledge Studies on the Chinese Economy Series Editor Peter Nolan University of Cambridge

Founding Series Editors Peter Nolan, Dong Fureng University of Cambridge, Beijing University

The aim of this series is to publish original, high-quality, research-level work by both new and established scholars in the West and the East, on all aspects of the Chinese economy, including studies of business and economic history. 1 The Growth of Market Relations in Post-reform Rural China A micro-analysis of peasants, migrants and peasant entrepreneurs Hiroshi Sato 2 The Chinese Coal Industry: An Economic History Elspeth Thomson 3 Sustaining China’s Economic Growth in the Twenty-First Century Edited by Shujie Yao & Xiaming Liu 4 China’s Poor Regions: Rural-urban migration, poverty, economic reform and urbanisation Mei Zhang 5 China’s Large Enterprises and the Challenge of Late Industrialization Dylan Sutherland 6 China’s Economic Growth Yanrui Wu 7 The Employment Impact of China’s World Trade Organisation Accession A.S. Bhalla and S. Qiu 8 Catch-Up and Competitiveness in China The case of large firms in the oil industry Jin Zhang 9 Corporate Governance in China Jian Chen 10 The Theory of the Firm and Chinese Enterprise Reform The case of China international trust and investment corporation Qin Xiao

11 Globalisation, Transition and Development in China The case of the coal industry Huaichuan Rui 12 China Along the Yellow River Reflections on rural society Cao Jinqing, translated by Nicky Harman and Huang Ruhua 13 Economic Growth, Income Distribution and Poverty Reduction in Contemporary China Shujie Yao 14 China’s Economic Relations with the West and Japan, 1949–79 Grain, trade and diplomacy Chad J. Mitcham 15 China’s Industrial Policy and the Global Business Revolution The case of the domestic appliance industry Ling Liu 16 Managers and Mandarins in Contemporary China The building of an international business alliance Jie Tang 17 The Chinese Model of Modern Development Edited by Tian Yu Cao 18 Chinese Citizenship Views from the margins Edited by Vanessa L. Fong and Rachel Murphy 19 Unemployment, Inequality and Poverty in Urban China Edited by Shi Li and Hiroshi Sato 20 Globalisation, Competition and Growth in China Edited by Jian Chen and Shujie Yao 21 The Chinese Communist Party in Reform Edited by Kjeld Erik Brodsgaard and Zheng Yongnian 22 Poverty and Inequality among Chinese Minorities A.S. Bhalla and Shufang Qiu 23 Economic and Social Transformation in China Challenges and opportunities Angang Hu 24 Global Big Business and the Chinese Brewing Industry Yuantao Guo

25 Peasants and Revolution in Rural China Rural political change in the North China Plain and the Yangzi Delta, 1850–1949 Chang Liu 26 The Chinese Banking Industry Lessons from history for today’s challenges Yuanyuan Peng 27 Informal Institutions and Rural Development in China Biliang Hu 28 The Political Future of Hong Kong Democracy within Communist China Kit Poon 29 China’s Post-Reform Economy - Achieving Harmony, Sustaining Growth Edited by Richard Sanders and Chen Yang 30 Eliminating Poverty Through Development in China China Development Research Foundation 31 Good Governance in China – A Way Towards Social Harmony Case studies by China’s rising leaders Edited by Wang Mengkui 32 China in the Wake of Asia’s Financial Crisis Edited by Wang Mengkui 33 Multinationals, Globalisation and Indigenous Firms in China Chunhang Liu 34 Economic Convergence in Greater China: Mainland China, Hong Kong, Macau and Taiwan Chun Kwok Lei and Shujie Yao 35 Financial Sector Reform and the International Integration of China Zhongmin Wu 36 China in the World Economy Zhongmin Wu 37 China’s Three Decades of Economic Reforms Edited by Xiaohui Liu and Wei Zhang 38 China’s Development Challenges Economic vulnerability and public sector reform Richard Schiere 39 China’s Rural Financial System Households’ demand for credit and recent reforms Yuepeng Zhao

China’s Rural Financial System Households’ demand for credit and recent reforms Yuepeng Zhao

First published 2011 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2010. To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk. Routledge is an imprint of the Taylor & Francis Group, an informa business © 2011 Yuepeng Zhao All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Zhao, Yuepeng. China’s rural financial system: households’ demand for credit and recent reforms / Yuepeng Zhao.—1st ed. p. cm.—(Routledge studies on the Chinese economy; 39) Includes bibliographical references and index. 1. Rural credit—China—Jiangxi Sheng. 2. Agricultural credit—China— Jiangxi Sheng. 3. Rural development—China—Jiangxi Sheng. 4. China—Economic conditions. I. Title. II. Series: Routledge studies in the Chinese economy; 39. HG3756.C6Z43 2010 332.7'10951222—dc22 2010006262

ISBN 0-203-84581-1 Master e-book ISBN ISBN: 978–0–415–54793–2 (hbk) ISBN: 978–0–203–84581–3 (ebk)

Contents

List of tables List of figures List of plates Foreword Preface Acknowledgements List of abbreviations 1

San nong problems and the challenges of the rural financial system in China

viii x xi xii xvi xix xx

1

2

Literature gap and research objectives

13

3

Fieldwork villages, procedures and the RCCs’ pilot program in Jiangxi province

19

Households’ indebtedness and borrowing behaviour in the natural village of Yao

45

Households’ indebtedness and borrowing behaviour in the natural village of Wulitang

75

Households’ indebtedness and borrowing behaviour in the natural village of Xiaobu

97

4 5

6 7

Analytical summary of the three villages

117

8

Conclusion

140

Appendix Notes Bibliography Index

145 148 155 164

Tables

1.1 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8

A brief chronology of events in the rural financial system of China, 1951–2005 Seven private enterprises in the administrative village of Yao Comparison of some key characteristics of the three natural villages Composition of the outstanding loans of the RCCs in Jiangxi, by 2002 Measures and innovation of the pilot program of the RCCs in Jiangxi Characteristics of formal loans in Yao, 2001–5 Comparison of the households who obtained full loans (type A) and the households (directly) rationed from the formal credit market (types B and C) in Yao Determinants of credit rationing (farmers’ view), Yao Detailed information of the participants in the formal credit market, Yao Determinants of the households’ unwillingness to enter into the formal credit market, Yao Characteristics of the informal loans in Yao, 2001–5 Functions and locations of the participants of duck-breeding activities and egg-processing business in Yao and its surrounding areas Borrowing methods of the participants in the duck-breeding and egg-processing business in Yao and its near areas Detailed information of the three formal loans in Wulitang, 2001–5 Comparison of the households who obtained full loans (type A) and the households (directly) rationed by the formal credit market (types B and C) in Wulitang Determinants of credit rationing (farmers’ view), Wulitang Determinants of households’ unwillingness to enter into the formal credit market, Wulitang Transactions relating to the view of usurious interest rates on loans received by the farmers in Wulitang Characteristics of the informal loans in Wulitang, 2001–5 The borrowing of Yu Xi, 2001–5 Selected farmers’ experience of medical care, Wulitang

11 26 31 35 43 46 50 52 59 60 64 67 68 75 78 79 80 82 84 87 91

Tables 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9

Characteristics of formal loans in Xiaobu, 2001–5 Differences between microcredit loans from RCCs in China and microfinance loans from Grameen Bank Comparison of the households who obtained full loans (type A) and the households (directly) rationed by the formal credit market (types B and C) in Xiaobu Determinants of credit rationing (farmers’ view), Xiaobu Determinants of households’ unwillingness to enter into the formal credit market, Xiaobu Characteristics of informal loans in Xiaobu, 2001–5 Functions and locations of the participants of the cultivation of orange trees, Xiaobu Borrowing methods of small dealers of production inputs and farmers, Xiaobu Overview of the status of households’ indebtedness in the three examined villages, 2001–5 Summary of the characteristics of households’ formal borrowing, three villages, 2001–5 Summary of the characteristic of farmers’ informal credit, three villages, 2001–5 Comparison of the characteristics of households’ borrowing in the three villages, 2001–5 Farmers’ engagement with the RCCs, Yao and Wulitang Farmers’ engagement with the RCCs, Xiaobu Share of households’ informal borrowing, three villages The financial mechanism of the new rural cooperative medical system in Jiangxi province Minimum amount of hospitalization compensation and the ratio of compensation in Jiangxi province

ix 98 100 102 104 108 110 112 112 118 119 120 121 125 128 131 138 139

Figures

2.1 3.1 4.1 4.2 4.3

Conceptual framework Map of Jiangxi and three fieldwork counties Duck-breeding in Yao Market situation of the duck-feeding business in Yao Egg-processing and related business

17 21 65 66 66

Plates

3.1 3.2 3.3 3.4 4.1 4.2 4.3 5.1 6.1

A duck-breeding family farm, Yao A view of Wulitang A field of orange trees, Xiaobu An interview with a group of female farmers Example of a note written by a borrower to the fodder delivery-man in Yao A container of Good Heart preserved eggs Boxes of Good Heart preserved eggs A receipt from the local RCC to Mr Yu (household (e) in Table 5.5), Wulitang A picture of one household’s credit book for microcredit loans

25 28 29 33 68 71 72 82 99

Foreword

Under the policy of ‘reform and opening up’, which it has pursued since the late 1970s, China has achieved a remarkable economic transformation. China’s GDP has grown by 10 per cent per annum since the late 1970s. China has urbanized at high speed. Its urban population has grown from 18 per cent of the total in 1978 to 46 per cent in 2008. The total number of urban dwellers rose from 172 million in 1978 to 607 million in 2008, an increase of more than 430 million urban residents. Average real incomes advanced tremendously over the course of three decades, with a large increase per person in housing space, diet, clothing and consumer durables. The outside world has been mesmerized by China’s enormous achievements. However, in the course of China’s explosive growth, many major policy challenges have emerged to confront China’s leaders. China’s growth has been highly ‘unbalanced’. It has an exceptionally high rate of saving and investment, and an exceptionally low share of consumption in national output. The ratio of international trade in the national economy is exceptionally high, which makes the country especially vulnerable to fluctuations in the international economy. Inequality in the distribution of income and wealth has greatly increased. China’s pattern of growth has been strongly biased towards energy intensive, polluting industries. China faces the prospect of rapid ageing of its population. In the light of these development challenges, China’s leaders have called for a fundamental change in China’s development model. In the midst of the policy challenges that confront China’s leaders, rural development remains centrally important. Despite the tremendous changes in the past three decades, China remains a developing country, in which a majority of the population are rural residents. In 2008, China’s rural population stood at over 720 million, with an average net income per person of less than two US dollars per day, compared with more than US$6 per day for urban residents. Financial institutions are critical for economic development, not least in order to help lift poor people out of poverty. The provision of finance for China’s mass of rural dwellers remains a vital issue in China’s development policy. China has a long-established system of rural credit cooperatives. Farming communities have special financial needs stemming from the pronounced seasonal characteristic of agriculture. The main commercial banks were unable and

Foreword

xiii

unwilling to meet fully the needs of millions of small rural businesses and hundreds of millions of farmers. Since the 1950s, the main institutions in which farmers could make deposits, and from which they and small rural businesses could borrow, were the rural credit cooperatives (RCCs). Originally, the RCCs were genuinely ‘collective’ institutions. Increasingly, they lost their collective character, as their function merged with that of the peoples’ communes and the supply and marketing cooperatives, to form a single system. From 1980 to 1996, authority to manage the RCCs was handed to the Agricultural Bank of China (ABC). The RCCs effectively became base level branches of the ABC. At the end of 1999 there were around 42,000 RCCs across the country. Their total assets were RMB1.430 trillion (US$173 billion), total deposits were RMB1.34 trillion (US$161 billion) and outstanding loans were RMB923 billion (US$112 billion). There was a total of 642,000 employees in the RCCs. The RCCs had a total of 62,000 branches and savings offices without independent accounting across the country. In the face of explosive rural economic expansion in the 1980s and 1990s, new forms of rural financial institutions grew at high speed to meet the urgent credit needs of the rural population. For example, in Guangdong province alone, alongside the network of rural credit cooperatives, by the late 1990s there were 900 rural financial associations (RFAs), with an even greater number of local branches. In the course of China’s high-speed development in the 1990s, serious problems developed in the rural financial sector. It became apparent that a large part of the rural financial sector was insolvent. This prompted a series of runs on local financial institutions, which were frequently accompanied by extensive social disorder. The impact of the Asian Financial Crisis in 1997/98, especially in southern China, intensified these problems. In 1999, across the whole country, the central government introduced emergency measures to shut down most of the RFAs, a massive administrative undertaking, reflecting the gravity of the situation that the government faced. The general principle was contained in the State Council’s document of March 1999. This specified that where RFAs had capital that exceeded their debts, they should be merged with the local RCCs or urban commercial banks. Those RFAs in which debts exceeded capital, after clearing the accounts, were to be closed down. China’s central bank, the People’s Bank of China (PBOC), played a central role in resolving the crisis in the country’s RFAs. Across the whole country the PBOC closed a total of 6,700 RFAs and merged a further 4,400 into RCCs. The practice adopted was for the PBOC to provide loans to the local commercial banks for the specific purpose of resolving the RFA crisis. The banks then took over responsibility for the RFAs’ assets, including farmers’ deposits, in the case of those that were performing adequately. Others were closed or merged with the local RCCs. The government allowed the possibility that some RFAs that operated in line with the law could return to the status of mutual-aided financial organizations which would be able to serve the community after a period of time. Even before the onset of the Asian Financial Crisis, it was widely recognized that there were deep problems with the RCCs, as well as the RFAs. Well before the

xiv Foreword crisis the central government began a programme of reform of the RCCs. The key document for the reform was published by the State Council in August 1996, entitled ‘Resolution on the reform of the rural credit cooperatives’. The objective of the reform was to establish cooperation as the foundation of rural finance, in order to achieve a mutually beneficial division of labour between commercial finance and policy finance. The relationship between the RCCs and the ABC was to be ended. Instead, supervision of the RCCs was to pass jointly to the PBOC and the xian-level network of RCCs. In relatively advanced areas, in which the RCCs were already relatively commercialized, following rectification (zhengdun), the RCCs were to become ‘rural cooperative banks’. In 1998 and 1999, the PBOC undertook a comprehensive national survey of the assets and capital of the RCCs. Each RCC was then classified into one of five categories with appropriate treatment. Those placed in the first two categories were ‘urged to expand their business and improve financial services’. Those placed in the third and fourth categories were required to ‘improve internal controls and work out mechanisms to regain profitability’. Those in the fifth category were ‘disposed of through acquisition by the first two categories’ and their independent legal person status was annulled. In those areas with a high concentration of RCCs in the fifth category, the grass roots cooperatives were ‘consolidated into a single legal person within the whole county’. In the course of this complicated process of consolidation, the PBOC provided some RCCs with ‘timely assistance’ in the face of ‘temporary liquidity crises in the process of consolidation’. As we have seen, the RCCs also were responsible for absorbing several thousand RFAs. In the course of 1999, over 2,200 RCCs across the whole country had their legal person status cancelled and were merged with other RCCs. The government paid close attention to the implications for the RCCs of the dissolution of large numbers of RFAs, and their being placed under the supervision of the RCCs. The cooperative principles of the RCCs were emphasized during the clean-up process, including improvement in their share-holding structure. The PBOC attempted to establish or improve the management system, recruiting people with higher educational qualifications to raise their management quality. The RCCs were encouraged to develop a comprehensive range of financial services for the rural community. The main focus of the RCCs’ lending was intended to be towards the needs of rural production. At the end of 1999, loans from the RCCs for agriculture totalled RMB304 billion (US$37 billion) and loans for the township and village enterprises totalled RMB419 billion (US$50 billion). In addition, the RCCs were encouraged to ‘extend their service scope from production to consumption’, making loans to farmers to build or buy houses, purchase consumer durables, meet educational fees and other consumption needs. Following the massive reorganization of the rural credit system, involving the closure of many thousands of rural financial institutions and a radical shake-up of the long-established rural credit cooperatives, a key question for China’s policy makers remained: To what extent were China’s rural financial institutions able to meet the credit needs of the more than 700 million rural dwellers in the early twenty-first century?

Foreword

xv

Dr Zhao Yuepeng’s book addresses this critically important question. She conducted in-depth fieldwork in three counties in one of China’s poorest provinces, Jiangxi, in southeast China. She spent many months conducting household surveys in order to build up a unique picture of China’s rural financial institutions today. Her main conclusions are striking. Foremost among these is the fact that informal finance plays the dominant role in meeting the credit needs of the rural households. Her research concludes that, even after the enormous reforms of recent years, the RCCs are not adequately fulfilling the task for which they were established. Dr Zhao Yuepeng’s research suggests that, whatever their shortcomings, the explosive growth of the RFAs in the 1980s and 1990s answered a desperate need for credit among China’s 700 million rural dwellers. The Chinese government has not yet found a way to meet these needs adequately. There is painfully little in-depth scholarly research on China that uses fieldwork and case studies. This is especially true in the rural sector. Research in the Chinese countryside is exceptionally demanding. However, it is only through such research that the challenges facing China’s policy makers can be fully understood. Dr Zhao Yuepeng’s is one of the few pieces of research of this type. It makes an invaluable contribution to understanding one of the most important issues in China’s political economy in the early twenty-first century. Peter Nolan Sinyi Professor Judge Business School and Chair of Development Studies University of Cambridge

Preface

Without whose [farmers’] cooperation continuous economic progress and political stability are alike impossible. Until his lot is substantially bettered, all other reforms will be written in water. (Tawney, 1939)

Agriculture is a strategic industry in an economy. The farmer’s life is vital to the development of a country. Among a total population of around 1.3 billion, China currently boasts 950 million registered farmers, with 750 million living in the countryside. Three decades ago, triggered by the rural reforms, China began her economic reforms and opened up to the world. So far, China has made tremendous achievements in her social and economic development. However, although reforms began in the rural areas, as with trends in other developing countries, the government allocation of resources has been mainly in favour of urban areas and biased against rural areas (Lipton, 1984; Brandt, Park and Wang, 2005). In a country in which more than 70 per cent of the population are farmers and most of them are still living in rural areas, China’s economic prosperity and political stability are vitally dependent on them. In recent years, the Chinese government has always placed great importance on agriculture, rural development and farmers’ way of life: to use its own words, san nong problems – i.e. nong ye (agriculture), nong cun (rural areas or villages) and nong min (farmers). Zhu Rongji, in his valedictory speech as China’s premier in 2003, alerted people to the urgent fact that: Agricultural, village and farmers’ problems relate to the overall situation of China’s reform, opening and modernization. We cannot neglect them or relax at any time. If we do not change these conditions, they will severely dampen farmers’ enthusiasm to produce, undermine the foundation of agriculture and even threaten the overall health of the national economy. (Nolan, 2004: 13, quoted in the Financial Times, 6 February 2003) On 30 January 2008, the Central Committee of the Communist Party of China issued its first document (No.1 central document) for that year, calling for greater

Preface xvii efforts to address rural problems. It was the fifth year in a row in which the No. 1 central document focused on rural problems. Among various issues of san nong problems, rural finance, especially rural credit owing to the vital role it played to augment rural incomes, especially agricultural incomes and to generate surpluses that can be used to finance rural non-farm enterprises (Meyer and Nagarajan, 2001), has again become a hot topic in both academic research and policy debates. From the 1980s to 2002, along with the reforms of overall financial systems, the rural financial systems in China had undergone a series of reforms. Nevertheless, it seemed that those reforms had always failed to achieve their planned goals set by the central government. In particular, following the objective of building up a new financial system characterized by differentiated roles for the financial institutions in the reforms of 1994, and the fact of separating policy banks from commercial financial institutions, the Rural Credit Cooperatives (RCCs) had been left over as the only type of financial institutions providing credit to households in rural areas. However, by the end of 2002, the financial performance of the RCCs was still appalling, which triggered a call for further fundamental reforms of the rural financial system. In 2004 when I started my PhD, China was just engaging in another new round of evolutionary reforms for her rural financial system. In July 2003, following the Document 15 issued from the State Council, the pilot program of the RCCs initialized the eight experimental provincial level units across China. Compared with the attempts of the RCCs reform in the 1980s and 1990s, the pilot program was regarded as different from three key respects: (1) restructuring of the RCCs; (2) handing the RCCs’ management over to local governments; (3) injection of government funds. It was expected that the program would gradually spread over most provinces of China by the end of 2005. It was a common view of the Chinese press, as well as policy makers, that this reform was ‘a milestone that is supposed to bring about a fundamental reform in the rural financial system of China’ (Xie et al., 2005: 26). RCCs were the most effective institutions providing solutions to the credit problems of rural households. However, questions arose as to the reality of the reforms. Could the reformed RCCs fully and efficiently satisfy rural households’ credit demands? The questions could only be answered by practical reality. This book grew from my PhD thesis – ‘Rural Credit in China: A Case Study of Three Villages in Jiangxi Province’. It will draw a picture of the credit needs and the borrowing behaviour of rural households in China, particularly covering the period of shortly before and shortly after the 2003 pilot program. The study on credit needs was based on an in-depth analysis of the status of Chinese rural households’ indebtedness. The study on the borrowing behaviour was based on the performance of Rural Credit Cooperatives (RCCs), as well as resources of informal finance. Those issues were investigated through a case study of three natural villages at different stages of development in Jiangxi province – the natural villages of Yao, Wulitang and Xiaobu. Jiangxi is an inland province that shares many similarities with other central regions of China, in terms of social and economic development. It was also one of eight designated provinces in the first batch of pilot programs.

xviii Preface The micro-study on the credit needs of those villages with dissimilar social and economic backgrounds and the in-depth analysis of the complexity of households’ borrowings behaviour in rural China contribute to the literature on rural finance. It also contributes to the policy discussions in meeting the credit demands of rural households in China. The structure of this book is as follows: Chapter 1 gives a background picture of san nong problems and the supply-side of the rural credit market on offer to rural households. In particular, it outlines the evolutionary history of the rural financial system reforms in China since the economic reforms in 1978. Chapter 2 reviews the main literature in the field of rural finance related to the themes in the book. It also outlines the objectives and conceptual framework of the research. Chapter 3 gives a brief introduction to Jiangxi province. Then it presents three detailed pictures of the economic and social background of the fieldwork villages. Moreover, in order to provide a perspective for the status of the rural financial market in the fieldwork region, this chapter outlines the main measures and innovations undertaken by the Jiangxi provincial Rural Credit Cooperatives union in the pilot program. Chapters 4–6 analyse the key characteristics of households’ indebtedness and borrowing behaviour, with an emphasis on two particular issues: households’ access to formal credit and the determinants of credit rationing, and households’ participation in the formal credit market and the determinants of their participation, in those three villages respectively. Chapter 7 provides an analytical summary of the findings of three fieldwork villages and also gives an evaluation of the RCCs’ performance after the pilot rogram was introduced. Finally, the book concludes with policy suggestions of rural finance in China. It is argued that during China’s recent agricultural modernization and economic transformation, farmers’ demands for credit largely focus on production purposes. Informal finance plays a dominant role as the source of credit to households. However, depending on the variance in economic and social structures in different areas, the pattern of credit demanded by farmers and the sources of finance they adopted are differentiated in accordance with their own preferences. Furthermore, with respect to the two specific issues relating to households’ borrowing from the RCCs, households’ access to formal credit and the determinants of households’ credit rationing, and households’ participation in the formal credit market as well the determinants of their participation, it concludes that while some progress has been achieved in the financial performance of RCCs following the pilot program, many critical problems are still unsolved by the RCCs. They face many challenges if they are to become efficient market-oriented financial institutions to meet rural households’ divergent demands for credit in China. Yuepeng Zhao Beijing

Acknowledgements

In preparing the publication of this work, I am extremely grateful to my supervisor, Professor Peter Nolan, for his intellectual guidance, inspiration and advice on my research, his invaluable advice on the manuscript and his encouragement to publish this work. I am deeply grateful to Dr Jin Zhang for her enormous support during the course of my PhD studies. I have had enormous support from various people and institutions for my fieldwork in China. I am extremely grateful to Di Peng, Daobin Peng and Zhengkun Huang from Jiangxi Provincial Bureau of Statistics, Wei Liu and Xinjian Cao from Jiangxi Provincial Rural Credit Cooperatives Union, as well as Dr Dongni Li from Nanchang University, for sharing with me their deep knowledge and providing me with invaluable information and data on the case studies. I thank Jie Chen and Ping Luo for their assistance and company in undertaking interviews in the three villages. I highly appreciate the residents of the three villages in this study and many officials at the villages or township levels, as well as officials in the local branches of the rural financial institutions for helping me understand the status of rural credit. I wish especially to thank them for their kindness and willingness to participate in my interviews, in particular their care and hospitality when I visited them. I am indebted to The Suzy Paine Fund of the University of Cambridge which awarded me a grant to support my fieldwork, without which the field trip to China would not have been possible. I am indebted to the Cambridge China Development Trust, the University of Cambridge, for its generous financial support with the writing of this book. I am greatly indebted to Peter Sowden at Taylor & Francis for his support and patience for the delivery of the manuscript. I appreciate my friends in both Britain and China for their great support during the course of my PhD study. Special thanks go to Zhuo Liu, Yue Li, Yue Kui, Dr Jamie Walch, Dr David Barnett, Dr Anupama Sen, Sarah Stephen, Anusha Nirmalananthan, Rita Dey and Dr James Weatherall. I am very grateful to my husband Nick for his love and support. I am also deeply indebted to my parents for their great love and unstinting support.

Abbreviations

ABC ADBC BOC CBC CBRC ICBC NPLs NSL OECD PBOC PRC RCCs RCCUs RCFs RMB ROSCAs SMEs TVEs WSCBs WTO

Agricultural Bank of China Agricultural Development Bank of China Bank of China Construction Bank of China China Banking Regulatory Commission Industrial and Commercial Bank of China non-performing loans National Student Loan Organization for Economic Cooperation and Development People’s Bank of China People’s Republic of China Rural Credit Cooperatives Rural Credit Cooperative Unions Rural Cooperative Foundations Ren Min Bi Rotating Savings and Credit Associations small and medium enterprises township and tillage enterprises wholly state-owned commercial banks World Trade Organization

1

San nong problems and the challenges of the rural financial system in China

Introduction Since the economic reforms and opening up of trade with the world initialized by Deng Xiaoping three decades ago, China has made great achievements in various aspects of her economy. Nonetheless, compared with the speedy development of urban areas, progress in rural areas is lagging behind and needs much support. Indeed, san nong problems, including nong ye (agriculture), nong cun (rural areas or villages) and nong min (farmers), have played a very important role in China’s economic development. In recent years, the Chinese government clearly understands the significance and urgency of this issue, and its policy emphasis has been consistently addressed to san nong problems. Among various issues related to san nong, rural finance is vitally important. Since the late 1990s, along with China’s ongoing rapid economic growth and entry into multilateral agencies, especially the World Trade Organization (WTO), a considerable number of rural households, in particular small-scale farmers and private or newly private rural enterprises owned by individual households, have expressed their great concern at the increasing difficulty in obtaining credit1 (Nyberg and Rozelle, 1999; Brandt and Zhu, 2002). According to the Organization for Economic Cooperation and Development (OECD) (2004: 7), a national survey of rural families revealed that only 16 per cent of farmers had access to formal or informal institutions2 by 2003. By considering the significant role that rural credit played as an essential instrument in stimulating rural development and achieving economic spin-off for rural residents (Zoetelief, 1999), it is vital for financial institutions to provide adequate loans to satisfy farmers’ credit demands (Brandt et al., 2005). Furthermore, following the development in Chinese agriculture from traditional to modern methods, as well as the structural transformation of the entire economy from an agricultural base to a non-agricultural base, farmers’ demand for credit is shifting away from the traditional context of rural credit. Therefore, on the basis of providing adequate credit to farmers, it is also of critical importance for rural financial institutions to understand the differences in the types of credit and financial service demanded by farmers.

2

San nong problems

Beginning with a brief introduction to the rural financial system before the economic reforms in 1978, this chapter outlines the major experiences of the development of the rural financial system in China, specifically with an emphasis on Rural Credit Cooperatives (RCCs) and their three-stage reforms during the last three decades. It will give a general picture of the supply-side of the rural credit market which is offered to rural households.

Rural financial systems in China and the reforms of Rural Credit Cooperatives Since the founding of the People’s Republic of China (PRC) in 1949, the Chinese government has attempted to build a sound rural financial system, in particular, with Rural Credit Cooperatives as its grass-roots units, to promote the development of the rural economy. Although a series of reforms has been conducted in this sector, it seems that the Chinese government has not yet found an effective solution to all the problems of the system (Cheng, 2006: 25, 26). The rural financial system of China, 1949–78 and the history of the RCCs In the 1950s, the financial system in China was simply based on a mono-bank.The People’s Bank of China (PBOC) functioned as central commercial bank and provided agricultural loans (Meyer and Nagarajan, 2001). Together with the establishment of agriculture-production cooperatives, RCCs, which were established for the purpose of preventing the exploitation of farmers and usury by local moneylenders (a serious problem which was prevalent in rural areas in pre-Liberation China (Cheng, 2006)), were encouraged to set themselves up to be responsible for providing loans to households. From the opening of the first National Rural Financial Meeting of the People’s Republic of China in 1951 to 1957, the rural cooperative system in China had developed very quickly and achieved an outstanding performance. By 1957, around 103,000 RCCs had been established with some 0.1 billion households holding membership (Jiangxi provincial RCCU report, 2005: 8). However, while the RCCs were collectively owned by their members, they did not carry the true nature of cooperatives in China even since their foundation (Xie, 2003). This is evident because, first, they were not established on a voluntary basis: ‘[Being] similar to the agricultural producers and marketing cooperatives [in China], RCCs were created by administrative forces, with the wishful thinking of mutual help and mutual benefits among farmers. Members do not have the freedom to quit the cooperatives’. Second, RCCs were not subject to control by their members (they did not have full autonomy). Even at this early stage of collectivization, the management of the RCCs was appointed by local party governments (Cheng, 2006, citing Shang, 1989). Between the establishment of rural people’s communes (1958) and the 1970s, mainly owing to the unsystematic political and economic environment of China, the development of the RCCs experienced a chaotic period: RCCs first acted as

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administrative subordinates to the people’s communes, then were transferred to communes, production brigades and later, in the 1970s, to the People’s Bank of China.3 The cooperative nature of the RCCs was further weakened – i.e. they became a sub-branch of the local party and political organization (IFAD, 2001: 7). The rural financial system, 1979–2002 In 1979, China opened its economy to the world. Accordingly, two substantial transitions have taken place in its economy, including a transformation from a centrally planned economy to a market-based economy, and a structural transformation from an agricultural base to a non-agricultural-based economy (Meyer and Nagarajan, 2001). At the same time, the rural financial system has undertaken a series of reforms during the last three decades. In general, these reforms can be divided into three stages: the preliminary experiments in the 1980s, the national financial reforms from 1994, and the pilot program from 2003 (Cheng, 2006: 26). Reforms in the 1980s The first stage of the economic reforms in the 1980s focused on the institutional rearrangement of the banking system, creating a two-tiered banking system. A central bank was created from the People’s Bank of China (PBOC) and four specialized banks (namely, Agricultural Bank of China (ABC), Industrial and Commercial Bank of China (ICBC), Construction Bank of China (CBC) and Bank of China (BOC)) were established, owned fully by the central government (Meyer and Nagarajan, 2001). In the rural sector, after the dismantling of the collectives and the initiation of the household responsibility system, there was a rapid increase in agricultural production and income, which led to a transition from subsistence farming to commercialized production in the rural areas of China. A number of township and village enterprises (TVEs) emerged and engaged in non-farming production activities. The demand for credit from rural household, township and village enterprises surged during this period. In order to accommodate such change, the Chinese government facilitated the ABC and RCCs as major credit suppliers in rural areas (Meyer and Nagarajan, 2001: 241). In particular, along with the re-establishment of the ABC in February 1979,4 which was responsible not only for various rural savings and agricultural loans, but also for rural industrial loans, loans for procuring agricultural products and byproducts, and loans for the cooperative supply and distribution system (IFAD, 2001: 7), the control of the RCCs shifted from the PBOC to the ABC.5 From 1982 to the early1990s, the RCCs had undertaken a number of reforms, in pursuit of the following fundamental objectives, including (Cheng, 2006: 28–32): 1

The government aimed to restore the ‘three characters’ of the RCCs, including the mass character of organization, the democratic character of management and the flexible character of operation.

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2

The RCCs were to be responsible for their profit and loss, while being independent to run their businesses. Specifically, the RCCs could in principle decide to whom the money should be lent, provided that they deposited the required reserves in the ABC. To reduce the intervention of the ABC in the RCCs, the government established Rural Credit Cooperative Unions (RCCUs) at the county level to coordinate the member RCCs (Cheng, 2006: 27).

However, the performance of the RCCs seemed not to achieve those goals. Citing Shang (1989), Cheng (2006: 27) pointed out that the reforms at this stage were ‘reportedly more nominal rather than real’. In particular, the reforms were specifically confusing regarding the full autonomy of the RCCs, with respect to the issue of establishing RCCUs at the county level and their unclear role in operation. Although by the end of 1984 around 1,136 counties had established RCCUs (Shang, 1989), the ABC continued to intervene in the operation of the RCCs. Moreover, the RCCs also suffered from some other complicated problems, such as constraints on the flow of funds, the surrender of a significant share of deposits to ABC and an unreasonable interest rate structure (at many times – the lending rates were even lower than the deposit rates). Consequently, the performance of the RCCs was very disappointing. It was estimated that in 1989 over 40 per cent of the RCCs in China were loss-making (Xu et al., 1994). Despite these problems with the RCCs, they still experienced rapid financial growth during this period. For example, from 1978 to 1990, the total deposits of RCCs increased from RMB16.6 billion to RMB214.5 billion; and the total loans supplied by RCCs expanded from RMB4.5 billion to RMB141.3 billion (Cheng, 2006: 27, quoting Xu et al., 1994). During the same period, the ABC also experienced rapid financial growth. Its outstanding loans increased from RMB168.8 billion in 1985 to RMB377.4 billion in the 1990s. However, similar to the performance of the RCCs, the ratio of non-performing loans (NPLs) of the ABC was recorded as 17.5 per cent (Xu et al., 1994: 31). In addition, due to an incredible demand for credit from rural households during the 1980s, various types of informal financial institutions were rapidly emerging in rural areas as an alternative to formal financial institutions. In the late 1980s, private lending in rural China was estimated to be between about RMB40 billion and RMB60 billion. Specifically, one type of institution – rural cooperative foundations (RCFs) – which were internal financial institutions of rural collectives (Cheng et al., 2003) were rapidly expanding. The funds gathered by them were estimated at between RMB8 billion and RMB10 billion in 1990 (Xu et al., 1994: 4). However, they suffered from the lack of proper supervision and the inability to ensure the quality of their loans. Those shortcomings led to their eventual closure in 1996. National financial reforms and rural finance reforms, 1994–2000 After the experimental reforms in the 1980s, in 1994 the Chinese government launched a further essential phase of financial reforms – national financial reforms, with an aim to achieve two major objectives (Cheng, 2006: 28–32):

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Institutional building of financial institutions, i.e. building up a new financial system characterized by differentiated roles of financial institutions.6 Management of the non-performing loans (NPLs).

Starting with the separation of policy and commercial lending activities, the first objective of the reforms focused on the commercialization of four specialized banks. The measures, such as ‘the attempt to reduce government intervention, the removal of credit allocation, a narrowing of the scope of business, interest rate and entry deregulations, and a gradual tightening of accounting and prudential regulation’ (Shirai, 2001: 50), had all been conducted to facilitate this goal. Regarding the second objective, the government adopted techniques such as ‘recapitalization of wholly state-owned commercial banks (WSCBs), the disposal of NPLs held by WSCBs, and the merger and closure of problematic banks, the transformation of urban credit cooperatives into city banks, and the promotion of debt-equity swaps’ (Shirai, 2001: 50), to deal with this issue. As part of the national financial reforms, various experiments were also launched in the rural financial sector. In 1994, the Agricultural Development Bank of China (ADBC) was separated from the ABC, and became responsible for providing policy loans, including loans for the purchase of farm goods, poverty alleviation and agricultural development (Meyer and Nagarajan, 2001: 241).7 In 1996, the State Council issued Document no. 33 of Resolution on Rural Financial System Reform, which had been considered one of the most important rural financial reform proposals in recent years. Document no. 33 highlighted that ‘the development of the rural financial system should be based on cooperative principles and that the commercial lending should be separated from policy lending’ (IFAD, 2001: 8). In particular, there were two major undertakings: 1 2

RCCs were separated from the ABC and were mandated to service rural households and small rural enterprises independently. The ABC, one of the four existing stated-owned specialized banks, was mandated to be transformed into a purely commercial bank (Cheng et al., 2003).

After separation, the ABC was mainly responsible for lending working capital loans to rural enterprises, and trading and retail organizations operating in rural areas. Its lending to households was limited and in decline8 (Park, 1998: 10), and the network extended only to townships (or not at all). On the other hand, RCCs had been left as the only type of financial institutions providing a lending service to grass-roots level farmers, whose branch outlets reached nearly all the townships and villages. Due to this unique service provided by the RCCs, as well as the special role they played in the rural financial system since the founding of the PRC, the Chinese government devoted enormous attention to the reforms of the RCCs. Specifically, following the aim of restoring the cooperative nature of the RCCs and restructuring

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their ownership and how they were governed, three major steps were taken to reform the RCCs: 1

2

3

After the separation of the RCCs from the ABC,they were expected to restructure as a genuine cooperative financial organization. As a result of separation, the RCCs were no longer governed by the ABC and did not act as ‘resource providers to ABC’ (Meyer and Nagarajan, 2001: 245). Instead, the new system relied on the RCCUs at county level to administer and coordinate the activities of individual RCCs. The RCCs’ capital was expected to come from three major resources, including rural households, rural collective economic organizations, and staff and workers of the RCCs. The cooperative members or their representative would manage the RCCs through the highest authority – the congress of representatives of RCCs members, with the rule of one-person-one-vote (instead of oneshare-one-vote). RCCs were required to allocate more than 50 per cent of their total loans quota to their members and to be given the lending priority of agricultural loans. In terms of the administration, the RCCs were regulated by the PBOC, which performed a supervisory function, with the aim of setting up a supervision system relying on top-down control from central government to grass-roots level.

Two additional measures were launched during the course of the RCCs reforms: 1

2

In order to consolidate the RCCs to prevent financial instability, the Chinese government decided to close down the RCCs that had been managed badly or were deemed unable to survive for external reasons. As a result, the number of RCCs (counting independent legal entities) decreased from 49,692 in 1996 to 33,020 in 2002. To further strengthen the RCCs’ support in the development of the rural economy, in 1999 the Chinese government introduced microfinance loans from the RCCs to rural households. This program contained two specific lending products: microcredit loans and joint guaranteed microcredits.

By June 2003, the total amount of RCCs’ lending in microfinance was over RMB160 billion, equivalent to 23 per cent of the total agricultural loans. The number of rural households having access to microcredit and joint guaranteed microcredit from RCCs nationwide reached 71.34 million in September 2005, accounting for 32.31 per cent of the total 220 million rural households. Given that around 120 million of the 220 million rural households had real borrowing needs, the microcredit provided by the RCCs met 60 per cent of their needs (Wu, 2006). However, in reviewing the progress RCCs had made since the reforms of the mid-1990s, it seemed that they had not seen any significant improvement in their management. Most importantly, the RCCs’ financial performance was still appalling. The official statistics from the PBOC indicated that the ratio of NPLs

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reached 44 per cent by the end of 2001, compared to over 50 per cent in the late 1990s. Furthermore, among all the RCCs, 46 per cent were loss-making and 58 per cent registered a negative equity (Zhou Xiaochuan, 2004). It was suggested that the bad financial performance of the RCCs was partially a result of the forced absorption of the ABC’s NPLs, when the ABC opted for commercialization, and a large amount of NPLs were transferred from the Rural Cooperative Foundations (RCFs) after they were liquidated (Ma, 2004) between 1996 and 1999. Among other criticisms, it was pointed out that the limited capacity of the central bank in supervising the RCCs had also resulted in their poor performance. Besides, the fact that the operations of the RCCs relied heavily on the relending of the central bank caused serious concerns about the RCCs’ performance, and in particular, regarding their sustainability in running microfinance programs. According to Yu and He (2003), 22.37 per cent of the net increase in the RCCs’ loans in 2001 was derived from relending by the central bank. At the end of 2002, RMB77.2 billion out of RMB94.6 billion relending by the central bank for supporting agricultural development was dispatched to the RCCs (OSSC-MOA, 2005: 39). As a whole, it seemed that all the problems encountered in the functioning RCCs had triggered further fundamental reform in their operations. The rural financial system in China after 2003 and the pilot program of the RCCs After years of debate and experimental tests,9 the most significant round of rural financial reforms was launched in 2003. In July 2003, the State Council issued Document 15, Pilot Scheme to Deepen Reform of Rural Credit Cooperatives, and designated eight provincial-level units (seven provinces and one municipality), including Jilin, Shandong, Jiangxi, Zhejiang, Jiangsu, Shanxi, Guizhou and Chongqing, as the first group of regions for the experimental reform of the RCCs. The overall strategic goal of the reforms was to transform and equip the RCCs, according to Document 15, to be ‘true local or community financial institutions to provide services to san nong (rural areas, agricultural production and farming households)’. Compared to previous reforms, the pilot program was regarded as ‘a milestone that is supposed to bring about a fundamental reform in the rural financial system of China’ (Xie et al., 2005: 26). The program was characterized by three major elements (Cheng, 2006: 34; Xie et al., 2005: 26): 1 2 3

To clarify the ownership structures of the RCCs at micro level and also to improve corporate governance with a new operations mechanism. To restructure the managerial regime to handover RCC management to local governments. To finance a new mechanism (huaqian mai jizhi).10

Moreover, regarding each element in the pilot program, the following concrete measures were mandated in Document 15:11

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Clarify the ownership structure of the RCCs to improve corporate governance The RCCs should be transformed into legal entities with clear ownership and governance structure. However, it also indicated that the ownership structures should be given a variety of different forms12 based on differences between the regions’ local circumstances (Yin Di Zhi Yi). In particular, three ownership structure models were proposed by the governments: a)

In localities where conditions permit, the RCCs will be transformed into shareholding banks. b) In localities where conditions are inadequate, cooperative shareholding will be tested. c) In those localities where conditions are appropriate for cooperatives but not for shareholding, the use of cooperatives will be attempted. In parallel with the ownership transformation, organizational forms will also be determined as follows: a)

In advanced localities with a high degree of urbanization, shareholding banks (or commercial banks) will be established in the RCCs if they are sufficiently large and commercially oriented. This form is actually a replication of the experiments worked out in counties in Jiangsu province from 2001 and called the ‘Jiangsu Model’. b) In densely populated localities or prefectures/municipalities/counties designated as grain- or cotton-production bases, RCCs and RCC unions will be consolidated into a unified legal entity. c) In other localities, the current two-tier system (where RCCs and RCC union are both legal entities) will be continued to make them better cooperatives. Those RCCs that are deeply insolvent should be closed according to the regulations on the withdrawal of financial institutions. 2

Local government’s roles in managing the RCCs Central government made a decision to hand over the management of the RCCs from the central bank to the provincial government. Document 15 specifies the major responsibilities that the provincial governments are assumed to perform over the RCCs’ management. It is also suggested that in those pilot areas where conditions are appropriate, an organization of the RCC union will be established at provincial level through which the provincial government can manage, guide, coordinate and serve the RCCs. However, at the same time, there is no need for different regions to adopt a unified model of organizational structure, and other types can also be launched if it is suitable to the region’s local circumstance. On the other hand, Document 15 specifically states that the provincial government should not interfere in the business activities and operations of the RCCs, and in particular that the managerial power of provincial

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government should not be delegated to lower levels of government. Apart from the above, it also emphasized that no RCC unions or other forms of independent managerial units should be established at the prefecture/municipality level. Additionally, based on the fact of the establishment of the China Banking Regulatory Commission (CBRC) in April 2003, Document 15 also specified the main responsibilities of the CBRC in regulating and supervising the RCCs to increase the reforms. 3

To finance a new mechanism More importantly, in order to facilitate the absorption of the RCCs’ losses, and furthermore to smooth the implementation of the pilot program (since ‘if RCCs are trapped in financial difficulties, it is impossible here for them to carry out the ownership reforms’ (Cheng, 2006: 34), central government also decided to carry out the following measures (Xie et al., 2005):

The PBOC will fully reimburse the losses of RCCs from indexed deposits during 1994–7. From 1 January 2003 to 31 December 2005, for participating RCCs under the reform, the income (profit) tax will be halved and, in particular, tax exemption applied to all participating RCCs in the western region. On the other hand, business tax will be levied at 3 per cent for all participating RCCs in all pilot areas, compared with 5– 6 per cent for other financial institutions. Central government provides two options for compensation schemes – relending and specials bills – to the participating RCCs to cover half of the negatives’ net worth of the RCCs based on their end-2002 data. It is important to stress that certain prerequisites were made on the initial application for financial help and also to receive the injected funds from central government further improvements had to be met. These prerequisites were mainly created for two reasons: first, to provide a mechanism to give incentives for the provincial governments to make progress in the reforms (huaqian mai jizhi); second, to eliminate RCCs that were unable to make any improvements. Consequently, in attempting to meet the initial conditions, many local provincial governments had either to mobilize investment or inject funding, using their own money. Likewise, in order to meet the required conditions for cashing the bills of the central bank, provincial governments had to make further improvements (Cheng, 2006: 36). It is reported that at the time the program was launched, the total debt-equity gap of the RCCs stood at RMB330 billion; thus, the total funding to be injected by the central bank amounted to around RMB165 billion. With the addition of further concessions granted to some of the poor regions, it was estimated that the total funding needed would be RMB168.8 billion, of which RMB167.9 billion would be special bills and RMB0.83 billion would be special relending from the central bank (Cheng, 2006: 36). The adoption of more flexible interest rates is permitted, in particular, in those areas where informal finance is active and lending rates will be floated within a

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range of one to two times the regulated rates. Besides, in those areas, plagued with natural disasters, lending rates to farming households can be floated downwards if this is possible. However, the lending rates for micro-loans to farmers will not float upwards except in rare cases of high risk, but in those cases they should not exceed 1.2 times regulated rates. During 2004 and 2005, the pilot program had quickly expanded to most other provinces. By 2005,13 the rural financial sector in China consisted of three types of institutions, including: 1

Formal financial institutions, including: a) Commercial banks – Agricultural Bank of China (ABC). b) Policy banks – Agricultural Development Bank of China (ADBC). c) Cooperative financial institutions – Rural Credit Cooperatives (RCCs). In particular, along with the most recent round of RCCs reforms – the pilot program launched in October 2003, some RCCs have been transformed or are under transformation to Rural Cooperative Banks or Rural Commercial Banks.

2 3

Donor- and government-sponsored microfinance programs. Informal finance – for example, friends, relatives, money-lenders, etc.

Summary The issue of rural finance or rural credit has always been a historical and evolutionary problem in China. By reviewing the development of the rural financial system, in particular the RCCs’ three-stage reforms since the economic reform in 1978, a dynamic picture of how the supply-side of the Chinese rural credit market operated is introduced in this chapter (a brief chronology of events in the rural financial system is summarized in Table 1.1). Notably, from the national financial reform in the mid-1990s, apart from various traditional forms of informal financial institutions, the cooperative financial institutions, mostly RCCs, have been left as the ‘dominant supplier, or in some places the sole supplier’ (Xie et al., 2005: 1)14 which provide credit services to grass-roots level farmers, with their branch outlets reaching nearly all townships as well as villages in many rural areas of China. Soon after the implementation of the pilot program, it was a commonly held view among Chinese policy makers that the RCCs were the most effective institutions, providing solutions to the credit problems of rural households. The Chinese press frequently referred RCCs as the Zhu Li Jun (major army) in solving san nong problems. However, is the reality as optimistic as expected? What is the real progress that RCCs made towards their goal at the micro-level? In practice, do rural households select RCCs as their major resource so as to meet their multidimensional

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Table 1.1 A brief chronology of events in the rural financial system of China, 1951–2005 Year

Rural financial sector

1951–7

Mono-bank financial system. The People’s Bank of China (PBOC) functioned as a central bank and commercial bank. Rural Credit Cooperatives (RCCs) initialized in 1951 and developed very quickly. In August 1951, the State Affairs Council founded the Agricultural Cooperative Bank, responsible for fiscal appropriations for agriculture, providing long-term loans and supporting the development of RCCs. Agricultural Cooperative Bank promptly abolished in 1952. In March 1955, the ABC was officially founded. A four-level system was established, with a main headquarters, provincial branches, and main branches in special regions and sub-branches in counties. ABC was placed under the leadership of the People’s Bank of China (PBOC) and made responsible for directing RCCs. In April 1957, ABC was again abolished and its personnel and organizational structures were merged into PBOC. 1958–78 In November 1963, ABC was re-established. In November 1965, due to retrenchment, ABC was integrated with PBOC. Chaotic period of RCCs, business and management of RCCs was transferred to communes and production brigades and later to state-owned bank branches. 1979 ABC was re-established. Control of ABC shifted from PBOC to ABC. 1980s ABC and RCCs began serving TVEs and rural households. 1987 Several small commercial banks allowed to lend to all sectors. 1993 PBOC no longer required financing budget deficits and to provide loans or refinance the state-owned banks for policy purposes in rural areas. 1994 ADBC established to provide policy loans to agricultural sectors. 1996 The State Council issued the document of the ‘Resolution on Rural Financial System Reform’; RCCs were separated from the ABC with the former mandated to service rural households and small rural enterprises independently. The RCCs were expected to restructure as a real cooperative financial organization in essence. Administratively, RCCs were regulated under the PBOC. 1997 PBOC formed Cooperative Financial Management Department, which directly supervises and manages the RCCs. 1999–2000 Nationwide, 65 city (regional) credit unions, 6 provincial credit union and 5 provincial credit associations undertook the experimental tests. 2003 In April the China Banking Regulatory Commission (CBRC) was established, carrying out the responsibility of regulating and supervising the RCCs. In July 2003, following the issue of the State Council Document 15, ‘Pilot Schemes to Deepen Reform of Rural Credit Cooperatives’, the pilot covers 7 provinces and 1 municipality. 2004–5 Pilot program expanded to most other provinces. By November 2004, the reforms were extended to another 21 provinces. Source: Meyer and Nagarajan (2001) and author’s own summary.

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credit demand in contemporary rural China? Can the pilot program promote RCCs towards market-oriented financial institutions? Are RCCs truly acting or progressing as community financial institutions providing a service to san nong, especially to rural households? All these questions are important but are still waiting to be answered.

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Literature gap and research objectives

Literature gap Many studies have been made on the topic of rural credit or the rural financial system in China. Broadly speaking, these studies mainly emphasize two specific themes: household analysis and institutional analysis. Household analysis First, based on the large collection of data from the survey of households, a considerable number of studies evaluate the characteristics of farmers’ borrowing in rural China and the determinants of their access to (or their status of credit rationing1), or more frequently households’ participation in rural credit markets.2 For example, Feder et al. (1990a), relying on the data of 200 households selected from eight random townships in Gongzhuling, Jilin province, in December 1987, estimated that the probability of households being credit constrained was conditional on a number of variables.3 It is identified that savings in financial institutions and the last season’s income are two key factors that affect most significantly households’ credit rationing by formal lenders. Zhu et al. (1997), drawing on a subsample of 1,920 households from 34 villages, 34 counties and 12 provinces, measured the probability of households’ participation in both the formal and informal credit markets by employing a uni-variate probit model based on a set of determinants, such as institutional and infrastructure-related factors, including the level of rural financial activities in the province and distance from the village to the next county centre, household economic factors, including deposits and other assets held by the households, size of the farm and human resource-related variables, including education, the age of the household head and household size. Yan et al. (2005) used the data of 1,191 households randomly selected from 30 counties and 6 provinces and analysed the determinants of households’ borrowing behaviour in both the formal and informal sectors from 1996 to 2000 (probit model).4 The result concluded that there were three main determinants for farmers’ participation in the formal credit market: the age of the household head, land size and value of the house; on the other hand, the number of children going to school and the number of male workers in the family were two major factors that determined households’ participation in the

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Literature gap and research objectives

informal sector. Chen (2004) relied on the data of 472 peasant households collected from a farm survey in two administrative villages in Xichong county in Sichuan province in 2002 and discussed the mechanisms that affect credit demand and supply in rural areas. Institutional analysis The second area of active research into rural credit focuses on assessing the performance of rural financial institutions in China. More specifically, these studies can be broadly divided into three sections. First, a number of important studies are dedicated to the analysis of the rural financial system in China as a whole – for example, Xu et al. (1994); Zhu et al. (1997); Park (1998); Meyer and Nagarajan (2001); Han (2004). Second, regarding the national financial system reforms from 1994, a considerable number of studies focus on analysing the reforms of the rural financial system, especially the reforms of the RCCs in recent years– for example, Watson (2003); Xie (2003); Chen (2004); Xie et al. (2005); Cheng (2006), etc. Third, along with the development of the paradigm of microfinance in other developing countries,5 many studies focus on the analysis of the microfinance institutions and their development in China – for example, Park and Ren (2001); Cheng (2003); OECD (2004); Park et al. (2004). However, these studies are limited in two ways. First, with regard to the studies of households’ borrowing, the research done so far has mostly relied on the large amount of data collection at macro-level through the application of econometric analysis. The studies that adopt the approach of micro-level analysis, which refers to ‘detailed investigations of particular localities and groups’ (Vaidyanathan, 1989: 13) to examine the issue of rural households’ indebtedness or their borrowing behaviour, are very rare. While it is true that the former category of studies are incredibly valuable since some facts of the issues in the real world are qualified through quantitative analysis of information collected from households, it is also significant that the real economic phenomena is even more complex and ambiguous than the way it is shown in an econometric model (Leamer, 2007). Sharing a similar point of view with Srinivasan (1989), Bardhan (1989: 4) argued the advance of the richness, intensity and comprehensiveness of micro studies over large-scale sample surveys in examining many important features of economic changes and yield in rural areas, and its unique characteristic in flexibility through ‘reshaping investigation strategy midstream and probing an unanticipated or new phenomenon in depth’ (Bardhan, 1989: 5). Moreover, he stated that macro studies ‘do not capture the nature of on-going or changing relationships among people’. For example, referring to the Rural Credit (or Debt and Investment) Surveys of the Reserve Bank of India, he claimed that they only contained ‘estimates of borrowings of different rural groups by source and purpose of borrowings, but they do not indicate how the terms of borrowing interact with terms with regard to land, labour and output sales transactions’ (Bardhan, 1989: 7). In fact, many scholars – both social anthropologists and economists – have employed the approach of micro studies to examine issues related to rural societies (Epsteins, 1962; Shah and Shah,

Literature gap and research objectives 15 1974; Gough, 1977). In particular, among the many studies of Chinese rural society, there are three outstanding scholars – Mao Zedong, Fei Hsiao-tung and Yang Ch’ing-k’un – who, in the author’s opinion, have contributed to the three most pioneering micro-studies of Chinese rural communities. For example, Mao (1930) provided an extraordinary report on Xunwu County in Jiangxi province and revealed a comprehensive picture of the patterns of life and society in the pre-Revolutionary Chinese countryside in terms of rural administration, commerce, transportation, communication, education, land tenure, taxation, religions and social relations. Fei (1939), based on a short period of fieldwork in a village in Jiangsu province, gave a detailed description and systematic analysis (Wong, 1981) of the transformation in the 1930s of Chinese peasants’ lives with the traditional culture under Western impact; and Yang (1959) portrayed the picture of both the socio-economic situations of the Chinese village in the pre-Communist period and the transformation through land reform under communism through his fieldwork in Nanjing village, located in the vicinity of Canton (Kirby, 1961). Other studies include Chen (1936), Fei and Chang (1945), Myers (1970) and Nolan (1983). As Meyer and Nagarajan have noted: Rather than assessing the overall performance of the rural financial system at the macro level . . . it should be more meaningful to collect micro-level information from rural households and enterprises to assess the current sources of finance in rural areas, the unmet demand for financial services, and the willingness to pay for these services. The results would help pinpointing where new instruments are needed to meet demand. (Meyer and Nagarajan, 2001) Second, with respect to the studies of institutional level analysis, a large amount of studies focus on a general analysis of the overall rural financial system or mostly the formal rural financial institutions in China. Few studies in recent years emphasize the informal financial institutions or households’ behaviour in the informal credit market in rural areas (especially by using the method of in-depth qualitative analysis). Moreover, while a number of studies have been written on the topic of the reforms of the RCCs, most of them evaluate the RCCs’ experience before the most recent round of reform (the pilot program) in 2003. On the other hand, by looking at the small amount of literature that sheds light on the RCCs’ pilot program – for example, Chen (2004) and Xie et al. (2005),6 although the method of case study is adopted, the analysis is mostly based on the general discussion on the provincial level or sample of selected data. Studies that have taken a first-hand account of material collected at the natural village level to evaluate the impact of the reforms are rare. Besides, little research has been done on the RCCs reforms in the central region of China.

Research objectives and conceptual framework This book examines the credit needs and borrowing behaviour of rural households in the current economic transformation period of China. The study of credit needs

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Literature gap and research objectives

is based on an in-depth analysis of the status of Chinese rural households’ indebtedness. The study on the borrowing behaviour is based on the performance of Rural Credit Cooperatives (RCCs), as well as resources of informal finance. Specifically, this work is subject to: 1 2 3 4 5

An examination of the pattern of credit demanded by rural households and the sources of finance adopted by them in the period of economic transformation of rural China. An assessment of rural households’ accessibility to credit, in particular formal credit, and the determinants of credit rationing from the formal financial institutions. An understanding of the unmet demand for financial services to rural farmers and their willingness to pay for these services. An evaluation of the performance of RCCs after the launch of the pilot program. A summary of the innovative institutional arrangements that fit the emerging economic transformation of rural China and policy recommendations for new instruments that facilitate rural households’ access to the formal rural financial market and their effective utilization of credit.

In order to investigate the complexity of rural households’ borrowing in terms of the types of credit demanded by farmers, the sources of finance they obtained credit from and the degree of their accessibility to the credit market in contemporary rural China, this research discusses the approach of micro-studies of three rural natural villages with dissimilar economic characteristics in Jiangxi province. Jiangxi province is an inland province that shares many similarities with other central regions of China in terms of social and economic development. More significantly, Jiangxi was also one of eight designated provinces in the first batch of pilot programs for the reform of RCCs initiated in 2003. Summarized in Figure 2.1, the conceptual framework of this research is as follows. With regard to credit suppliers to ordinary farmers in rural areas, by the year of 2005 there were three typical sources providing credit to rural households, including:7 1 2

3

Commercial banks (a limited number of branches located at township level). Cooperative financial institutions, in particular RCCs (both township and village levels). Moreover, since the launch of the pilot program in 2003, some RCCs have been transformed or intend to be transformed to rural cooperative banks or rural commercial banks. Informal finance (long-established sources of finance to farmers), for example, friends or relatives.

This research attempts to discover which types of sources of finance were selected by farmers to satisfy their demand for credit in the period before and shortly after the 2003 pilot program.

Literature gap and research objectives 17

Agricultural Banks of China Township level Informal Finance Various Resources Friends & relatives, Moneylenders, Input suppliers, Storeowners/ merchants, Trader-lenders, Farmer-lenders, etc.

Rural Households 3 village typologies Formal Finance Rural Credit Cooperatives (RCCs) Pilot Program (Ownership Restructuring), 2003 * Rural Credit Cooperatives (RCCs) * Rural Cooperative Banks * Rural Commercial Banks (Village and township level) Innovative institutional arrangements that fit the emerging economic transformation of rural China

Figure 2.1 Conceptual framework

However, with regard to the pattern of credit needs of rural households, given the transition of agriculture from traditional to modern working methods, the level and degree of progress in agricultural development varies from one region to another in contemporary rural China. According to Mellor (1967), based on the differences in the distinct stages of agricultural development, patterns of credit are varied (he defined credit as ‘a device for facilitating the temporary transfer of purchasing power from one individual or organization to another’ (Mellor, 1967: 314). Moreover, this statement is also evident from the differences in the design of rural financial systems across different countries, subject to a variety of physical conditions, cultural factors, institutional construction and economic background. Therefore, in order to fully understand the complexity of rural credit in the current economic transformation period in China, this research selects three natural villages with dissimilar economic and social characteristics.They are the natural village of Yao, which is located in Nanchang county; the natural village of Wulitang, which belongs to Wuning county; and the natural village of Xiaobu in Xunwu county. Each of these rural communities represents a specific village typology that has been part of the process of agricultural modernization and economic transformation in contemporary rural China.

18

Literature gap and research objectives

In addition, this research analyses the status of rural households’ indebtedness and the characteristics of their borrowing behaviour from both segments of the rural credit market. With regard to the formal credit market, in order to give an evaluation of the performance of RCCs after the pilot program, two specific issues relating to households’ borrowing are examined: households’ access to formal credit and the determinants of households’ credit rationing by formal lenders; and households’ participation in the formal credit market, as well as the determinants of these households’ participation. With regard to the informal credit market, the study addresses the extent to which informal finance has reached in rural areas and whether rural households prefer formal financial institutions to informal ones when they obtain loans.

3

Fieldwork villages, procedures and the RCCs’ pilot program in Jiangxi province

In an attempt to give an in-depth qualitative analysis of the status of rural households’ indebtedness or the characteristics of their borrowing behaviour in contemporary rural China, this research was conducted through a considerable period of fieldwork in three natural villages with dissimilar economic and social characteristics in Jiangxi province of China. Starting with a short descripton of Jiangxi, this chapter first describes the general economic and social background of the villages, as well as the fieldwork procedure in these three villages, including Yao, located in Nanchang county, Wulitang, in Wuning county, and Xiaobu in Xunwu county. Each of these rural communities symbolizes a specific village typology that exists along the process of agricultural modernization and economic transformation in contemporary rural China. The characteristics of the economic and social background of these villages form the basis of our understanding of the complexity of credit demanded by farmers in rural areas. The chapter then outlines the status of the RCCs in Jiangxi before the launch of the pilot program, and the key measures and innovations that have taken place so far in this round of reforms. It aims to present a relatively comprehensive picture of the supplyside of the rural credit market1 in the case study areas, with respect to the policies framework in which the formal credit supplier (RCCs) operates, and the RCCs’ performances during the period when this research was conducted.

Fieldwork locations Jiangxi province2 and three fieldwork counties Jiangxi province is one of the inland provinces located in south-eastern China. It is a leaf-shaped region, covering a total area of 166,900 sq km. It consists of a fertile area in the middle and lower reaches of the River Yangtze, at latitudes of between 24°29'14"and 30°04'40" and longitudes of between 113°34'36"and 118°28'58". Jiangxi borders Hunan in the west, Zhejiang and Fujian in the east, Hubei and Anhui in the north, and Guangdong in the south. It has a subtropical climate, with plentiful rainfall and distinct seasons. The average annual temperature of Jiangxi is around 16°C to 20°C and the average annual rainfall ranges between 1,341 mm and 1,940 mm. The name of Jiangxi province is has its roots in the Tang Dynasty (AD 618–907). It is also called ‘Gan’ for short, as the River Gan runs through it.

20

The RCCs’ pilot program in Jiangxi province

In terms of topography, Jiangxi is characterized by mountainous and hilly land. The mountains account for 36 per cent of its total land, hills 42 per cent, and the remaining 22 per cent is composed of plains and water. In particular, the mountains in Jiangxi are not high and have many natural passages facilitating its link to other provinces. For example, the Mufu, Jiuling, Wugong and Wanyang mountains lie in the west; the Dayuling and Jiulian mountains in the south; the Huaiyu and Wuyi mountains in the east; and Lushan mountain in the north. Besides, there are many red-soil hills and basins in the central-south. The Jian basin in the south is a major farming area. In addition, Jiangxi has a plentiful water supply, with a total of 141.6 billion m3. Over 2,400 rivers, with a combined total length of about 18,400 km, run across the province, of which the Ganjiang, Xinjiang, Fuhe and Raohe are the four most important. Lake Poyang, situated in the northern part of the middle-lower Yangtze, ranks first among China’s largest freshwater lakes. Jiangxi has abundant natural resources. In particular, it is incredibly rich in mineral resources. Out of a total of 150 minerals discovered in the world, Jiangxi owns more than 140, of which 89 types of mineral deposits have been verified and 33 are among the top five in volume and quality in China. Of these minerals, the reserves of non-ferrous metals, precious metals and rare metals are among the most plentiful in the country. The largest copper mine in Asia, the Dexing Copper Mine, and the largest copper metallurgical centre of China, the Guixi smelter, are both set in Jiangxi. Due to its favourable climate, plentiful water supply and fertile soil, Jiangxi is perfect for agriculture. It is traditionally known as the ‘granary south of the Yangtze River’. Its main agricultural output is among the top ten in China. In 2005, the total provincial agricultural output value was RMB114.3 billion. The grain production totalled 18.5 billion kg. Rice is the most important farm crop. Most areas have twoseason paddies and even three-season in the south. The major cash products include rapeseed, sugar cane, cotton, oranges and tea, and other agricultural products, such as timber and bamboo, are also adequately supplied in this province. In recent years, along with agricultural modernization, non-cropping activities, especially aquaculture and agricultural processing, have become increasingly important. For example, in 2005, the share of animal husbandry accounted for 31.9 per cent of the province’s total output value of farming, forestry, animal husbandry and fishery, compared to the share of 12.8 per cent in 1978. Jiangxi has also experienced a remarkable growth in secondary and tertiary industries. In 2005, for example, the province’s gross domestic product (GDP) reached RMB405.62 billion, of which the GDP ratio of the primary, secondary and tertiary industries was 19.0:47.2:33.8, compared with 41.6:38.0:20.4 in 1978. In particular, various industries – for example, automobile, manufacturing, machinery building, electronics, chemical engineering, metallurgy, construction materials, food, textiles, etc.– have already been established. In 2005, the provincial industrial added value reached RMB145.55 billion, an increase from RMB2.316 billion in 1978,3 and the gross industrial increment was recorded as RMB82.85 billion, 23.6 per cent higher than in the previous year. In the northeast, the famous imperial kilns of the Ming dynasty (AD 1368–1644), which produce Jingdezhen porcelain, are still operating in Jiangxi.

The RCCs’ pilot program in Jiangxi province 21

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Figure 3.1 Map of Jiangxi and three fieldwork counties

22

The RCCs’ pilot program in Jiangxi province

In terms of the administrative divisions, Jiangxi is divided into 11 prefecturelevel cities (municipalities), including Nanchang, Jiujiang, Ganzhou, Yichun, Shangrao, Ji’an, Fuzhou, Jingdezhen, Pingxiang, Xinyu and Yintan, 10 countylevel cities and 70 counties. Nanchang is the provincial capital. In 2005, the population of the province stood at 43.112 million and the main ethnic groups include Miao, Hui, Yao and She. In particular, the three natural villages of the fieldwork locations, namely, Yao, belonging to Nanchang county; Wulitang, situated in Wuning county; and Xiaobu in Xunwu county, are located in the middle, north and south of Jiangxi respectively (as shown in Figure 3.1). Nanchang county Nanchang county4 is located in the middle of Jiangxi province, the middle-west of which is closely connected to the provincial capital, Nanchang (city). It borders Jinxian county in the east, Fengcheng city in the south, the Lake Poyang in the northeast and Xinjian county in the northwest, covering a total area of 1,684 sq km. The county includes 71,767 ha of cultivated land and a water-covered surface of 67,034 ha. Nanchang comprises 16 townships and 267 village committees. In 2005, the population of the county stood at 917,258, consisting of 256,518 households, of which the non-agricultural population had reached 161,192 (17.6 per cent) and the number of migration farmers reached approximately 200,000 (21.8 per cent). Due to its favourable geographical location situated around the southern part of the Yangtze River, Nanchang is traditionally famous for agriculture. It is one of China’s key counties for the production of commodity grain. A few townships, such as Jiangxiang and Bayi, are well known for their high-quality rice and other agricultural products. From the late 1990s onwards, the agricultural structure of Nanchang gradually shifted from the traditional pattern of single grain production to the new fashion predominating in farm-cropping, but with forestry, husbandry and fish farming in addition. The products, such as pork, eggs and fish, as well as fruits and other agricultural produce, have also become the principal products of the county. For example, Hongdu bacon and Huangshanghuang roasted ducks are two of the most famous brands nationwide. Apart from agriculture, Nanchang is the biggest industrial county in Jiangxi. The main industries, including automotives, textiles, IT, clothing and food processing, have developed rapidly. In 2005, the total GDP in Nanchang county reached RMB129.13 billion and the annual per capita farmers’ net income stood at RMB4,008. Wuning county Wuning County5 lies in the northwest of Jiangxi province, next to the Hubei province. It borders Ruichang city in the northeast, De’an county and Yongxiu county in the east, Jing’an in the south, and Tongshan and Yangxin in the north. It covers an area of 3,507 sq km, of which 80 per cent is mountains and hills,

The RCCs’ pilot program in Jiangxi province 23 10 per cent is water and lakes, and the remaining 10 per cent is plains. In 2005, the population of Wuning totalled 349,000, comprising 97,408 households. Wuning is rich in natural resources. First, it is one of the thirteen ‘essential forestry counties’ in Jiangxi. It has a total forested area of 248,997 ha, accounting for 69.4 per cent of the total area of the region. The lumber reservation is around 7.73 million m3. Second, it has adequate water resources. There are a total of 603 large or small rivers in Wuning. It possesses a total water area of 460,000 mu, and electricity power reserves of 145,600 kW. Third, Wuning is rich in mine reserves. More than 30 mines have been found in the county – notably, coal, tungsten, antimony, marble and porcelain clay– and they have great reserves. Wuning is traditionally famous for its agricultural products, such as rice, cotton, mushrooms, Chinese medicine, bamboo shoots, pears, tea, etc. In recent years, processed food, fruit cake, medicine capsules, tungsten and antimony products, as well as bamboo and wooden products, have also become the county’s trademark goods and been sold to a number of provinces and foreign countries. From the late 1990s onwards, the economy of Wuning has grown rapidly. In order to promote the process of industrialization, following the strategy of an ‘open economy’ set by the local government, the county has built up an industrial park, called as ‘Wanfu economic and technological development zone’. This zone is classified as a provincial-run science and technology park, with a strong focus on the development of private enterprises. A few key industries, such as food, mines, textiles, chemicals, construction, energy, etc., have all been set up in this zone, yet they remain relatively small-scale at present. In 2005, the private economy turned over taxes of RMB135.8 million, accounting for 67.9 per cent of the county’s fiscal revenue. In 2005, the GDP in Wulitang reached at RMB2.29 billion. Xunwu county Xunwu County6 is located in the southeast of Jiangxi province, at the juncture of three provinces: Jiangxi, Fujian and Guangdong. It has a total area of 2,312 sq km and a total arable land of 161,000 mu. Xunwu comprises 15 townships, 172 administrative villages and 4 residential committees. In 2005, the total population stood at 289,200. It is a pure Hakka county, as 99 per cent of its population is Hakka. Xunwu is in a region of subtropical monsoon climate, warm and humid. The average temperature is around 18.9°C, with an annual average rainfall of 1,648 mm and an average frost-free period of 284 days. Similar to Wuning, Xunwu is rich in water, forest and mineral resources. Xunwu has a total of 547 large and small rivers, with a total river length of 1907.7 km. The county can be divided into three major river valleys: Dongjiang, Hanjiang and Ganjiang. The total water volume is about 2.132 billion m3, with an electricity-generating capacity of 90,000 kW. Also, Xunwu is one of the most important forestry development counties in China. It is characterized by subtropical, evergreen, broad-leaved forest, and the basic types include coniferous, broad-leaved, evergreen broad-leaved, bamboo and camellias. Xunwu has many mineral resources.

24

The RCCs’ pilot program in Jiangxi province

The county has 30 proved types of mineral resources, such as tungsten, rare earth elements, iron, niobium and tantalum. Of these, rare-earth mine is the key category. Due to the favourable geographic location and climatic condition, Xunwu is ideal for fruit growing. In fact, farmers in this region have been planting tangerines and oranges since the 1960s. From the late 1980s, the county government of Xunwu has devoted special attention to the development of the fruit industry, with the longterm strategic aim of ‘creating Xunwu as the number one tangerine and orange production county in China’. The Xunwu citrus plants, including tangerines and oranges (Qicheng in Chinese), have won many prizes in China’s agriculture fairs. The county has been granted favourable names, such as ‘China’s Rural Orange Home’, or ‘China’s Orange Exports Base’. Today, the fruit industry has become one of the most important supports to Xunwu’s economy. By the end of 2005, the area of fruit-cultivated land reached 255,000 mu, with a total output of 181,000 tons and a gross income of RMB339,130,000. In addition to the development of agriculture, the county government has also worked hard on the development of industralization from 1990s, mainly focusing on fundamental infrastructure, such as energy and telecommunications. Today, Xunwu has become one of the eight most significant economic development zones in the south of Jiangxi. Three fieldwork villages The natural village of Yao in Nanchang county The natural village of Yao7 is situated on the outskirts of Nanchang (city). It is the fourth production team of the administrative village.8 Most farmers in this village have the surname ‘Yao’, giving the natural village its name. In 2005, there were 53 households in Yao, with a total population of 234. The total labour force was 154 and 74 were migrant workers. During the fieldwork, 52 households, with a population of 231 and labour force of 152, were visited and interviewed. The operating arable land per interviewed household was estimated as 3.02 mu, of which the collective contract land was about 2.47 mu. Yao belongs to an administrative village that is typified as ‘a large population but a small and scattered land’ (given the special term of Ren Duo Di Shao in Chinese). In 2005, the total population of the administrative village of Yao amounted as 2,126 (made up of 492 households); however, the total cultivated land was merely about 2,001 mu9 (each farmer owns less than 1 mu of land on average). Specifically, in Yao, each farmer owned only about 0.8 mu land on average.10 As a result, farmcropping did not play a vital part in farmers’ incomes. Villagers produced crops, such as paddies (two seasons), corn, beans, rapeseed, vegetables and fruit, mainly for their own daily consumption. Yet there was one exception – celery. Owing to a fairly high selling price in the local market, many farmers in Yao and the surrounding areas participated in celery planting in order to generate income. In 2005, it was estimated that in the administrative village of Yao, around one-fifth of families cultivated more than 1 mu of celery. In Yao, 11 households – around 21.2 per cent of

The RCCs’ pilot program in Jiangxi province 25 the households interviewed – participated in celery planting, with an operating area of 1.33 mu, with an income of RMB7,300 per household. Due to the village’s specific characteristic of Ren Duo Di Shao and its unique geographic location next to the provincial capital, giving a great advantage for the marketing and distribution of products, instead of engaging in agriculture, most farmers in Yao and its administrative village participated in animal husbandry, such as poultry, ducks, partridges, pigs and cows, as their major source of income. In particular, duck-breeding dates back to the late 1980s. By November 2005, the number of ducks fed in the overall administrative village totalled about 420,000 (more than 500 canopies). This meant that each household possessed about one canopy of ducks, with a size of 800–1,000. In addition, 6 households engaged in large-scale pig-breeding (more than 300 pigs per farm) and 28 households engaged in large-scale partridge-breeding (more than 3,000 partridges per farm). More specifically, among the total of 52 households interviewed in Yao, 32 (61.15 per cent) specialized in professional animal husbandry, of which 19 households majored in duck-breeding, 6 in pig-breeding and another 7 in partridge-breeding, accounting for 36.5 per cent, 11.5 per cent and 13.5 per cent respectively, of the total number of households interviewed (Plate 3.1 shows a picture of a duck-breeding family farm in Yao). The average operating scale of each family farm was estimated to be 1,589 ducks for those engaged in duck-breeding, 159 pigs for those in pig-breeding and 3,785 partridges for those in partridge-breeding. In addition, the household with the largest duck-breeding farm owned 5,800 ducks, and those engaged in pig-breeding and partridge-breeding possessed 600 pigs and 6,000 partridges respectively. Together with the development of animal husbandry, various sideline industries, such as the processing of fodder or eggs, also grew rapidly in Yao and the

Plate 3.1 A duck-breeding family farm, Yao

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The RCCs’ pilot program in Jiangxi province

surrounding area. The local village committee calculated that subtracting the amount of duck eggs sold to the local markets, 20 tons of processed eggs were produced every day in the administrative village of Yao and sold to other provinces – for example, Guangdong, Fujian and Hunan. Thanks to the spread of industrialization from the provincial capital, a number of small and medium enterprises (factories), such as the manufacture of clothes, cement and rice noodles, were soundly established in Yao and surrounding areas. By the time it was visited, seven private enterprises (as listed in Table 3.1), with a total income of more than RMB5,000,000 per year, were officially recorded as located in the administrative village of Yao. In particular, two small family enterprises were in operation: one was the garment factory, run by the village head, whose family net income totalled RMB312,000 in 2005. The factory mainly employed local workers (from the same natural village or administrative village), whose pay was calculated by volume of output, with relatively flexible working hours. In 2005, the income of each worker was around RMB8,000. The second enterprise was the family fodderprocessing farm operated by Mr Tu (6 employees), whose family net income was RMB106,000 in 2005.11 Together, the total net income of these two families contributed to 23.8 per cent of the farmers’ total net income in Yao. In addition to the activities illustrated above, migrant works formed another important source of income for villagers in Yao. As indicated above, the total migrant workers in Yao recorded as 74 in 2005, accounting for 48 per cent of the total labour force. Estimated from the fieldwork, in the same year, the per capita income of migrant works was RMB1920, accounting for 25.3 per cent of the per capita farmers’ net income. Due to the advantage of the proximity of the village to Nanchang county centre (about 2 km), where the largest egg-trading centre and the provincial capital city is situated, the villagers have adequate employment opportunities. The employment of migrant workers in Yao was mainly located in the county, township, as well as the administrative village. In 2005, the number of farmers working within the township was recorded as 27, accounting for 36.9 per cent of the total interviewed migrant workers in this village; those working outside the township but within the county were 35, accountied for 47.9 per cent; and those working outside the province totalled only 2, accounting for 2.8 per cent. On the other hand, in terms of employment, the number of labours working in the local construction industry was 16 and those working in the local egg-processing factory Table 3.1 Seven private enterprises in the administrative village of Yao

1 2 3 4 5 6 7

Number of employers

Major products

Annual revenue (RMB 1,000)

26 30 33 60 12 16 26

Stock-feeding materials , preserved egg-processing Preserved egg processing Preserved egg-processing Preserved egg-processing Packaging bags Plastic paper Garments

2,000 1,100 1,200 2,200 180 90 550

The RCCs’ pilot program in Jiangxi province 27 totalled 12, representing 21.9 per cent and 16.4 per cent of the total migrant workers interviewed respectively.12 The natural village of Wulitang in Wuning county The natural village of Wulitang13 was the fifth production team located in the northeast of the administrative village in Wuning county. In terms of topography, it was categorized as mountainous and hilly. In 2005, it had a total population of 191, made up of 48 households. The workforce of Wuning totalled 135 and there were 100 migrant labourers. In the fieldwork carried out, 44 households, with a total population of 175 and a labour force of 129, were interviewed. The operating land per household interviewed was estimated as 3.10 mu. In Wulitang, most males have the surname ‘Yu’. The village has a rich history originating from the Ming Dynasty (AD 1368–1644). Around 600 years ago, the forefather of the Yu family migrated from another province to the place where the administrative village of Wulitang is currently situated. Since then, his descendants have remained in this area. The natural village of Wulintang is also called ‘Wulintang’, where five brothers (five is pronounced wu in Chinese) belonging to the same branch of Yu family used to live. Local villagers recounted two versions of the story about where the village’s name originated: (1) when the five Yu brothers lived in this place, each of them had a well in front of their house. In Chinese, a well is pronounced tang. There were five wells in total, so that the village was named ‘Wulitang’; (2) the name ‘Wulitang’ was given in memory of these five brothers who built an ancestral shrine for the Yu family memorial services in this natural village. As the word for an ancestral shrine can also be pronounced as tang in Chinese, the village was named ‘Wulitang’. The village elders pointed out that Wulitang is a combination of two locations of the Yu family branches: one was Wulintang, the other Huishantang, both of which had the same forefathers named Yu. In the family tree book of Yu, male members of the most recent six generations of the Yu family were named in the order of XianDie-Xiang-Xiu-Shui-Jing. More interestingly, the book also records that most males in the Die generation at Wulintang died from pestilence. From the perspective of traditional Chinese culture, although most males at Wulintang currently have the surname Yu, they are not the true descendants of the Yu family. Instead, they are members who have been called Ru Zhui, meaning ‘to become a son-in-law who lives in the wife’s home and assumes the role of a son’ to the Yu family. In contrast to the inhabitants of Wulitang, most villagers in Huishantang did not die from pestilence. During our visit, the elders who belonged to the branch of Huishantang were very proud to tell us that they were the true descendants of their forefathers. As the village is situated in a relatively remote area and also the lack of sound business enterprises in the administrative village,14 most farmers in Wulitang were migrant workers. Only a few farmers were engaged in agriculture in Wulitang, where the average size of arable land per capita was estimated at 0.99 mu. However, due to the development of tourism in the neighbouring township, the water supply in Wulitang was cut off, so that local farmers experienced great difficulty

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The RCCs’ pilot program in Jiangxi province

producing crops.15 In 2005, in addition to the natural disasters of drought and insect infestation in Wulitang county, each mu of field produced only 250 kg of grain, much less than the cost of production. In total, the per capita net income of farmers from agriculture was only RMB569, accounting for 8.8 per cent of the per capita net income of farmers. Most farmers in Wuning were outflow migrants, apart from the small number involved in agriculture In 2005, among the total number of 129 labourers in this village, 92 (71.3 per cent) were migrant workers. The estimated per capita farmers’ income from migrant jobs was RMB4,817, accounting for 74.7 per cent of the farmers’ per capita income. More than half of the migrant workers (54 farmers) in Wulitang were employed in the eastern or coastal areas of China, such as Jiangsu, Shanghai, Guangdong and Fujian. The rest were employed in the central provinces (11 workers, around 12 per cent) or within the local county (27 workers). The majority of the migrant workers were engaged in construction or traditional manufacturing industries, such as electroplating. In particular, under the leadership of one villager, 15 labourers from 6 families all worked in an electroplating factory in Jiangsu, with a monthly salary of approximately RMB1,400. In addition, a few households in Wulitang also participated in another type of industry– for example, by the time this village was visited, one household had a small restaurant and another owned a motor-repairing shop, located in the township.

Plate 3.2 A view of Wulitang

The RCCs’ pilot program in Jiangxi province 29 The natural village of Xiaobu in Xunwu county The natural village of Xiaobu16 is situated to the south of Xunwu town, 2 km away from the county centre. It comprises two production teams: Shangwu and Dawuchang. In 2005, it had a total population of 229, consisting of 53 households and a labour force of 141. In the fieldwork, 50 households, with a total population of 213 and a labour force of 129, were visited. The operating area of arable land in Xiaobu was calculated at 2.61 mu per household, of which the average area of contracted land assigned from the collective was around 2.91 mu. In addition, the area of Xiaobu and its administrative village were actually referred in President Mao’s masterpiece, Report of Xunwu, since the township of Xiaobu formed part of a region named Matigang in his report. From 1981– the year when an agricultural production system was implemented in rural areas – until 1995, villagers in Xiaobu were engaged solely in agriculture, which was mainly two-season, or sometimes three-season, paddies. Since 1995, following the county government’s strategy of ‘readjusting the agricultural structure of the single grain planting system’, the administrative village of Xiaobu started the vigorous development of citrus fruit cultivation. By 2005, the fruitgrowing industry had generally taken shape in the administrative village of Xiaobu, and more than half of the labour force were engaged in the cultivation of citrus fruits. On average, each farmer owned an area of land for growing fruit trees of about 3 mu17 and the share of farmers’ income received from fruit trees accounted for 70 per cent of their total income. More specifically, in the natural village of Xiaobu, among the total of 50 households interviewed, 46 (92 per cent) participated in planting fruit trees. Of the remaining 4 households, 1 was a rural doctor, who gave his land for free to his sons to plant citrus fruit trees, and the other 3 were elders of around 70 years of age. However, in terms of economic scale, Xiabu’s fruit industry could not be strictly defined as being fully developed. Due to its specific economic and social background, many farmers in Xiaobu had only participated in the cultivation of fruit trees since late 2000 or 2001. Until 2005, the fruit industry

Plate 3.3 A field of orange trees, Xiaobu

30

The RCCs’ pilot program in Jiangxi province

was still at its beginning stage of the development – a period when capital investment is most needed by farmers.18 By the end of 2005, the total number of fruit trees in Xiaobu amounted to about 24,140 (with an average number of fruit trees per family farm of around 483), of which 30 per cent were tangerines and 70 per cent were oranges. In particular, 5 households had more than 1,000 trees.19 However, of the total number of over 24,000 fruit trees cultivated in the natural village, 63.1 per cent were not fully productive.20 In 2005, the farmers’ per capita net income from fruit planting in Xiabou was around RMB1,152, which accounted for 27.8 per cent of farmers’ per capita income. Plate 3.3 shows a field of orange trees in Xiaobu. One notable fact is that among all the households interviewed in Xiabu, almost none of them engaged in grain cropping (in this fieldwork, only 1 household had an area of paddies land of 0.8 mu). Also, although the development of the fruit industry has brought many benefits to villagers in Xiaobu and its surrounding areas in terms of the increase in farmers’ income and living standards in recent years, it has also created many problems, especially with respect to the effects on the environment. It is of great concern that the massive orchards of fruit trees will inevitably cause problems such as the destruction of the natural vegetation, soil erosion, etc., and furthermore will reduce the capacity of the region to withstand natural disasters. As well as planting fruit trees, employment in other jobs, including migrant work, was another important source of farmers’ income in Xiaobu. Among the farmers interviewed who participated in other jobs, 56 (or 77.8 per cent of farmers in this group), were employed in Xunwu county. In particular, 17 worked in the local orchards, planting trees, spraying fertilizer and picking weeds, with a daily salary of RMB25. On the other hand, 7 households were engaged in running their own family businesses.These included 3 households who opened shops, including an electrical appliances repair shop, a motorcycle repair shop and a bicycle repair shop, in the county centre. The remaining 4 households ran other types of businesses, for example, a village grocery store selling pesticide, chemical fertilizers and other agricultural products. Table 3.2 compares several key indicators of the three selected villages in this research, including the type of topography of the village, the distance between the natural village and different locations – for example, to the county centre, to the township government offices and to the nearest local market – and the medical facilities and water supply in the villages. Each of these three villages represents a specific typology that exists alongside the dynamics of the modernization of agriculture and the economic transformation of rural, modern China. .

Fieldwork procedure From November 2005 to July 2006, following the approach of micro-studies, a considerable period of fieldwork was undertaken in Yao, Wulitang and Xiaobu. While the fieldwork in these three natural villages was formally started in November 2005, tremendous effort had been made before the actual visit, for the purposes of selecting the villages to be researched and the pilot studies to be carried out.

The RCCs’ pilot program in Jiangxi province 31 Table 3.2 Comparison of some key characteristics of the three natural villages Indicator Topography: 1 Plain, 2 Hills, 3 Mountains Is the village an old remote area?Yes (Y) or No (N) Can the village be reached by highroad? Yes (Y) or No (N)

Yao

Wulitang 1 N Y

Condition of the road: 1 Cement or asphalt road, 1 2 Holystone or flagstone road, 3 Others Distance between the natural village to the following locations (m): County centre 2.5 Township government 2.5 Administrative village committee 0.3 Nearest junior school 0.2 Nearest local market 1.5 Nearest junior high school 2.5 Nearest bus station 1 Nearest sanitation station (or branch) 0.5 Nearest postal office 2.5 Land usage situation (mu) 1 Arable land 180 2 Irrigation land 180 3 Garden plot 4 Population and labour situation 1 Number of households 53 2 Population size 234 3 Labour force 154 4 Migration workers 74 Local enterprises in the natural village 1 Number of enterprises 11 2 Number of employment 26 3 Major products Garment 4 Annual revenue (RMB) Medical and sanitation situation? Yes (Y) or No (N). (If Yes, please specify) Has the national rural cooperative medical Y program been executed in the village? Number of sanitation stations in the administrative 2 village? Does the natural village have the branch of the Y sanitation station? Number of certified doctors in administrative 3 village Number of certified nurse of baby birth 2 Number of the seniors’ homes at administrative N village (in township)

Xiaobu

3 N Highroad under construction 2

2 Y Y

22 2.5 1.8 1.8 2.5 2.5 2.5 1 2.5

2.5 2.5 2.5 1.5 2 0.5 2 0 2.2

2

201 180 14

168 168 550

48 191 135 100

53 229 141 16

N — — —

N

N

N

11 Y

1 Y

11

1

N N

1 1

Notes 1 This number did not include Mr Tu’s production materials shop, due to its very small scale.

32

The RCCs’ pilot program in Jiangxi province

During the pilot study in a natural village of Sheng, located in Xinjian county of Jiangxi, a considerable number of experimental semi-structured interviews were conducted with local rural households, cadres and officials working in rural financial institutions. More specifically, the semi-structured interview comprises two parts: (1) the general status of the economic and social background of the household, and (2) the status of the household’s indebtedness and their borrowing behaviour between 2001 and 2005. First, drawn from the materials of the annual rural households’ survey conducted by the provincial Agricultural Investigation Team and a World Bank project on the topic of agricultural modernization in Jiangxi, an experimental three-page questionnaire concerning the households’ economic and social background was compiled and tested. It is important to underline that, in order to define more accurately the households’ economic status, two measures are applied in this study, so as to measure the level of living standards of the households interviewed.21 These are: (1) the households’ per capita net income, and (2) the possessions scores of households’ general living conditions, specified by the Living Index in this book, and the major durable consumer goods owned by households). See the Appendix on p. 145 for an explanation of the how these scores are calculated. Second, the status of households’ indebtedness during the period 2001 to 2005 was questioned in the interviews. This formed the main part of the study. Specifically, the issues related to households’ access to formal credit and their participation in the formal credit market, as well as their borrowing behaviour in the informal credit market. From November 2005 to July 2006, the fieldwork was carried out in three examining villages. In Yao, an officer from the Provincial Bureau of Statistics accompanied me in the field. One of his colleagues, whose uncle was a member of one of the households interviewed, also went with us twice. This was a great advantage for collecting local information and also particularly for allowing the villagers and ourselves to get to know each other better. In Wulitang and Xiaobu, the field trip was carried out with the help of two assistants, mainly for the purpose of dialect translation. For the fieldwork in the natural village of Wulitang at Wuning county, most of the villagers, especially male farmers, are migrant labours working outside Jiangxi. Therefore, we chose the time of the pre-spring festival to visit this village, as most of the farmers had returned to the village during this period for the traditional custom of spending the New Year together with their extended family. For a village like Wulitang, which has a rich history dating back a thousand years, returning home is very important for farmers. The fact that most migrant farmers had returned to the village in advance of the spring festival ensured the success of this research. The days spent in Wulitang were joyful. Farmers, especially migrant workers, were pleased to share their experiences and also their opinions, specifically on rural credit. One interesting issue that is worth highlighting is that the road from the major junction between the township and the administrative village of Wulitang leading into Wulitang was under construction during our visit. We had to spend at least half an hour to walk from the township to the natural village by crossing the

The RCCs’ pilot program in Jiangxi province 33 paddy fields. When it was raining, it took even longer – perhaps up to one hour or one hour and twenty minutes. We were lucky that one household allowed us to join them for lunch at home on a daily basis (for which, of course, we paid), which meant that we did not need to walk back to the township centre to find a place to eat and then walk into the village again. This therefore saved much of our research time. It also gave us a great opportunity to gain information from the villagers by talking to the farmers after lunchtime. For the fieldwork in Xiaobu at Xunwu county, our visit coincided with the planting of fruit trees. Farmers did not have time to be interviewed during the day except their lunch hour, so we chose the times of 12.30 pm to 2 pm and after 6 pm to interview them. One interesting feature in Xiaobu village is that a junior high school is located in this natural village. The teachers usually gathered at the home of one household (who opened a local food store next to the school) after the meal – hence, we were sometimes able to chat with the local teachers and I highly appreciated their opinions on every aspect of farmers’ lives in Xiaobu. As a whole, the interviews with the rural households in the three villages were the most challenging and fruitful part of this research. Usually, when we first arrived at a village, the village committees took us to the households’ homes for a general introduction. We then carried out interviews ourselves on a daily basis. We found that the women were more willing to reveal details of their family backgrounds (Plate 3.4 shows a scene with a group of female farmers), and male household heads gave more ideas and opinions on the topics of interest of this research. The interviews were carried out in different situations: sometimes, they took place inside rural farmers’ houses, sometimes sitting in the sun after the lunch, and sometimes with a group of farmers near a fire, perhaps with a light drink together. Compared with formal interviews, casual talks with groups of farmers tended to reveal greater information.

Plate 3.4 An interview with a group of female farmers

34

The RCCs’ pilot program in Jiangxi province

The pilot program of the RCCs in Jiangxi province Jiangxi province is one of the eight designated provincial units in the first group of the RCCs pilot program. Beginning with a brief introduction to the general status of the RCCs before the launch of the pilot program, this section highlights the main measures and innovations undertaken and achieved in the pilot scheme of the RCCs in Jiangxi from 2003 to 2005. General status of the RCCs in Jiangxi before the pilot program Before the launch of the pilot program in 2003, the general status of the RCCs in Jiangxi could be broadly summarized as follows: organizational structure, management functions, staff structure and business operations.22 Organizational structure By the end of 2002, the RCCs in Jiangxi had a total of 3,802 individual networks. These consisted of 1,611 RCCs which were legal entities, including 1,510 (local) RCCs, 95 county (cities, districts) RCCUs and 6 prefecture-level city RCCUs, and 2,191 RCCs which were without legal entity status, including 1,258 RCCs branches, 424 savings units, and 503 credit stations. Management functions The management function of the RCCs at the provincial level was carried out by the RCCs management office, located in PBOC Nanchang Central branch. Furthermore, in the five prefecture-level cities, the local PBOC had also internally established the credit cooperatives management office, which performed the same function as the RCCU at county level to manage the RCCs within its local area. Personnel structure From the perspective of personnel structure, by the end of 2002, the RCCs in Jiangxi had a total staff of 20,251, of whom 14,137 people had obtained secondary technical qualifications or more, accounting for 69.8 per cent, and 5,956 people obtained professional titles of assistant level or above, accounting for 29.46 per cent. In terms of the age structure, 10,758 people were 35 years old or below, accounting for 12 per cent, and 6,636 people were 36–45 years old, accounting for 32.77 per cent. In addition, the number of staff working in county (city or district) authorities (including the business department) were 3,644, accounting for 17.99 per cent. Business operations By the end of 2002, the total assets of RCCs in Jiangxi reached RMB61.0 billion, including outstanding loans of RMB23.72 billion, of which normal loans were

The RCCs’ pilot program in Jiangxi province 35 Table 3.3 Composition of the outstanding loans of the RCCs in Jiangxi, by 2002 Orientation of loans Rural households loans Microcredit loans and joint guaranteed microcredit loans to rural households Loans to rural economic organizations Rural industrial business loans Other loans Total outstanding loans

Amount (RMB billion)

Shares (%)

5.65 5.38

23.83 22.68

2.50 4.48 5.71 23.7

10.54 18.89 24.07 100

Source: Jiangxi Provincial RCCU (2004). Internal Report: a few points related to the reforms of RCCs in Jiangxi.

RMB13.08 billion, accounting for 55.14 per cent of the total amount of outstanding loans, and non-performing loans were RMB10.64 billion (44.86 per cent). On the other hand, the total liabilities of the RCCs in Jiangxi were RMB60.92 billion, of which the outstanding deposits were RMB34.84 billion. In particular, regarding the composition of loans, Table 3.3 lists the outstanding value of each type of loan grouped by its orientation. The (normal) rural households’ loans stood at RMB5.65 billion, accounting for 23.82 per cent of the total outstanding loans, and the microcredit and group guaranteed loans to rural households were RMB5.38 billion, accounting for 22.68 per cent. Evaluating the financial performance of RCCs, by the end of 2002, the total income of the RCCs in Jiangxi achieved RMB2.098 billion, representing an increase of 14.14 per cent from 2001. The total expenditure reached RMB2.092 billion, with an increase of 2.82 per cent from the previous year. It is important to point out that, during the period 1994–2001, the RCCs had suffered continuous losses. The year 2002 was the first year in which the RCCs in Jiangxi reached a positive profit (RMB6.13 million). Among all their corporate bodies (1,611 legal entities), 1,341 RCCs gained surpluses and 270 (16.76 per cent) experienced losses. In addition, the capital adequacy ratio of RCCs in Jiangxi was –6.32 per cent and the accumulated aggregate loss reached RMB2.473 billion. On the other hand, 1,177 RCCs had aggregate losses and 620 RCCs had negative owner’s equity. In general, similar to the situation in most other provinces of China, the RCCs in Jiangxi were deeply troubled with six fundamental problems before the launch of the pilot program. THE INSTITUTIONAL ARRANGEMENT OF RCCS MANAGEMENT WAS UNSOUND

For the past twenty years, the ownership structure of the RCCs had been unclear and their management system had experienced many changes (as discussed in Chapter 1). This caused the management of the RCCs to be extremely uncertain and characterized by ‘internal control’. The issue of an unclear ownership structure (which led to an imbalance between shareholders’ rights and responsibilities) and uncertain management had furthermore created a variety of problems in the RCCs’ operations, such as difficulties in decision making, low operational efficiency, and corruption and operational risks.

36

The RCCs’ pilot program in Jiangxi province

THE RCCS CARRIED A HEAVY HISTORICAL BURDEN OF LARGE ACCUMULATED AGGREGATE FINANCIAL LOSSES

By the end of 2002, the accumulated aggregate losses of the RCCs in Jiangxi totalled RMB2.473 billion. This heavy historical burden not only affected the operations and development of the RCCs, but also carried great financial risks. More specifically, there were four main reasons for this large amount of accumulated aggregate losses: 1

2

Losses from policy business: a large amount of the financial losses from the RCCs was derived from the high-interest expenses on inflation-indexed deposits during 1994 and 1997, totalling RMB363.35 million, or 14.68 per cent of the total accumulated aggregate losses of the RCCs in Jiangxi. Accumulated aggregated losses of urban credit cooperatives carried over.

In the 1990s, 85 urban credit cooperatives were renamed and merged into the RCCs system, of which the former carried over a total of RMB185.08 million accumulated aggregate losses to the latter. 3

4

Losses from the chaotic management of the RCCs: weak management in the operation of the RCCs was unquestionably another very significant factor that accounted for the large historical losses. (This issue will be discussed in more depth below.) Operational difficulties of the RCCs: in addition, different forms of fines or capital coming from local governments or other departments had created an extra burden on the RCCs. For example, in one city branch, between 1996 and 2002, the local RCCs spent RMB2.38 million on various types of shares, and paid a total amount of up to RMB2.56 million in different kinds of fines to the auditing or other related departments in local government.

THE CAPITAL QUALITY OF THE RCCS WAS POOR AND THE RATIO OF THE NPLS WAS HIGH

By the end of 2002, the NPLs of the RCCs in Jiangxi stood at RMB10.64 billion. Broadly speaking, this huge amount of NPLs was essentially derived from seven channels as follows: • • • • • • •

loans left by production teams when the family responsibility system was launched in the rural areas; loans inherited from the ABC when the RCCs were separated from the ABC; loans inherited from urban credit cooperatives when the latter was renamed and incorporated into the RCCs; loans issued to, or guaranteed by, the party or government cadres or other similar types of interference; debt from the restructured corporation; losses not resulting from the RCC’s own operations, for instance, natural disasters; other reasons.

The RCCs’ pilot program in Jiangxi province 37 THE OPERATIONAL MECHANISM OF THE RCCS WAS INEFFECTIVE

There were three main reasons for operational inefficiency: 1 2 3

lack of incentives within the system; weak implementation of the internal control mechanisms; lack of development of electronic procedures for the administration of business.

For many years, the RCCs had not established incentives for staff to progress. The old system of equal status remained and staff worked inefficiently. On the other hand, the old management had not instigated procedures to introduce talented new personnel into the system, which is one of the most critical shortcomings of its business development. Moreover, due to the inefficiency or, in some places, absence of internal control mechanisms in the RCCs, violation of the regulations were prevalent. In particular, the non-standardization in the decision-making and managing of loans was a major contributor to operational risks, which furthermore caused severe problems for the NPLs. For example, it was reported that one credit officer at a county office had issued more than one million RMB of unregulated loans during his four-year employment. In addition, the implementation of electronic procedures lagged far behind modern progress. This resulted in the RCCs having a very low level of business efficiency, and a lack of automation and information processing. In particular, an automatic system for nationwide deposits and cash withdrawals was still not established. This meant that the RCCs were not competitive in the marketplace. THE OVERALL QUALITY OF STAFF IN THE RCCS SYSTEM WAS EXTREMELY POOR

For many years, the RCCs had no standards for selecting staff. The RCCs therefore acquired a reputation for being run by staff with low educational qualifications and low professional standards, and where nepotism and different interest groups were endemic. By the end of 2002, among the total personnel of the RCCs, only 699 members of staff were educated to university level or had higher qualifications; of these, fewer than 160 had obtained an initial qualification at undergraduate level. On the other hand, in terms of professional qualifications, only 5,956 people, accounting for 29.46 per cent of the total labour force, achieved professional and technical titles of assistant level or above. According to one official in a provincial RCCU, before the take-over of the provincial RCCU, in the original workforce of the RCCs, there were few staff who understood the business of bank cards, intermediate business, the design of new products and the business information network. Moreover, the problem of nepotism was severe in the running of the RCCs. For example, one former head of a county RCCU arranged for 20 of his relatives to be employed in the local RCC. In some RCCUs, which had as many as 100 employees, the chairman employed around 20 of his relations and friends.

38

The RCCs’ pilot program in Jiangxi province

In addition, due to the poor quality of the team, the lack of standardization of training and education, and the fact that many staff failed to understand the existing rules and regulations, lack of discipline became a critical matter for the RCCs. THE MACRO-ENVIRONMENT FACED BY THE RCCS WAS RELATIVELY POOR

In some areas, local governments took on policies that discriminated against the RCCs – for example, it was stipulated that they should not to deposit in the RCCs. The pilot program in Jiangxi – measures and innovations23 In 2003, Jiangxi province had been designated one of eight experimental regions for the pilot program. Following the State Council Document 15, three major measures had been adopted in this reform. Injection of funds By the end of 2002, the accumulated aggregate loss of the RCCs in Jiangxi totalled RMB2.473 million and the NPLs RMB10.6 billion. In addition, the overall capital adequacy ratio was –6.32 per cent and 270 RCCs had negative equities. In this reform, the PBOC granted RMB2.655 billion to Jiangxi. The Ministry of Finance approved RMB0.313 billion in interest subsidies to RCCs that paid interest on indexed deposits for the period 1994–7. From 1 January 2003, the RCCs were required to pay only 3 per cent of business taxes, and income taxes were exempted from 1 January 2003. Ownership restructurings Under the pilot program, among the original 95 county RCCUs in Jiangxi, 67 county RCCUs were consolidated with RCCs (in local regions) into new legal entities (unified legal entities) as county credit cooperative unions (one for each county). The 12 county RCCUs were selected as pilot rural cooperative banks and the other 16 were chosen to remain in the current two-tier system where RCCs and the RCC union were both retained as legal entities. By the end of the 2004, the paid-in capital from member shareholders of all the RCCs in the province reached RMB3.108 billion, an increase of more than RMB1.862 million from the end of 2002. Management of the provincial government In terms of administrative reforms, Jiangxi chose the model of Provincial Rural Credit Cooperatives Union (provincial RCCU). On 26 May 2004, Jiangxi provincial RCCU was formally established in Nanchang. Later, accompanied with the establishment of nine affiliates (districts, prefectures or cities) and the setting up of operations on the approval of the provincial government, the initial phase of the establishment of RCC administration in Jiangxi was deemed to be completed.

The RCCs’ pilot program in Jiangxi province 39 In this round of reforms, one of the biggest concerns and criticisms raised by many Chinese scholars was that, in the administrative structure of the provincial government, it was possible to create a risky situation in which the provincial RCCU was inclined to maximize its own interests and emphasize its operations, but to neglect the role of the entire management sector. As cited in Xie et al. (2005), it was explained that ‘the key to solving the conflicts between respecting shareholders’ rights and strengthening self-regulation is the power of senior management: the shareholder24 should extend a helping hand, not a controlling hand’. In order to avoid such hidden dangers, and more importantly, to promote the success of this round of reforms, the provincial authorities in Jiangxi have paid great attention and given tremendous support to the provincial RCCU. In accordance with Document 15 of the State Council, the provincial authorities issued the Document entitled ‘Plan for Deepening the Reforms of RCCs in Jiangxi’ and guided the provincial RCCU to devise a systematic framework on the reform and development of RCCs, which is formulated as San gang, Liu zhi in the system of RCCs in Jiangxi. San gang stands for three guiding principles (outline briefs), including the ‘guiding principles to reforms and developments of the RCCs’, ‘guiding principles to risk managements of the RCCs’, and ‘guiding principles to the corporate culture of RCCs’. Liu zhi stands for six mechanisms (institutional arrangements), including a corporate governance mechanism, internal risk control mechanism, incentive and control mechanisms, industry management mechanism, the party-building mechanism, and a system innovation mechanism for the RCCs. Under this formulated framework, set against of some fundamental problems faced by the RCCs before the reforms (described in the previous section), the provincial RCCU systematically defined the specific goals, directions and measures for the reforms and development of the RCCs in recent years. In particular, based on the market location of ‘community-based and serviced to the rural economy’, the provincial RCCU set three major goals for the RCCs in Jiangxi, including developing business, improving effectiveness and preventing risks. The provincial RCCU also created many concepts in institutional operations and management – for example, priority in development, customer-focus, people friendly, prudent operations, effective incentives, standardized operations, system innovations, etc. Furthermore, based on the above specific goals and new management concepts, the reforms have launched 12 explicit projects for innovations in four areas, including business innovation, management innovation, service-methods innovation and cultural innovation. In particular, in the two years since the 12 projects were launched, the RCCs in Jiangxi have achieved success in implementing the innovations. Business innovation With the aim of becoming ‘truly local or community financial institutions which provide services to san nong’, the RCCs in Jiangxi launched a comprehensive financial product innovation as a result of the pilot program. First, following the concept of demand-led lending, the RCCs in Jiangxi made many attempts to create novel credit products, such as credit community

40

The RCCs’ pilot program in Jiangxi province

loans, forest mortgage loans, warehouse receipts loans, local students loans, etc. According to one official at the provincial RCCU, by the end of 2005 a (new) lending system which covered almost every type of customer had been set up in the RCCs in Jiangxi. The total number of credit products increased from 10 at the prereforms period to over 30. In particular, it is worth highlighting three specific credit products (or lending models). First, based on the principle of strengthening the microfinance loans, a special credit product – loans to ‘civilized creditworthy farmers’ who enjoyed the favourable lending policies of ‘priority in issuing loans, interest rate concessions and large-size loans’ was established in Jiangxi from the beginning of 2005. This particular type of loan was put in place by both the RCCs and local governments, with a combined objective of promoting a better credit environment and building a harmonious society in rural areas. Any householder granted the status of a ‘creditworthy farmer’ had to provide an excellent repayment history in microfinance loans, and conform to the rules of civil life, such as the one-child policy. During 2005, around 353,200 rural householders were awarded this title in Jiangxi, with a total outstanding loan of RMB1.829 billion having been issued. Second, in line with agricultural modernization, and in particular large-scale production in aquaculture and agriculture, the RCCs promoted an innovative lending model – loans to ‘company plus farmers’ – in Jiangxi. For example, in Nanchang county, through the financial help given to the Jinding Food Company (the leading enterprise involved in the large-scale production of duck eggs and the processing of related products, to which the Nanchang county RCCU issued a total of RMB7.99 million by the end of 2005), the local RCCU managed to support the credit demand for a large number of scattered duck-breeding farmers in local areas (around 1,136 duck farmers). In particular, this model worked as follows: based on the contractual relationships of duck-egg production and marketing between the Jinding Company and duck-breeding farmers, the former applied for production loans to the RCC for the latter and also acted as a guarantor. Then, the RCC issued a series of loans to the account held by the RCC, and the company subsequently distributed the credit to individual farmers to use in their businesses – for example, to buy fodder and for immunization.With regard to repayment of the interest on the loans, the farmers were only committed to the amount actually spent on production; the rest of the unused loan was the responsibility of Jinding itself. By adopting this ‘company plus farmers’ model, three benefits are achieved: (1) the duck-breeding farmers do not have difficulty in applying for credit; (2) from the perspective of the RCCs, the question of loans management and risk control is resolved; (3) this method also supports the development of the industrialization of lending enterprises. Third, as an innovative product in risk-sharing, different types of ‘credit communities’ (which comprise local governments, local institutional resources, such as farmer associations or production cooperatives, and RCCs) were established in many areas of Jiangxi. The Qinyuan (district) RCC in Ji’an (city) was the first RCC to adopt this renewed credit product in Jiangxi. In recent years, commercial households trading locally experienced many problems in obtaining formal loans.

The RCCs’ pilot program in Jiangxi province 41 In 2004, the local private enterprises association, district government and commercial households established a credit community and set up a creditworthiness assessment centre to evaluate and grant credit ratings to individual commercial households. Through the credit community, the RCC granted loans, as a group, to individual commercial households following the principle of a ‘group guarantee’ among borrowers. In the meantime, the role of local government and private enterprise associations was to assist the RCC in related issues, such as the collection of interest, in order to mutually share the loan risks. Up to that time, Qinyuan RCCU had issued a total of RMB13 million loans to 103 commercial households, and all were used successfully. In addition to innovations in credit products, the RCCs also explored a variety of intermediary businesses after the reforms. These included distributing farm-crop subsidies, acting as an insurance agency and distributing student loans. Moreover, some district/city RCCUs upgraded their service functions and provided bankers’ acceptance bills and discounts. In addition, the provincial RCCU also established a fund transfer and service platform, not only to solve the problem of transferring of funds between RCCs branches with a fund surplus and those with a deficit, but also to enhance the efficiency for the use of surplus funds. Management innovation In order to resolve the problem of the inefficient management of the RCCs, the provincial RCCU formulated around 300 management regulations, relating to business operation, financial accounting, distribution systems, risks control and human resources management. Based on those regulations, the provincial RCCU further designed around 490 routes, called ‘the Route’ in short, which covered all areas associated with the operation and management of the RCCs to promote a standardized management system. From the perspective of internal management, following the principle of ‘incentives plus competition’, three systems innovations, including the ‘manager system’, the ‘staff system’ and the ‘income system’, were adopted in Jiangxi. In particular, in the renewed income system, staff income comprised three parts: a basic salary, a performance salary, determined by performance, and a bonus for excellent or exceptional performance. The performance salary and bonus form a sound basis to motivate staff to improve the quality of their work. Alternatively, from the viewpoint of competition, the method of ‘eliminating the last’ created many pressures for staff, as explained by some RCC officers. The system worked as follows: each season, the provincial RCCU prepared a league table of the country’s RCCUs’ performance which covered the whole RCCs system. The managers of the bottom three RCCUs on the list had to have have their work assessed. If anyone remained in the bottom three the following season, he would be asked to discuss his performance with senior management and have a proportion of his bonus deducted. If his low grading continued for a year, he would face demotion. This measure was applied to every tier in the RCCs system, ranging from provincial RCCUs to the grass-roots saving units of the county RCCs.

42

The RCCs’ pilot program in Jiangxi province

In addition, the provincial RCCU also focused on improvement in the audit and supervision systems, and strongly intensified its investigation into and prevention of irregularities. From the establishment of the provincial RCCU until the end of 2005, over 2,300 employees who had violated rules or disciplines in the RCCs system were investigated and punished. However, purely tightening control of irregularities was not enough; the RCCs also attempted to build up an innovative risk-management mechanism followed by a three-step approach. First, a threedimensional (i.e. functional, professional and network) form of risk-management framework was designed. Second, a five-tier risk-management system, covering the aspects of corporate governance, internal control, industrial sector management, supervision by both the arty and external authorities, was established. Third, a number of effective risk-management regulations and rules were issued, and the financial losses liability system was adopted for the first time. Through this system, the RCCs in Jiangxi claimed liabilities of over RMB1million in many cases of financial loss caused by the violation of regulations. In 2004, the risk profile of the RCCs had shown a great improvement. As rated by the CBRC, acting as one of the pioneering risk-management institutions, the ratio of preventing risks of the RCCs in Jiangxi improved from D (low) to A (high). Service methods innovation Apart from the innovations in business products and management, in order to facilitate service methods and to strengthen institutional efficiency to other financial institutions, after the reforms the RCCs also accelerated the introduction of online services. By December 2005, having spent just over a year since the implementation of the pilot program, the RCCs in Jiangxi achieved online running for their core businesses, covering all their networks within the province. By contrast, it had taken other commercial banks about ten years to achieve the same task. Apart from the achievement of online networking, a provincial information centre was set up in Nanchang and the service of provincial-wide deposits and facilities for cash withdrawals were also introduced by the RCCs in October 2005. Culture innovation The provincial RCCU also generated a five-faceted enterprise culture, including ‘spiritual culture’, ‘strategic culture’, ‘regulation culture’, ‘behaviour culture’ and ‘appearance culture’. In particular, in terms of improving the quality of staff, by education and training in business schools, a series of corporate training courses were offered to staff working in the RCCs, averaging four times per person per year. In a short summary, the measures and innovations of the pilot program in Jiangxi was summarized in Table 3.4.

The RCCs’ pilot program in Jiangxi province 43 Table 3.4 Measures and innovation of the pilot program of RCCs in Jiangxi Measures and innovations Injection of funds

PBOC granted note of RMB2.655 billion Ministry of Finance subsidized to RCCs 3% business taxes, income taxed exempted from January 2003

Ownership structure

Original 95 county RCCUs 67 consolidated into new legal entities, 12 cooperative banks 16 remained two-tier system

Management of May 2005, Provincial RCCU established provincial San gang, Liu zhi government 12 projects, 4 areas Business innovation 30 various products Management innovation Standardized Around 490 routes for business construction operation Internal management Incentive + competitive mechanism Around 2,300 employees who violated the rules or disciplines have been investigated Five-tier risk-management system Services provision Online running core businesses information resource centre Culture Five-faceted enterprise culture Source: Author’s own summary

Summary Starting with a short description of Jiangxi province, this chapter is an introduction to the general economic and social background of the three villages in this study, as well as highlighting the main procedure of fieldwork in these areas. Indeed, each of these natural villages represents a specific village typology that exists in the process of the modernization of agriculture and the economic transformation of rural China in recent years. Specifically, first, the natural village of Yao specialized in large-scale animal husbandry, mainly duck-breeding, and was experiencing a fast transformation towards a modern agricultural or industrial economy. Wulitang retained its traditional methods of agriculture, especially crop-farming. However, it enjoyed the characteristic of typical inland provincial villages in China with an outflow of migrant labourers to the eastern or southern regions. Xiaobu was starting its agrarian transformation to modernization, mainly specializing in the cultivation of orange trees. Moreover, with the aim of presenting a more specific picture of the supply-side of the rural credit market in the fieldwork area, this chapter has given an introduction the RCCs in Jiangxi province through the discussion of two specific themes: the status of the RCCs before the pilot program, and the main measures and innovations that had taken place in Jiangxi after the pilot program, from 2004 to 2005. It can be seen that, since the launch of the pilot program, tremendous effort, from

44

The RCCs’ pilot program in Jiangxi province

both central government and the provincial RCCU, had been made to implement the reforms and see the development of the RCCs. However, compared to the performance of the RCCs before the launch of the pilot program, how has real progress been made by the RCCs towards their improvement at the micro-level? Compared to their previous performance, how have the RCCs perform after the reforms? Are they truly acting or progressing as a community financial institution, providing service to san nong, especially to rural households? Through the empirical analysis on the status of the households’ indebtedness and the characteristics of their borrowing behaviour in each individual village, from 2001 to 2005, the remainder of this work aims to provide the perspective to the answers to these questions and furthermore give some guidance on future policy implementation.

4

Households’ indebtedness and borrowing behaviour in the natural village of Yao

The natural village of Yao was characterized by large-scale animal husbandry, mainly duck-breeding, as well as the fact that is was fast becoming transformed into an industrialized economy. Following the idea of the segmentation of the rural financial market, this chapter first examines the characteristics of households’ borrowing from the formal financial institutions in Yao. In particular, through the discussion of two issues – households’ access to formal credit and the determinants of households’ credit rationing by formal lenders, and households’ participation in the formal credit market, as well as the determinants of households’ participation – this chapter presents a picture of both the supply- and demand-sides of the formal credit market in Yao. The study of the former issue aims to give an understanding of the performance of the formal financial institutions, specifically RCCs, in recent years, whereas the latter issue focuses more on the analysis of the pattern of credit demanded by households. Second, as an alternative to the formal credit market, this chapter analyses the characteristics of households’ borrowing from informal lenders in Yao. More specifically, farmers’ borrowing activities in the duck-breeding business is investigated in particular.

Formal credit General status of households’ borrowing in the formal credit market In the formal credit market of Yao, a total number of 14 loans, borrowed by 8 households, were issued between 2001 and 2005. Among these 14 transactions, apart from one which was a national student loan issued by the ICBC,1 the remainder were issued exclusively by the RCCs. The main characteristics of these loans are summarized in Table 4.1. More specially, half of these loans (7 loans) were borrowed for the purpose of fixed-production investment, of which 5 loans (35.8 per cent) were borrowed for fixed-production investment only, and 2 loans (14.3 per cent) were borrowed for both fixed-production investment and production inputs. Furthermore, 5 out of a total of 7 loans for fixed-production investment were used for industrial investment. In terms of the method of borrowing and the size of borrowing, while there was asmall number of loans (3 loans, 21.4 per cent of the total number of the formal loans) issued as ‘microcredit loans’ by the RCCs (between

46

Households’ indebtedness and borrowing behaviour in Yao

Table 4.1 Characteristics of formal loans in Yao, 2001–5 Number of participants Number of loans Source of borrowing Rural Credit Cooperatives( RCCs) Industrial and Commercial Bank of China (ICBC) Total Purpose of borrowing Fixed-production investment Productions inputs Fixed-production investment and production inputs Durable consumption goods Daily consumption goods Education Others Total Method of borrowing Credit Others guarantee Collateral on house-ownership certificate Collateral on liquidity Others Total Loan size (annually, RMB) 1–5,000 5,001–10,000 > 10,000 Total Interest rate (% per month) 0–0.5 Maturity of loan (year) ⱕ1 > 1– ⱕ 3 > Total Repayment rate On time Delay On-going, will repay on time On-going, but likely to default On-going, future unclear Total

8 14 Number of loans 13 1 14

Share (%) 92.9 7.1 100

5 3 2 0 0 1 3 14

35.8 21.4 14.3 0 0 7.1 21.4 100

3 2 3 4 2 14

21.4 14.3 21.4 28.6 14.3 100

1 5 8 14

7.1 35.7 57.1 100

1

7.1

10 3 1 14

71.4 21.4 7.1 100

9 1 2 1 1 14

64.3 7.1 14.3 7.1 7.1 100

2001 and 2002, with an average monthly interest rate of around 0.6 per cent), the majority of the formal lending in Yao were still categorized as normal household’s loans. These loans requested collateral (collateral on a house-ownership certificate, 21.4 per cent, and collateral on liquidity, 28.6 per cent) or a guarantee by another party (14.3 per cent, with an average monthly interest rate of 0.8 per cent), and typically obtained a large amount of more than RMB10,000. From the perspective of the maturity of loans, around 71.4 per cent were issued with a maturity of less than one year, 21.4 per cent were medium-term loans, and 7.1 per cent were long-term

Households’ indebtedness and borrowing behaviour in Yao 47 loans (one national student loan was for a six-year period). It was also found that 64.3 per cent of these loans were paid on time. Households’ access to formal credit One objective of this study is to evaluate households’ access to the formal credit market and the determinants of their credit rationing by formal lenders. Empirical studies on the credit rationing of rural households are fruitful. Overviewed by Petrick (2005), six major approaches have generally been applied in recent rural financial literature to measure households’ credit rationing, including: (1) the measurement of loan transaction costs, (2) analysis of qualitative information collection in interviews, (3) analysis of quantitative information collected in interviews using the idea of credit rationing, (4) analysis of spill-over effects with regard to secondary credit sources, (5) econometric household modelling, and (6) econometric analysis of dynamic investment decisions. This research applies method 2 for analysis as it adopts the approach of micro-studies for the purpose of studying the issue of credit in rural China. The basic design of this method is to ask respondents directly about their rationing status and, according to their answers in interviews, respondents are classified into credit constrained and credit non-constrained. More specifically, households were initially asked about their experience in the credit market, whether or not they had borrowed from formal financial institutions during the period being studied. With regard to the households who had borrowed, they were also asked whether they received the full amount of the loan requested or if they sought more credit than the amount they were actually granted at the prevailing interest rates.The non-borrowers were asked whether they had applied for a loan or not during the same period. Accordingly, this group of households was divided into two categories: those who applied for loans but were rejected and those who did not apply. However, the classification of the latter group of households is problematic and inconsistent in the studies. Some researchers, such as Kochar (1997), cited in Baydas et al. (1994), consider such groups of households as having no economic demand for credit, on the assumption that only those households whose loan applications were rejected were rationed (Mushinski, 1999).2 (However, other scholars, such as Zeller (1994), Baydas et al. (1994), Barham et al. (1996) and Mushinski (1999), claim that not all households who did not apply had no desire for credit; in fact, some households, although they had not applied for a loan, strongly desired formal credit. However, they either perceived they had no chance of being granted a loan or that the transaction costs of a loan application were too high. Such households, defined as ‘induced internal selection’ borrowers by Baydas et al. (1994), or ‘pre-emptively rationed’ households by Mushinski (1999), should also be considered as credit rationed. According to Baydas et al. (1994), this method may reflect the correct assessment of access to credit because ‘these applicants do not possess the attributes (income, collateral, etc.) required by lenders’. Our research follows the method of Baydas et al. (1994) and Mushinski (1999), in which questions that allowed these two groups to be distinguished were asked in the fieldwork.

48

Households’ indebtedness and borrowing behaviour in Yao

Status of households’ access to formal credit In Yao, among a total number of 52 households interviewed, 17 households (32.7 per cent) were credit constrained, of which 3 households had not been granted the full amount of the loan requested; 2 households had applied for a loan but had been rejected; and the remaining 12 who would have liked to borrow money at the current interest rates did not apply for various reasons, which will be discussed later in this chapter. In contrast, 35 out of 52 households interviewed (67.3 per cent) were credit non-constrained. These included 5 households who received the full amount of loans for which they applied and 30 households who preferred not to borrow at the current interest rates. Determinants of credit rationing Based on the status of the households’ access to formal credit in Yao, the next issue raised is what are the determinants of credit rationing used by formal lenders, mainly the RCCs. Following the approach of micro-studies which shed light from a more sociological or human-oriented perspective, this section intends to analyse the determinants of credit rationing by the RCCs from both the supply- and demand- sides of the rural credit market in Yao. CREDIT SUPPLY-SIDE

In order to receive a perspective from the credit suppliers, the author visited the local township RCC and had a direct conversation with the credit officer Liu3 on the issue of credit rationing. He explained that when they selected the applications of potential borrowers, they typically considered four aspects of rural households as follows: 1 2 3 4

Characteristics of the household (especially their major economic activities). The household’s production skills – i.e. whether the household was capable of generating the expected income or profit. The household’s previous credit history. Whether the household could provide collateral.

Liu explained that among these four factors, they (i.e. the RCCs’ staff) regarded factors (1) and (2) as the two important determinants for their judgement of a household’s ability to repay a loan – one of the most important measures they used to select potential borrowers. Furthermore, a household’s previous credit history also largely influenced their decisions on whether to issue a loan to an applicant or not. In general, if a household had a negative credit history or still had an overdue loan, it was very unlikely that they would be offered a new loan. However, in practice, even in such cases, a loan might be issued. For instance, if the project that the household applied for was very profitable and low risk, there were occasions when a new loan would be issued. On the other hand, loans were also granted to households who had special reasons for delaying repayments of existing loans. In addition, Liu

Households’ indebtedness and borrowing behaviour in Yao 49 pointed out the importance of a household being able to provide collateral, as it directly related to the risks of defaulting. Since the reforms of the RCCs, officials were very concerned with the quality of the loans and reducing the amount of NPLs; therefore, they paid close attention to the matter of collateral. It is worth pointing out that the criteria provided by officer Liu only applied to households who had applied for loans; households who did not demand credit and those who actually would have liked to receive credit but did not apply for a loan for their own reasons, were not included. Based on these four criteria, Table 4.2 compares a few key characteristics of the households who obtained the full amount of a loan and those who were directly rationed by the RCC, including those who received the reduced amount of loan as applied for and those who were rejected. These characteristics are also the factors expected to have some influence on the lender’s decision to ration a household who demands for formal credit in many studies which adopt the econometric approach. In our analysis, the living index and possession score of durable goods owned by a household are used as the indicators to measure a household’s long-term wealth status. On the other hand, the per capita net income represents a household’s liquid assets, which indicate their short-term wealth. The table shows that, among these three categories of loan applicants (groups A, B and C), the households who received the full amount of loan for which they applied (group A) stood at the highest numerical results in the listed factors on average, including the living index, durable goods index and per capita net income. In particular, households 18 and 29 were derived from the top 10 per cent income group and obtained a high value in operating income from involvement with secondary or tertiary industries. This provided them with a solid and stable financial resource for their loan repayment. By contrast, the households who were rationed by the formal credit market (including the households in groups B and C) had relatively low values in both long-term and short-term wealth indicators. In particular, the rejected households ranked as the lowest. Their incomes came mainly from agriculture and few of them participated in a family-run business in the secondary or tertiary industries. This result suggests that a household’s access to formal credit is mostly restricted to wealthy farmers in Yao, and it is reasonable to infer that the lender’s decision to approve a loan request is largely based on the wealth status of the applicant. Nevertheless, if we take a further look at Table 4.2, it appears that the above finding does not portray a complete picture of the status of credit rationing in this village. For example, household 51 in group B, although being well presented in terms of wealth and income, was still rationed by formal lenders. Conversely, households 52 and 22, with a low value of the same indicators, were nevertheless granted full loans. Such contradictory results illustrate that, in addition to a household’s wealth, other devices have also been employed by the RCCs to select potential loan applicants. CREDIT DEMAND-SIDE

In order to gain a perspective from the credit demand-side, discussions on credit rationing were carried out with farmers in Yao (Table 4.3 shows the results of

Households index Age of the head of household Education level of head of household Operating land of household (mu) Of which contracted land (mu) Number of people in household Dependency ratio Net income from primary employment (RMB) Net income from secondary employment (RMB) Net income from tertiary remployment (RMB) Net family operating income from primary employment (RMB) Net family operating income from secondary employment (RMB) Net family operating income from tertiary employment (RMB) Number of labourers in primary employment (RMB) Number of labour in secondary emploment (RMB) Number of labour force in tertiary employment (RMB) Living index Order of the living index

Types of households

24,000 0 43,800 24,000 0 43,800 1 0 1 12 3

10,000 0

13,850 0 0 1 2 0 4 39

4 1.3 1.3 4 0.5

3 3.1 3.1 5 0.4

13,850

18 37

5 48

A (received full loans)

0 10 13

0

2

29,000

0

2,660

29,000

0

2,660

3 3.2 3.2 5 0.6

22 70

2 12 3

1

1

100,000

200,000

2,800

100,000

200,000

2,800

4 3.5 3.5 5 0.2

29 53

0 4 39

1

2

0

0

1,120

0

9,600

1,120

3 1.6 1.6 3 0.25

52 57

1 4 39

0

1

0

0

1,400

6,000

0

2,900

3 1.6 1.6 4 0.5

17 35

1 12 3

0

2

0

0

12,700

0

5,000

12,700

3 2 2 4 0.25

30 51

B (received less)

2 7 23

0

1

22,000

0

1,400

22,000

0

1,400

3 5 3 4 0

51 29

2 4 39

0

3

0

0

3,110

9,600

0

5,510

1 4 4 5 0

41 62

1 3 3 9 0.56

49 81

1 3 52

2

1

0

0

3,900

6,000

11,000

3,900

C (rejected)

Table 4.2 Comparison of the households who obtained full loans (type A) and the households (directly) rationed from the formal credit market (types B and C) in Yao

25 6 16,950 5

6 51

4,770 32

25

6,332

7

24

1

62,480

2

30

46

2,680

33

13

50

2,225

24

15

20

6,825

3

29

13

7,800

19

16

45

3,022

47

8 19

16

49

2,322

Notes Index order: 1 = best; 51= worst. Schooling indicator: 1= illiterate; 2 = junior school; 3 = junior high school; 4 = senior high school or high technical school; 5 = college/university or higher degrees.

Possession score of durable goods Order of the possession score of durable goods Per capita farmers’ net income (RMB) Order of per capita farmers’ net income

52

Households’ indebtedness and borrowing behaviour in Yao

Table 4.3 Determinants of credit rationing (farmers’ view), Yao

Not received full loans No reason Collateral problems Rejected applicants Collateral problems Pre-emptively rationed households Inability to provide collateral No contact/network with formal financial institutions High transaction costs in application process Total households who were credit-constrained

Number of households

Percentage(%)

3 2 1 2 2 12 6 3 3 17

17.65 11.76 5.88 11.76 11.76 70.59 35.29 17.65 17.65 100

farmers’ interviews for determinants of credit rationing). According to local rural households, in particular the pre-emptively rationed households, three issues – collateral, contact/network with the formal financial institutions and transactions costs – were regarded as the most significant determinants of credit rationing. From the point of view of farmers, first and most significantly, collateral was the most important determinant of credit rationing by formal lenders (the RCCs). In Yao, half of the pre-emptively rationed households who had the need for credit but chose not to apply, did so because of their concern that they had no collateral or insufficient collateral. Moreover, the applications of two households were rejected as a direct result of their lack of collateral. As described earlier, the villagers in Yao specialized in large-scale aquaculture, particularly duck-breeding, the processing of agricultural products and small industrial businesses. The capital farmers demanded for their productions was relatively large, generally more than RMB10,000 ($2,500). Due to the relatively small size of microcredit loans (typically ranging from RMB3,000 to RMB5,000), farmers usually applied for the normal rural household loans that typically requested collateral. In general, there are three types of collateral required for the RCCs to issue a loan to a normal household: (1) collateral guaranteed by a third party, (2) collateral on physical goods (a house certificate), and (3) collateral on liquidity (savings books). However, it is not easy for farmers to obtain the appropriate collateral. The collateral guaranteed by a third party means that a farmer obtains a loan through another person’s guarantee on his liabilities. If the borrower defaults, the guarantor is legally responsible for the repayment of the debt. In general, a guarantor is someone who is wealthy enough and has the finance to repay a potential loan or is somebody with a social responsibility, such as a village head, and has the power to enforce a loan repayment in the village. However, in Yao, it was ‘not easy’ and also ‘pointless’, in the words of ordinary farmers, to try to find a suitable guarantor. The farmers argued that it was very hard to find a person who was willing to stand as a guarantor. Yao Bao, a 37-year-old duck-breeder with 800 ducks, explained:

Households’ indebtedness and borrowing behaviour in Yao 53 I wanted to apply for RMB20,000 so as to expand my duck-breeding business on my family farm. However, the RCC needed a guarantee. It is very difficult to find a guarantor. Who wants to be my guarantor? If my business were to fail, what would happen to the guarantor? Nobody would take the risk! ‘But I heard that the village head had guaranteed a loan for Mr Yao F’ [another farmer in the same production team], I said. He replied: ‘I am not so close to him [the village head]; I don’t think he would like to be a guarantor for me.’ In addition to the difficulty in ‘finding’ a guarantor, farmers also worried about having a ‘debt of favour’ (in Chinese, ren qing). Yao Shan,who was 62 years old and a member of the village committee, told us: I feel very heavy-hearted to ask somebody to be my guarantor. If you do, you owe him [the guarantor] a big favour. I do not like having to do this. What if I could not repay the debt? I would feel even worse. This statement is indicative of the Chinese ethic that when you ask someone for a favour, then a so-called ‘debt of favour’ results as a consequence. It can be expressed either in terms of a psychological feeling of having a heavy heart, as in the quotation above, or in other ways, such as offering a gift to the guarantor or a favour in return if the guarantor asks for help. The favour asked in return would be directly related to the amount of the loan guaranteed. Collateral on physical goods, usually the house-ownership certificate, was another way that farmers could possibly apply for a normal rural household loan. Nevertheless, this method was very unpopular, and even considered impractical, by many villagers, for two reasons. First, in the view of many farmers, using a house as collateral was very risky and even considered as unacceptable in rural communities. Farmers believed that, apart from land, their house was their most important possession. For some farmers, building a decent house was their highest ambition. In replying to the question about whether he would like to use his collateral, one farmer said: ‘No, I am not going to use my house as collateral. I have spent five years building up this house by saving every penny I earned. I will not use it as collateral. What would I be left with and where would Ilive if I defaulted on the loan?’ Moreover, even if some farmers were willing to adopt this kind of collateral, it was problematic when applied in practice. Two kinds of situation which typically occurred in Yao are illustrated as follows. Yao Yuan, a 45-year-old head of a four-member family, participated in partidge breeding (2,500 birds). He explained: I wanted to apply for a loan of RMB30,000 from the RCC to expand my business further. However, I heard they [the RCCs] needed a house-ownership certificate. Our house was built in 1970s by my parents, when I was married. At that time, house-ownership certificates were not issued. Therefore, I don’t

54

Households’ indebtedness and borrowing behaviour in Yao have a house-ownership certificate. There is no way that I can use my house as collateral.

Yao Ming was a 30-year-old part-time construction worker at the county, with a monthly income of RMB600. In 2004, Mr Yao made a loan application of RMB 10,000 to the local RCC, as his family planned to start a duck-breeding business. Although his family provided a house certificate to the RCC, their application was still rejected because the estimated value of their house was so small. They had a 70 m2 house, on one floor, constructed of bricks and wood. It was built in 1990, costing around of RMB5,000 at that time. According to the RCC, it was estimated to be worth less than RMB2,500, which was far less than the amount they applied for. The problem reported by Yao Ming was not just a concern raised by farmers on the demand-side of credit. From the view of the credit supplier, this method was unfavourable to them also. As the credit officer in the township RCC explained, ‘The value of a farmer’s house is usually very low. If the loan was defaulted, nobody would be interested in these properties.’ He also said that due to the ineffective legal system in rural areas, it was very difficult to implement an obligation to repay a loan after a default. Therefore, in rural areas, credit officers were typically unwilling to estimate the value of a farmer’s house. In addition, the high transaction cost was another reason for not doing so. Liquidity, in particular savings books, was the method adopted most frequently by farmers in Yao as collateral. Even so, critics still questioned how appropriate this method was. One farmer said: ‘It is such a ridiculous method! If I have money saved in the bank [RCCs], why do I have to borrow from you [RCCs]?’ However, compared to the other two methods, liquidity was perceived as the most practical means of collateral by farmers. In Yao, it happened very frequently that if a farmer did not have his own savings but was desperately in need of a loan, he would ask help from his friends or relatives and use their saving books to make an application.4 Regardless of their inability to provide collateral, having no contact or network with formal financial institutions was the second most frequently stated reason farmers perceived as the determinant of their rationing by formal lenders. In Yao, it was a typical view among farmers that, without knowing someone working inside the financial institutions, there was no chance of being granted a loan. In their interviews, 5 out of 12 pre-emptively rationed households mentioned this matter, in which 3 of them ranked it as the most important reason for not applying for a loan. Yao Hai, 33 years old, participated in a transportation job in the county centre. His wife stayed at home and took care of their two children. Mrs Yao told us that they needed RMB200,000–300,000 in order to buy a new car for her husband’s transportation job that year. However, they did not apply for a loan. Mrs Yao explained: ‘[Mr Yao’s] parents died many years ago. We neither know anybody who works in the RCCs directly, nor a third party who knows an official at the RCCs. There is no way we would receive a loan.’ For Mr and Mrs Yao, using the house as collateral (they lived in a two-storey, 180 m2 house) was not a problem.

Households’ indebtedness and borrowing behaviour in Yao 55 However, they still supposed that, even by providing collateral of the householdownership certificate, having no inside contact with the RCCs, it was unlikely that they would be granted a loan. Yao Jiangping, 43 years old, intended to start an egg-incubation business the following year. He required initial capital of around RMB80,000–90,000 as the preparation for selling on credit ducklings to other farmers. However, he was not confident that he would receive credit from the local RCC, for the same reason as Yao Hai. He argued that [The RCCs] only lend money to someone who they know or who gives them gifts. It is even not necessary for the one who has a contact to repay the full amount of the loan. However, for those of us who neither has a contact nor are able to give them present, the full amount of the loan certainly needs to be repaid. One farmer stated: ‘The road is ahead of you if you have a contact. Otherwise, there is no way that you can receive a loan’ (you shu ren jiu you chu lu, mei you jiu jie bu dao). According to local villagers, those who received loans all had personal contact with the formal lenders. Among the eight formal credit borrowers (2001–5), households 29 and 52 were two typical examples of evidence of most farmers’ perception. Yao Guo is the head of a five-member family (household 29). He had been the head of the village cadre for almost twenty years (six years as village head). The family had continuously received loans from the RCCs in recent years. It was a common view shared by villagers that Mr Yao’s close relations with the local officials in the township RCC made it easier for himto receive formal credit. Again, his viewpoint had been further confirmed during the conversation we had with his youngest son. ‘Do you consider that capital, especially initial funding, is a problem for your business?’ I asked. ‘It is hard, but not that difficult,’ he replied.‘My friends and relatives gave me a hand to a certain degree, and also we have other resources, for example, borrowing from RCCs.’ ‘But I heard from other villagers that it is very difficult to borrow a large amount of money from the RCCs, as [the RCCs] are very restricted on collateral, such as house ownership certificates or saving books.’ He nodded his head and continued: ‘It depends [on the different cases] really. For us, it might be easier. I have some friends who worked in the RCCs. So does my dad. It is not that hard. Also, each time we repay the loans.’ Hu CQ (female), 57 years old, received a loan of RMB10,000 from the local RCC in 2005. She was the head of a three-member family, including her son and daughter-in-law.5 After Hu’s husband died, the financial status of Hu’s family was in chaos. In 2005, the total debt of the family stood at RMB100,000, consisting of RMB10,000 from the RCC for repaying her daughter’s loan for her duck-breeding

56

Households’ indebtedness and borrowing behaviour in Yao

business, RMB600,000 from their friends and relatives for buying a transportation car for her son in 2001, and the medical expenses during the previous years for Hu’s husband. Based on the family characteristics of Hu CQ, the possibility of being granted a loan by the formal financial institutions was expected to be very low. However, as Hu said, they had a relative who was working in the township RCC. Through this contact, Ms Hu received a loan of RMB10,000 through another person’s guarantee in May 2005. In addition to the factors of collateral and network with formal credit institutions, another reason that farmers were discouraged from applying for formal credit was the high transaction costs. This issue was ranked by 3 out of 12 pre-emptively rationed households as the most important determinant for not applying for a loan. The transaction costs refers to the various costs that borrowers face apart from the nominal interest rate, in terms of time, energy and money – for example, the cost of information searches and collection of information, application and service fees imposed by lenders, the cost of obtaining collateral and property titles, as well as travel expenses and lost work time of the borrowers (Cuevas and Graham, 1984; Ladman, 1984; Meyer and Cuevas, 1992; Adams, 1993).These costs may make the cost of the loan prohibitive (Barham et al., 1996: 802) and thus lead to the exclusion of certain types of borrowers, particularly small farmers, who do not have prior borrowing experience with a prospective lender but who might be in a position to repay the nominal interest rate from the formal credit market. As identified by Adams and Nehman (1979: 166), at least three kinds of borrower transaction costs are included when farmers apply for a loan. First, loan charges are collected by the lender on top of interest payments, for such things as application fees, the forced purchase of other lenders’ services, service fees, bribes, compensatory balances and closing costs. The lender may also raise the borrower’s transaction costs by deducting interest charges in advance or collecting interest on the entire loan, though only a part is withdrawn by the borrower. Second, in many low-income countries the rural poor may be forced to negotiate with someone outside the formal lending agency before a loan application is formally reviewed. This individual may be an extension agent, a local official or leader or a co-signer. In some cases a potential borrower must pay expenses for a technician to visit and make an inventory of the borrower’s farm operation. Gifts and bribes may be involved in some of these cases as well. Yao Sheng, 40 years old, specialized in pig-breeding and had 30 pigs. The total annual cost of fodder was RMB25,000. Initially, he planned to apply for a loan from the RCCs. However, he withdrew this decision when he considered the cost he had to pay for approval of his collateral. He said: The entire application procedure is so complicated. I have to apply [for a loan] first, then [the RCCs] come over to investigate. This is not enough. They also ask for a third party’s guarantee. You know, when you ask somebody else’s help, you have to give him a gift as an appreciation of his help, such as a box of cigarettes costing around RMB50–100. If I borrowed RMB1,000, the present

Households’ indebtedness and borrowing behaviour in Yao 57 costs around 10 per cent of the main amount, plus the interest I need to pay. It is too expensive! On the other hand, as mentioned previously, from the traditional Chinese ethics perspective, the face value of a favour counts as another critical form of transaction cost that farmers considered during the collateral collection procedure. Third, in many cases, the largest and most important transaction costs are the borrower’s time and travel expenses involved in the loan transaction. Many small and new borrowers are required to visit the formal lender a number of times to negotiate the loan, withdraw portions of the loan and make a repayment. Some of these visits may involve queuing for long periods and travelling long distances. Lost work time may become an important factor, especially when loan transactions are concentrated in planting and harvesting periods when the costs of the borrower’s time are substantial. Yao Qing, 33 years old and head of a four-member family, needed RMB 40,000 for his duck-breeding business in 2005. However, his previous borrowing experience of the RCCs, especially the complicated and time-consuming procedure of applying for a loan, discouraged him from applying again. He explained: At that time [when he borrowed from RCCs previously], in order to obtain a loan, I visited the local RCC office three times. The first time I went there, nobody bothered to pay attention to me. I was told the credit officer had gone to another village to collect a loan repayment. A few days later I went there again; after two hours’ waiting, finally I managed to talk to somebody. However, I was told that I would not be granted a loan because I had no collateral. I returned to the village and tried my best to persuade the village head to guarantee the loan for me. When I visited the RCC for a third time, the credit officer [at the RCCs] finally agreed to issue a loan to me. However, the interest of the loan had to be deducted in advance, as they were worried that I would not be able to repay it. As I had no alternative but to obtain a loan during that time, I continued to pursue a loan there. It’s so time-consuming and complicated, I don’t think I would try it again. Households’ participation in the formal credit market As well as the issue of households’ access to formal credit, another objective of this study is to discuss the behaviour of households’ participation in the formal credit market, which generally includes two particular issues: the occurrence of participation and its extent, and the determinants of the household’s participation. As the first of these issues has already been discussed, the second issue will now be discussed in more detail. It is worth noting that whereas most studies concentrate on the quantitative analysis of loan participants, our study is more focused on the qualitative analysis of rural households’ borrowing behaviour, from both the participants’ and non-participants’ point of view.

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Participants With reference to the borrowing details of the formal loans (Table 4.4) and the characteristics of individual borrowers (selected from Table 4.2), it was found that, based on the difference in the level of households’ wealth or income, the farmers’ demand for formal credit possessed a unique pattern. First, regarding the borrowers in the upper-income group, including household 18 who specialized in the fodderdelivering business, and household 29, the village head who owned a garment enterprise, a total of 8 loans in this group were exclusively used for production purposes. In particular, all 5 loans borrowed by household 29 were subject to purely industrial uses (RMB30,000–150,000). Moreover, regarding the middle-income participants, household 30 took out the loan on behalf of another farmer; households 22 and 51 required loans for their own businesses, butchering buffalo and electric heating respectively. Together, the pattern of households’ demand for credit in these two groups indicated that Yao was experiencing a rapid transformation towards a modern agricultural or industrial economy. However, unlike the situation in the previous two categories, if we look at the households from the lower-income group, including households 5, 17 and 52, none of them demanded credit for production purposes. Instead, the loan borrowed by household 5 was actually a national student loan issued by the ICBC (Yao’s son started an undergraduate course at Nanchang University in 20046), and households 17 and 52 both borrowed for the purpose of repaying their debt to others. According to households 17 and 52, they had no other alternatives for borrowing. The RCCs was their last resort. Despite their poor financial family status, they were able to receive loans from the RCCs either through the introduction of or help from their relatives working inside the institution, or a third party who knew staff in the RCCs. Non-participants Many households interviewed in Yao were actually non-participants in the formal credit market. In particular, this group of households can be categorized into three subgroups: 1 2 3

Households who had applied for a formal loan, but were rejected. Households who wanted credit at current interest rates, but did not apply. Households who did not want to borrow at prevailing interest rates.

Since an in-depth discussion on the behaviour of credit-constrained households (including the households in groups (1) and (2)) has already been discussed, the focus of this section is on the households in category (3). Based on our interviews with this specific group of households, a number of underlying reasons why households in Yao did not want to participate in the formal credit market are revealed. Table 4.5 lists the six most significant factors for farmers’ non-application. These factors were not typically within the scope of previous studies related to statistical analysis. However, they were of critical importance for

24 33 51

Note Index order: 1 = best; 51= worst.

17 39 52 39 5 39

Lower-income level

2

7 3 19

3

Middle-income 22 13 level 30 12 51 23

29

6

3

Upper-income level

18

Order of Order of living possession index durable goods

Households’ index

50 46 32

25 20 13

1

5

2002 2002 2005

2004 2001 2005

2001 2002 2003 2004 2005

2003 2002 2001

5,000 10,000 6,000

50,000 15,000 20,000

30,000 30,000 30,000 60,000 150,000

10,000 10,000 8,000

Paying back other’s debt Paying back daughter Education

Fixed-production investment Helping others to borrow Fixed-production investment

Production inputs Production inputs Production inputs Fixed-production investment and production inputs Fixed-production investment and production inputs

Fixed-production investment Fixed-production investment Fixed-production investment

Order of per-capita Year of Loan size Purpose of borrowing net-income borrowing (RMB)

Table 4.4 Detailed information of the participants in the formal credit market, Yao

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Households’ indebtedness and borrowing behaviour in Yao

Table 4.5 Determinants of households’ unwillingness to enter into the formal credit market, Yao Determinants

No. of households

No need for formal credit Interest rates Product design problems Limited (or no) knowledge of formal financial institutions and their business Fear of being taken to court or being punished for late repayments Other reasons (previous bad experience) Total number of households

17 6 3 1 1 2 30

influencing households’ decisions on whether or not to participate in the formal credit market in Yao. Of the total non-participants, 17 households (56.7 per cent) reported that they had no need for formal credit. Of these, 12 had sufficient financial resources and had borrowed from neither formal nor informal credit markets, and the rest only received minor amounts of informal loans, including 3 for production purposes with zero or trivial interest and 2 for house-building purposes. The problem of interest rates was another critical issue determining farmers’ non-participation in the formal credit market. As some farmers pointed out, the loans issued by formal lenders carried an interest rate that they could not afford. Generally, based on the difference in the purposes of the loan required by farmers, which can be broadly separated into production loans and consumption (personal) loans, the farmers’ concerns for interest rates focused on different viewpoints. First, one typical point of view shared by farmers was that they did not want to apply for a formal loan because the RCCs actually charged interest. They argued that the amount of money they needed could easily be obtained from their relatives or friends without any interest. The family of Yao Huangsheng was struggling financially because of Mrs Yao’s illness. The annual expense for Mrs Yao’s medicine was RMB6000–7000. Mrs Yao said, ‘If we borrowed from the RCCs, we would need around RMB10,000, mainly for my medicines. But the RCCs charge interest and we cannot afford it.’ According to her, they had paid for her medicine in the past with loans entirely from their relatives and friends who did not ask for any interest. Second, some farmers claimed that they would prefer to borrow formal credit if the current rate of interest was slightly lower, as borrowing from personal sources could be embarrassing. One villager explained that he would prefer to borrow from a formal lender rather than ask for help from others. He said: ‘As you know, it costs “face” (mian zi in Chinese, means dignity) when you borrow privately. We all have a face (or dignity). I feel so ashamed if someone refuses to lend me money.’ However, he considered that the current rate of interest of the RCCs was too high compared with the rate of interest for savings. He gave an example of why he thought it was problematic:

Households’ indebtedness and borrowing behaviour in Yao 61 If I borrow RMB20,000 from the RCCs with a monthly interest rate of around 1 per cent, in one year I need to pay more than RMB2,000 interest. By contrast, if I borrow from friends or relatives, they don’t charge me any interest. Even if I need to buy a present as an appreciation for his help, it costs less than RMB2,000 and we are good friends as well. He suggested that if the rate of interest from the formal lenders was only slightly higher than the savings rate, it seemed reasonable to him. Third, many households perceived their inability to afford formal lenders’ interest rates from the point of view of production. Tu Yun, 30 years old, specialized in animal husbandry (he had 600 pigs and 2,000 ducks in 2005). The annual cost of his production was around RMB400,000, which he usually obtained in three ways: his own resources, selling on credit from his father’s fodder-processing factory with no interest, and his friends and relatives, with an interest rate of around 0.3–0.5 per cent per month. Mr Tu explained that if he borrowed from the RCCs, he required a minimum of RMB100,000 per year. However, he was concerned that the current interest rate was relatively high. He said: [My family] are engaged in a small-scale business. The profit is not very high. The interest rate of the RCCs currently set was about 0.8 per cent per month or slightly higher. If I borrowed RMB100,000, the monthly interest would be around RMB800 or more; it is a little expensive for us. If it is 0.5 per cent per month, it would be acceptable. Unlike Tu Yun who consented to pay interest charges, a few households (involved only in the farm duck-breeding business) claimed that they did not want to participate in the formal credit market because the RCCs or banks charged interest for production loans, especially for buying the ducklings. Instead, they could receive a loan from the man who delivered fodder to them without any interest.7 However, although there was no so-called interest charged by the fodder delivery-man when he provided credit to the farmers, they did have to pay an extra price for the fodder they purchased from him. However, the farmers interpreted this extra benefit that the fodder delivery-man received as a necessary charge for the ‘favour of lending money’ to them. They were very happy about it. One farmer explained: We do not have enough money to buy ducklings, so [the delivery-man] lends us money, and of course we should give something back in appreciation. For example, he lent me RMB15,000. If my business fails, it takes me three years to repay this amount of money. However, he still lends me the money. This is poverty alleviation. The extra money we paid per packet of fodder to [the delivery-man] is necessary; it is not so-called interest. In addition to the issues of collateral and interest rates, the design of the loan product also determined whether farmers would participate or not in the formal credit market. More specifically, three subissues were raised.

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Households’ indebtedness and borrowing behaviour in Yao

First, some farmers who mainly participated in duck-breeding, pointed out that the loan period was not suitable for their business. Yao Ping, who produced 2,000 ducks annually, explained: A normal household’s loan usually lasts for one year. Sometimes, the [borrower] has to repay it after only nine months. This is not suitable for the duckbreeding business, as the profit is generally generated in 11 to 15 months. Second, the complicated, time-consuming loan-application process did not match the urgency of the loan requirements. Yao GY, 48 years old, was involved in the pig-breeding business and produced 300 pigs annually. He said: The application process of the RCC’s loan is so complicated. You have to apply first, find the collateral, then [the RCCs] come to your house to investigate. It takes ages! The money needed to buy pig-breeding materials is urgent, so I cannot wait. If I go to a private source for a loan, such as friends or relations, they can lend it to me instantly. I would only borrow money from the RCCs if the purpose of the loan is not urgent. Third, another reason that farmers did not apply for formal credit was that there was no reward for prompt repayment or punishment for defaulting. As well as the reasons described above, farmers’ limited or complete lack of knowledge about the formal financial institutions and how to contact them also accounted for their non-participation in the formal credit market. This was due to the poor education of farmers in rural areas. According to an elder in Yao, ‘We do not know what the RCCs are and also how they give loans to [farmers]. During all these years, the money we borrowed was purely only from our friends and relatives.’ Some farmers in Yao were too afraid to apply for formal loans as they were worried that they might be taken to court or punished if a repayment was late. Yao HP, who specialized in partridge-breeding, explained his feelings: I am a timid person. I do not want to be taken to court if I could not repay the loan. As you know, the animal husbandry business is very risky. Look, my wife just tested whether those partridges which died a few days ago had any diseases or not. This business always has the possibility of failing. The loans from friends or relatives do not have a deadline. It is much easier. What Yao HP said is typical of Chinese rural dwellers. They are honest and kind, but timid. On the other hand, they are very truthful about their ability to repay loans. In addition, other reasons, in particular farmers’ previous unhappy experiences with the RCCs, had also deterred some rural dwellers from participating in formal credit. One typical example is described by My Yao Shi as follows. Yao Shi, 52 years old, borrowed around RMB3,000 with one of his friends for business purposes from the RCCs in 1983. Due to the failure of their business, they were unable to repay the loan on time. However, the local RCC targeted only him for the delayed repayment and sent him to prison for three days. By contrast, his

Households’ indebtedness and borrowing behaviour in Yao 63 friend did not receive any punishment at all. According toYao Shi, this was because his friend had a contact inside the RCC. He said: I have spent three years paying back the loan. During those years, my two kids were in school, which also required lots of money. My life was so difficult. I could only repay the debt by farm-cropping at that time; there was no other choice. I worked very hard, very hard. Please do not mention the RCCs to me. Whenever I hear about them, I have a headache.

Informal credit General status of households’ informal borrowing Unlike the statistics of farmers’ borrowing in the formal credit market, many households in Yao participated very actively in the informal credit market. Between 2001 and 2005, a total number of 158 informal loans were taken out by 35 households (Table 4.6 summarizes the major characteristics of these transactions). Out of a total number of 35 households who received informal loans, 6 were participants in both the formal and informal credit markets, and the other 29 had participated only in the informal sector. Similar to the empirical findings of many other studies of rural credit in developing countries, a large number of informal loans (25) in Yao were borrowed for personal consumption. They were mostly derived from friends and relatives, were open-ended and interest-free. However, in terms of the number of loans, personal loans did not account for a major share of informal borrowing. Instead, the majority of informal loans were for production purposes, recorded on notepaper (49.4 per cent) or in loan-record books (17.1 per cent) and issued by business people, such as merchants (for example, the fodder delivery-man) or a factory. The village committee explained that although since the economic reforms in 1978 a tremendous improvement had been made in farmers’ living standards – ‘the management of daily life is usually without any problems’ – in a village specializing in animal husbandry, mainly duck-breeding, farmers were desperately in need of capital or credit for production purposes. In particular, in recent years, along with the development of a large-scale aquaculture industry, as well as any sideline business such as eggprocessing, credit for business purposes became a key concern for farmers in Yao.8 With regard to farmers’ informal credit for production purposes in Yao, it appeared that the farmers had already created a specific form of informal credit, around duck-breeding and its sideline business, egg-processing, in the local area. More notably, two specific borrowing methods – interlinked contract and buying on credit – had played a significant role in the whole process. The following section gives an introduction to the general procedure of duckbreeding and the related business of egg-processing business in Yao, and then illustrates comprehensively how farmers participating in different parts of duck production dealt with their capital problems.

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Households’ indebtedness and borrowing behaviour in Yao

Table 4.6 Characteristics of the informal loans in Yao, 2001–5 Purpose of borrowing

Total (158)

Percentage (%)

Fixed-production investment Production inputs Fixed-production investment and production inputs Durable consumption goods Daily consumption goods Education Building/buying house Medical care Weddings or funerals

21 74 38 0 1 2 14 5 3

13.3 46.8 24.1 0 0.6 1.2 8.9 3.2 1.9 100

Method of borrowing Verbal Recorded on notepaper (da bai tiao) Recorded in loan-record book (ji zhang)

53 78 27

33.5 49.4 17.1 100

Loan size (annual, RMB) 1–5,000 5001–10,000 10,001–30,000 >30,000

38 42 31 47

24.1 26.6 19.6 29.7 100

Interest rate (% per month) 0 0.5–0.8 >0.8–1

50 78 30

31.7 49.4 19.0 100

Source of borrowing Friends and relatives Specified relatives Specified only friends Delivery-man Fodder factories

70 43 1 52 36

44.3 27.2 0.6 32.9 22.8 100

31 3

19.6 1.9

124

78.5 100

33 1 46 74 4

20.9 0.6 29.1 46.8 2.5 100

Maturity of loan (year) 0–1 >1–3 >3–5 No duration restraints Repayment rate On time Delay No time requirement and still on-going No time requirement and repaid No time requirement but cannot repay in near future

Households’ indebtedness and borrowing behaviour in Yao 65 Introduction to duck-breeding in Yao9 Based on the information provided by local villagers, Figures 4.1, 4.2 and 4.3 present a general picture of duck-breeding and its related industry, egg-processing in Yao and the surrounding area (within the geographical context of the township). More specifically, Figure 4.1 gives a brief illustration of the whole procedure of duck-breeding on a family farm in Yao. In 2005, the market for duck eggs and its related business stagnated as a result of bird flu. The net income from the sale of duck eggs was very disappointing in 2005 compared with previous years, especially the later 1990s and early 2000s. Provided as supplementary information, Table 4.7 highlights some of the issues relating to the income received from duck eggs and its related business. In addition, Figure 4.3 shows the broader perspective of the production chain of duck-breeding and its sideline business,egg-processing. In particular, seven different types of participants are identified in the whole process of duck-breeding and egg-processing, including (P1) sellers of ducklings or adolescent ducks, (P2) the fodder-producing factory, (P3) the fodder deliveryman, (P4) farmers engaged in duck-breeding,10 (P5) the egg-processing factory (enterprise), (P6) small-scale family egg-processing farm and (P7) the local market. Accordingly, Table 4.7 gives a full description of the function and location of each participant. Table 4.8 summarizes the different methods of borrowing adopted by each participant. In Yao and the surrounding area, each participant adopted his own way of solving the problem of credit for his business. Table 4.8 summarizes the different methods of borrowing adopted by each participant. As a whole, a specific form of informal credit was used in the duck-breeding and the related business of eggprocessing. As this research mainly sheds light on rural households’ indebtedness, the rest of this section will give a comprehensive and in-depth analysis of the ways participants 3, 4 and 6 tried to the solve their credit problems.

Selling duck eggs C1

Duckling (幼鸭)

A

Adolescent duck 80–100 days (成品鸭) B 1st period

Adult duck ready to incubate 30–50 days (蛋鸭) (20–30 days C 2nd period

feed from the paddies; 10–20 days eat feeding materials)

Figure 4.1 Duck-breeding in Yao

Selling old ducks D1

Old ducks 8–10 months (老鸭) D 3rd period

Eat feeding materials for entire period

66

Households’ indebtedness and borrowing behaviour in Yao

1)

2)

3)

4)

5)

6)

During the 2nd period from stage B to C, ducks are fed from the paddies for 20 to 30 days and with feeding materials for the next 10 to 20 days. Moreover, for the whole 3rd period starting from a duck ready to incubate eggs to the day it is an old duck that can be sold in the market, the duck is fed purely by feeding materials. Thus, throughout the entire production period, the ducks need to be fed with feeding materials for 250–320 days in total. The general incubation rate of duck eggs is around 70–90%, normally 85%; and, roughly, using the Chinese system of weights (equals 0.5 kilogram), seven eggs weight 1 jin. This means that one egg weighs around 0.133 jin. During the second half of the year 2005, the price of duck was around RMB2.7/jin, and the lowest price reached was RMB2.2 /jin. Thus, for example, by taking the incubation rate of duck eggs at 85% and a price of RMB2.7/jin, the daily income per duck equals 1× 85% × 2.7 = RMB0.306. In 2005, one packet of duck feeding materials cost RMB64, and weighed 80 jin. The average amount of feeding materials for each duck per day was around 0.35 jin, which equals RMB0.28. Hence, subtracting (4) from (3), the net income of one duck per day was approximately RMB0.026. Usually, by the 3rd period, one canopy contains 1,000 ducks, so the total net income per canopy of ducks was around RMB6240–7800 (RMB0.026 × 1000 × 240 or RMB0.026 × 1000 × 300). Typically, the purchase of ducklings or adolescent ducks was transacted in cash. It cost RMB4–5 to buy a single duckling and RMB15–18 for an adolescent duck. The farmers at the natural village of Yao all purchased the latter. In general, the total investment cost of a single duck before it was ready to incubate cost (Ya tou qian) generally RMB20–25 in total (including the purchase of an adolescent duck and the price of feeding materials). In 2005, the selling price of an old duck in the market was about RMB15, hence one canopy of ducks lost around RMB5,000–10,000. However, if we add the profit of the duck eggs, the general situation of the duck business for a farmer borders on a slight loss.

Figure 4.2 Market situation of duck-feedings business in Yao

Fodderproducing factory P2

Fodder delivery-man B–C (intermediate, residing inside Yao), P3

Seller of ducklings/adolescent ducks P1

Duck egg-processing factory (Good-Hearted Corp.) P5 c–c1

Farmers, who conduct duck-breeding business P4

Figure 4.3 Egg-processing and related business

Small-scale family egg-processing farm P6 c–c1 Local market, selling old ducks + duck eggs P7

Households’ indebtedness and borrowing behaviour in Yao 67 Table 4.7 Functions and locations of the participants of duck-breeding activities and eggprocessing business in Yao and its surrounding areas Participator

Functions

P1: Sellers (individual or shops) of ducklings or adolescent ducks P2: Fodder-producing factory

Providers of fixed-production input: selling ducklings or adolescent-ducks to farmers (in cash) Provider of production inputs, selling fodder to farmers (two types): 1 delivery man, who requires large amounts of fodder; 2 individual farmers P3: Fodder deliveryIntermediary between sellers and buyers of man production inputs: purchasing fodder from the factory, then selling and delivering to the farmers in the natural village P4: Farmers participating Breeding ducks, selling duck-eggs and old in duck-breeding ducks P5: Egg-processing Processing eggs and selling to other places factory (enterprise) (nationwide) P6: Small-scale eggProcessing eggs and selling to the big eggprocessing family farm processing factory (enterprise) P7: Local market A market where farmers sell eggs or old ducks

Locations Administrative village or township Township

Natural village

Natural village Administrative village Natural village Township

The credit status of participants duck-breeding Farmers (participant 4) As illustrated in Figure 4.1, duck-breeding can be divided into three periods and four stages. According to the villagers, the most critical period for which they required credit was during the first period between stages A and B, for fixed production capital – ducklings or adolescent ducks, which cost RMB4–5, and RMB15–18 respectively at the market price in 2005. The transactions were typically carried out in cash. Due to the technical skill required to raise of ducklings to adolescent ducks, most households in Yao chose to purchase adolescent ducks directly at the start for duck-breeding, which normally starts in February each year. Most families in Yao had a single canopy of ducks – around 1,000 per year. Accordingly, it cost about RMB15,000–18,000 at period 1 to buy adolescent duck. As one farmer explained, ‘It is not easy for us to afford this large amount of money, especially in February, after the Chinese spring festival.’ Most farmers required credit and two methods of borrowing were usually adopted at this stage: 1 2

Loans from friends or relatives (open-ended and interest-free). Loans from the fodder delivery-man, who was also staying at the natural village,11 with a handwritten note (interlinked contract).

However, loans from the fodder delivery-man were made on two conditions:

68

Households’ indebtedness and borrowing behaviour in Yao

Table 4.8 Borrowing methods of the participants in the duck-breeding and egg-processing business in Yao and its near areas Participant

Borrowing methods

P4: Farmers

Friends and relatives, without interest Delivery-man (interlinked contract) Buying on credit from the fodder delivery-man (for short-term production inputs) Buying on credit from the fodder-producing factory (this type is specifically applied to farmers who consistently purchase large amount of fodder) Friends and relatives, without interest Friends and relatives, with very low interest Buying on credit from fodder-producing factories Friends and relatives, without interest Promissory notes Friends and relatives, without interest Friends and relatives (same industry), with interest, daily basis Friends and relatives, with or without interest

P3: Fodder delivery-man

P6: Small-scale family egg- processing farm P5: Egg-processing factory P1: Sellers (individual or shops) of ducklings or adolescent ducks P2: Fodder-producing factory

Private loans (friends and relatives), without interest Private lending, with interest Buy on credit to the materials input company (sometimes, borrowed from formal lenders)

Note As this fieldwork was mainly conducted within the geographical context of the natural village unit, the credit status of participants 1 and 2 was derived from accounts derived from the local villagers.

Plate 4.1 Example of a note written by a borrower to the fodder delivery-man in Yao

Households’ indebtedness and borrowing behaviour in Yao 69 1 2

The borrower had to buy fodder exclusively from the delivery-man for the entire course of his duck-breeding activities. Each pack of fodder cost an extra RMB1 on top of the normal selling price.

These conditions were to continue until the loan was fully repaid, which was typically at the end of the production process when farmers sold their old ducks. During period 2 (between stages B and C), ducks need to be fed initially from the paddies for 20–30 days (which were normally produced on the family farm) and then fodder for another 10–20 days. In 2005, the cost of fodder for a single duck was calculated at around RMB3 (or 2.8) –6 (or 5.6) during this short period, which therefore cost RMB3,000–6,000 for one canopy of ducks. Generally, farmers had two sources from which they could purchase fodder: 1 2

Fodder-producing factories, normally located in the township, and paid for in cash. Via an intermediary – i.e. the fodder delivery-man, who stayed in the same natural village, with a delivery fee of RMB1 per pack of fodder. The transaction could be paid for either in cash or by credit. The price of fodder per pack bought with cash from the fodder delivery-man (not including the delivery fee) was the same as that purchased from the factory.

In Yao, except for one or two farmers who purchased fodder directly from the fodder-producing factory and paid cash, most rural households chose to purchase from the fodder delivery-man and paid either in cash or by credit. More specifically, there were two types of farmers who bought fodder on credit: 1 2

Households who borrowed money from the delivery-man at period 1 to buy adolescent ducks, with an extra RMB1 charged per pack. Households who did not owe any cash at period 1 to the delivery-man and only bought fodder on credit.

In the second example, the price was the same as that charged to close acquaintances who paid cash, or with an extra RMB0.5 per pack. According to the delivery-man, this was so-called mutual help between friends and relatives in the village. According to the delivery-man, for loans on fodder, the borrowers were not required to sign for their debts. He simply made a note of the number of packs of fodder each household had purchased from him for his own records and calculated when the farmers should repay the money. As the delivery-man explained, ‘We [between the delivery-man and farmers who bought fodder on credit] are very close friends; we trust each other. Nobody cheats.’ Due to the difference in the two types of loans, our analysis makes a distinction between them. We consider the amount the farmers bought on credit in the first example as an interlinked contract between the delivery-man and the individual household because of the interest charged. In the second example,the fodder was bought purely on credit.12 Furthermore, although households could either borrow money from the fodder delivery-man to buy their ducks and also buy fodder on credit, or buy only fodder

70

Households’ indebtedness and borrowing behaviour in Yao

on credit, the fodder delivery-man had one guiding principle, which was that the maximum amount any farmer could owe him should not exceed RMB12,000. Finally, during period 3 (between stages C and D), ducks need to be fed with fodder for this entire phase. It is normally 8–10 months until old ducks are sold in the local market for various uses. During this period, farmers usually purchase fodder in cash. They sell duck eggs in the local market or to the egg-processing factory and receive money for the purchase of fodder. Typically, farmers buy fodder once every five days. In addition, this research also found a few cases where farmers bought fodder from the delivery-man on credit, which typically happened at the beginning of this period (when the egg-production rate is not very reliable or high), when the income farmers received from selling eggs could not fully cover the cost of fodder. Also, sometimes farmers had insufficient cash to make purchases. Participant 3: the fodder delivery-man As described above, the fodder delivery-man played a critical role in the process of duck-breeding. However, how did he manage to solve his own credit problems? Yao R. in Yao explained the answer. Yao R., 32 years old, delivered fodder to 20 households (18 in the natural village of Yao and 2 in another natural village next to Yao) in 2005, of which half asked his help to purchase adolescent ducks. From 2005 until he was interviewed, he had loaned around RMB200,000 to various borrowers. This included RMB120,000 to ten households who were involved in interlinked contracts (they asked for his help to purchase ducklings). These loans generally comprised two parts: 1 2

RMB80,000–90,000 cash for the purchase of adolescent ducks. RMB30,000–40,000 for the purchase of fodder on credit.

Moreover, the remaining RMB80,000 was the amount loaned to around five households, who bought fodder purely on credit, and the overdue loans issued to other households in previous years. However, where did Mr Yao obtain his financial resource? He explained that he obtained RMB200,000 from three sources: 1 2 3

His own savings (this made up the majority amount). Loans from friends and relatives, with no/very low interest rates. Buying on credit from the fodder-producing factory – around RMB70,000– 80,000.

It is worth noting that, due to the large amount of products the delivery-man purchased, the fodder-producing factory charged the same amount for the fodder brought on credit as for products paid for in cash by him (or by similar types of customers as Mr Yu). The fodder-producing factory considered it to be an interest-free loan. According to Mr Yao, the fodder he brought on credit from the factory had to be recorded on paper, with his signature. The average amount per transaction was

Households’ indebtedness and borrowing behaviour in Yao 71 between RMB5,000 and RMB6,000 and it was recorded by the factory. In 2005, he had a total debt of RMB70,000–80,000 from the purchase of fodder on credit. Previously, the maximum amount he owed the factory totalled around RMB120,000. Participant 6: small-scale family egg-processing farm One particular household was engaged in a sideline business of duck-egg production, a family-run egg-processing farm, which was operated by Yao XJ in Yao. Yao XJ, 55 years old, was the head of a four-member family. He had managed a small-scale egg-processing business for almost ten years. In 2001, two of Mr Yao’s relatives registered a food-processing enterprise named ‘Good Heart’, which specializes in egg-processing and other related business in the administrative village of Yao (see Plates 4.2 and 4.3). Mr Yao joined his family egg-processing farm to Good Heart so that it was a subsidiary of the parent company. In this way, Mr Yao shared the same production techniques, marketing information, selling channels and brand name as Good Heart, which largely reduced the overall cost of his business. In 2005, the average production rate of Yao XJ’s egg-processing farm was 200,000 per round (20 days). The average cost of purchasing eggs and processed materials in a single round was approximately RMB70,000–80,000. According to Mr Yao, usually processed eggs were not paid for instantly. At a good time, when the processed eggs were sold very quickly in the outside market, payment arrived very quickly. At a bad time, it took more than one month to receive the final payment after delivery of the products. In the latter case, a promissory note was usually issued by the buyer (the factory) to Mr Yao. On the other hand, Mr Yao needed to prepare funds for buying 2.5–3 rounds of duck eggs (50–60 days) from an individual farmer. As well as drawing on his own financial resources, Mr Yao borrowed

Plate 4.2 A container of Good Heart preserved eggs

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Households’ indebtedness and borrowing behaviour in Yao

Plate 4.3 Boxes of Good Heart preserved eggs

from two sources: interest-free loans from friends and relatives who were engaged in similar businesses and credit to buy duck eggs from farmers. Mr Yao would issue a promissory note to the farmers as evidence. The farmers could then bring the note to the fodder-producing factory to be used as credit to purchase the fodder, so there was no break in funds at any point of the production process. According to Mr Yao, between 2001 and 2002, the different sources of finance in the total production funds of his business could be accounted for as follows: his own savings: 40 per cent; loans from friends and relatives: 30 per cent, and buying duck eggs on credit from farmers: 30 per cent. Since 2003, due to an increase in eggprocessing factories, the use of cash to purchase eggs from individual farmers became more common, while the purchase of eggs on credit was reduced. Credit purchases were 20 per cent, 10 per cent and 5 per cent in 2003, 2004 and 2005 respectively. On the other hand, the share of his own funds increased to 50 per cent, 60 per cent and 65 per cent in 2003, 2004 and 2005 respectively. Loans from friends and relatives were generally the same.

Summary Characterized by large-scale animal husbandry, mainly duck-breeding, and also by a fast transformation to a more industrialized economy, Yao represents a rural community that is at an advanced stage of agricultural modernization. The empirical findings in this village show that the farmers’ demand for credit from both the formal and informal credit markets was mainly for production purposes. This result explicitly shapes the pattern of credit required by farmers in modern agriculture.

Households’ indebtedness and borrowing behaviour in Yao 73 Formal credit Specifically, in the formal credit market, between 2001 and 2005 the farmers’ involvement with the formal financial institutions was very limited. A total of 14 loans, taken out by 8 households, were found in this village. The majority were borrowed for investment in production, especially industrial investment, and issued on the basis of collateral or other guarantees from formal lenders. Moreover, regarding the issue of farmers’ access to formal credit, it showed from the credit supply-side – i.e. the township RCCs – that the determinants of credit rationing were mainly governed by four issues, including the individual characteristic of a household, the production skills of a household, a household’s previous credit history and its ability to provide collateral. On the other hand, a qualitative analysis of rural households at the demand-side illustrated the issues, including collateral, contact with formal lenders and transaction costs, and these were considered as the three most important determinants of credit rationing by formal lenders. In particular, the first two factors – i.e. collateral and contact with formal lenders – were specifically addressed by the farmers in Yao. From the perspective of farmers’ demand for formal credit, based on their limited participation in the formal credit market, first, it was found that the participants in the formal credit market typically came from two specific groups in Yao: the upper-income group of farmers who required capital for production investments and the lower-income group of farmers who considered the formal financial institutions as their last resort of borrowing. Second, from the analysis of non-participants in formal loans, the findings show that apart from the reasons that related to households’ access to credit, other factors, including the perception of high interest rates, dislike for the design of the loan products, personal fears and previous bad experiences with the formal financial institutions, were also considered by farmers as critical determinants for their non-participation in the formal credit market. Informal credit In contrast to farmers’ limited participation in the formal credit market, their borrowing behaviour in the informal credit market was prevalent in Yao. Owing to the village’s unique geographical location, and the agricultural and economic background that specialized in animal husbandry, as well as the rapid transformation towards industrialization, informal credit in Yao mostly focused on production purposes – a different result from many other studies and a distinguishing finding of this research. More significantly, with regard to the duck-breeding and related egg-processing businesses, a unique credit chain was developed by farmers to solve their financial problems in the village of Yao. In particular, this chapter has given an in-depth analysis of the business operation and credit status of the three main participants: farmers who conduct duck-breeding on family farms, the fodder delivery-man and a small-scale family-run egg-processing farm. The findings in Yao show that, due

74

Households’ indebtedness and borrowing behaviour in Yao

to the availability of better information and simpler, informal enforcement mechanisms of loans in rural areas, the methods of interlinked contracts and buying on credit played an essential role in the different types of informal credit issued. In addition, other types of informal loans, particularly for consumption purposes, were also found in Yao. However, compared with the loans for production purposes, they did not play a vital role in the informal rural credit market.

5

Households’ indebtedness and borrowing behaviour in the natural village of Wulitang

Characterized first by a consistent lack of agricultural development and second by an outflow of manual migrant labourers to the eastern and southern regions, the natural village of Wulitang is a typical community in the process of agrarian transformation in rural China. Following the same structure of empirical analysis as the natural village of Yao in Chapter 4, this chapter examines the types of credit requested by households in Wulitang and the sources of finance in both the formal and informal markets. However, as a large number of villagers in Wulitang were migrant workers who had little need for credit to invest in businesses, households’ indebtedness in this village were usually loans for personal use, which were normally taken out in the informal credit market. Therefore, more emphasis in this chapter is placed on the informal credit market.

Formal credit General status of households’ borrowing in the formal credit market From 2001 to 2005, farmers in Wulitang rarely participated in the formal credit market. Only three loans, borrowed by three individual households, were found (Table 5.1 shows detailed information of these transactions). These three loans Table 5.1 Detailed information of the three formal loans in Wulitang, 2001–5 Households’ index

211

218

234

Age of household in 2005 31 50 42 Year of loan issued 2005 2005 2004 Loan size (RMB) 5,000 10,000 50,000 Purpose of loan Building house Borrowed for Fixed-production friend investment, for own electricplanting factory Method of borrowing Collateral on Other Collateral on liquidity liquidity guarantee Maturity of loan (years) 2 1 2 Repayment rate On-going On-going On-going Interest rate (%/month) Around 0.9 % Source of loan Local RCC

76

Households’ indebtedness and borrowing behaviour in Wulitang

were exclusively lent by the RCCs, with the requirement of collateral, of which two were based on collateral of liquidity and one was by a guarantee.1 However, with regard to farmers’ borrowing purpose, apart from one household who borrowed to invest in his own business, the other two households borrowed for other reasons: one to build a house and the other literally borrowed for his friend. At the time this fieldwork was conducted, all these three loans were still outstanding, so the repayment rates of these loans were hard to define. Households’ access to formal credit Status of households’ access to formal credit With regard to households’ access to the formal credit market, among the 44 households interviewed in Wulitang, 12 (27.3 per cent) were credit constrained, of which 1 household had not been granted the full amount of the loan, 3 households had applied for loans but had been rejected, and the remaining 8 households would have liked to borrow at the current interest rates, but did not apply for various reasons. In contrast, 32 out of the 44 households interviewed (around 72.7 per cent) were classified as credit non-constrained. These included 2 households (4.5 per cent of all those interviewed) who had received the full loan amounts and 30 non-applicants (68.2 per cent), who did not wish to borrow from the formal credit market. Among the latter category of households, income from migrant workers’ employment meant that they did not feel the need to apply for credit. Determinants of credit rationing Based on the status of households’ access to formal credit, this section will give an in-depth analysis of the determinants of farmers’ credit rationing by the RCCs from the perspective of both the supply- and demand-sides of the rural credit market, following the same structure as the village of Yao. CREDIT SUPPLY-SIDE

First, from the view of the credit supplier, four key determinants for the selection process of potential borrowers were given by Mr Liang, the credit officer in the township RCCU of Wulitang. These factors were the same as those described by the credit officer for the village of Yao, including: 1 2 3 4

The characteristics of the household (especially the main source of the household’s income). The production skills of the household – i.e. whether the household was capable of generating the forecast income. The household’s previous credit history. Whether the household could provide collateral.

Households’ indebtedness and borrowing behaviour in Wulitang 77 Mr Liang concurred with the credit officer for the village of Yao in considering the characteristics of a household and their production skills as the most important factors in deciding whether to offer an applicant a loan, since these two issues directly determined the household’s ability to repay it. To a large extent, he agreed that wealthier households had advantages in this process. It is evident from our research findings (Table 5.2) that the households who received the full amount of a loan requested fulfilled the required criteria, including living index, possession score of durable goods and per capita net income. They also received more family income from secondary employment than rationed households. Apart from the importance of the first two factors, Mr Liang also addressed the significance of a third factor – households’ previous credit history – in the RCCs’ decision-making process to provide loans. In his opinion, the creditworthiness of farmers had always been a serious problem in rural areas. For many years, in Wulitang and its surrounding areas, the repayment rates were very low, and many farmers were not creditworthy. He gave as an example two local stories: 1

2

One farmer regularly bought pork on credit from a butcher. After a while, due to his bad repayment history, the butcher refused to sell him pork any longer. However, this farmer argued: Bu yong dan xin, wo hai you ming nian de fu pin dai kuan ne (‘No worries, I will still have my subsidy loan next year’). One cadre in the county said: Yin hang de shui jiu xiang chang jiang de shui, bu yao jiu liu dao Anhui qu le (‘Loans from banks2 are like water from the Yangtze River. If you do not ask for it, it would go to Anhui province’).

With regard to the first of these stories, Mr Liang pointed out that many farmers in rural areas could not distinguish between commercial loans and subsidiary loans. Due to their poor education, a considerable number of farmers believed that all loans issued by formal financial institutions were assets of the country and belonged to the people. Therefore, they believed that it was not necessary to repay the loan. For this reason, staff working in the RCCs were very cautious about issuing loans to households in Wulitang. CREDIT DEMAND-SIDE

As well as an analysis of the credit supply-side, with a view to obtaining a comprehensive picture of credit rationing, as in the village of Yao, open discussions on this subject were also conducted with the villagers of Wulitang regarding the credit demand-side. Yu Xiyuan, the most respected elder who used to teach in the county high school and had many articles published in the local newspaper, gave an idea of farmers’ understanding of this subject. Mr Yu explained as follows: Nowadays, young people, who are tiaopi [meaning not disciplined] can be granted loans by financial institutions. Also, the ones who apply for a large loan can receive [credit] as well. However, farmers who apply for a relatively

218 50 3 10 3.6 4 0.3 22,400 0 24,000 22,400 0 0 1 0 2 9 7 21 3 14,100 2

Households index Age of households Education level of head of household Operating land of household (mu) of which contracted land (mu) Number of people in a household Dependency ratio Net income from primary industry Net income from secondary industry Net income from tertiary industry Net family operating income from primary industry Net family operating income from secondary industry Net family operating income from tertiary industry Number employed in primary industry Number employed in secondary industry Number employed in tertiary industry Living index Order of living index Possession score of durable goods Order of possession score of durable goods Per capita farmers’ net income Order of per capita farmers’ net income

211 31 2 0 4.5 5 0.6 600 32,000 0 600 0 0 0 2 0 8 9 14 5 6,520 13

B (received less than full loan) 205 39 3 10 10 9 0.56 2,200 10,200 9600 2,200 0 0 1 2 1 6 18 9 16 2,444 35

C (rejected) 210 40 2 2.5 3.5 5 0.6 950 3,000 0 950 0 0 1 1 0 3 41 5 28 790 39

216 37 2 7 3 3 0.33 1,250 1,000 0 1,250 0 0 2 0 0 7 12 8 19 750 40

Notes Index order: 1 = best; 51 = worst. Schooling indicator: 1 = illiterate; 2 = junior school; 3 = junior high school; 4 = senior high school or high technical school; 5 = college/university or even higher degree level.

234 42 3 4.5 3.6 4 0.5 0 54,000 0 0 20,000 0 0 2 0 13 1 12 8 13,500 3

A (received full loan)

Types of households

Table 5.2 Comparison of the households who obtained full loans (type A) and households (directly) rationed by the formal credit market (types B and C) in Wulitang

Households’ indebtedness and borrowing behaviour in Wulitang 79 small amount [of loans], cannot. The RCCs usually check [the applicants’] family situation, for example, their houses. If [a house] is worth a large amount of money, [the RCCs] will offer credit to the farmer; otherwise they do not. As with the findings in Yao, three issues – collateral, network/contact with formal lenders and transaction costs – were regarded as the most important factors that determined credit rationing by formal lenders, especially the pre-emptively rationed households in Wulitang (Table 5.3). Due to the similarity with the situation in Yao, this chapter will not repeat the analysis of these problems, except to explain the issue of the network with formal financial institutions, as it was a top concern of the pre-emptively rationed households in Wulitang. In Wulitang, the villagers shared the view that, regardless of the importance of collateral, without having a network or contact with formal financial institutions, it was very difficult, or ‘even impossible’, in some farmers’ words, to be granted loans from the RCCs. One farmer explained: ‘If [a farmer] knows the staff in the RCCs well, he can obtain a loan at any time. Some of [the farmers who have contact with formal financial institutions and received loans] even borrowed for gambling or for their personal expenses.’ However, what exactly do the terms ‘contact’ or ‘network’ mean? Yu Yanda interpreted ‘contact’ in this way: ‘Contact’ means “face” (mian zi in Chinese). The person who applies for loans needs to have a little bit of face – for example, if you know somebody who works inside [the RCCs], then you can receive a loan, ranging from about RMB8,000 to even more than RMB10,000.’ According to Liu Wen, who used to be head of the production team in Wulitang during the 1980s, two kinds of people typically obtain ‘contact’ with financial institutions: ‘[the first type are] the ones who are rich and have a big business and [the second type are] the ones who are cadres.’ ‘I cannot get hold [of loans] nowadays because I am retired,’ he said jokingly. On the contrary, if a farmer did not have a contact or network with the financial institutions, how could he receive a loan? Yu Yanda said: ‘If [a farmer] does not have a contact, he needs to buy some gifts, such as cigarettes or alcohol, or use other methods, for example buy a meal for the credit officer; otherwise he will not be granted a loan.’ According to the local villagers, gifting had already become a Table 5.3 Determinants of credit rationing (farmers’ view), Wulitang Not received full loans No reason Rejected applicants Collateral problems Pre-emptively rationed households Inability to provide collateral No contact/network with formal financial institutions High transaction costs in application process Total households who were credit–constrained

Households

Percentage

1 1 3 3 8 3 4 1 12

8 8 25 25 67 25 33 8 100

80

Households’ indebtedness and borrowing behaviour in Wulitang

‘custom’ during the process of a loan application by farmers in Wulitang and the surrounding areas who did not have any contacts in surrounding the financial institutions. Households’ participation in the formal credit market In addition to the discussion on households’ access to formal credit, which focused on the supply-side of the credit market, the following section will give a brief analysis of households’ participation in the formal credit market of Wulitang, which focused more on the demand-side of the credit market. Participants With reference to Tables 5.1 and 5.2, our findings in Wulitang show a different picture from the one in Yao. The pattern of credit demanded by farmers in Wulitang was not mainly for investment in production, but two out of three participants took out loans for other purposes. Specifically, household 218 borrowed to help one of his friends whose family finances were tight and did not have any other means of borrowing. On the other hand, household 211 borrowed as a personal loan to build a house. According Yu Ren, the head of household 211, his family used to live in a small and poor quality house built ten years previously. At the beginning of 2004, the house was on the edge of collapse, which forced him to build a new house. By using all his savings and money borrowed from friends and relatives, he still needed RMB5,000 to finish the building. So, with the help of a friend, he borrowed from the RCC. With a total loan of RMB65,000, these three participants belonged to the upperincome group of households in Wulitang. Non-participants As discussed above, there were three major reasons to explain why rationed households in Wulitang did not participate in the formal credit market: their inability to provide suitable collateral, lack of network/contact with formal lenders and the high transaction costs of taking out a loan. On the other hand, based on the interviews with the households who did not wish to borrow from formal lenders at the current interest rates, there were four additional reasons that affected households’ demand for formal credit in Wulitang (Table 5.4): there was no need for formal Table 5.4 Determinants of households’ unwillingness to enter into the formal credit market, Wulitang Determinants

No. of households

No need for formal credit Interest rates Fear of being taken to court or being punished for late repayments Other reasons Total number of households

24 4 1 1 30

Households’ indebtedness and borrowing behaviour in Wulitang 81 credit; interest rates; farmers were afraid of being taken to court or being punished for late repayments; other reasons, of which the two most important will be explained here. The most important determinant for farmers’ unwillingness to enter into the formal credit market was the fact that they did not require formal credit. The main reason for this was the fact that most farmers in Wulitang, especially male farmers, were outflow migrants who worked in the south or east coast regions. According to the village committees,3 traditionally Wulitang specialized in farm-cropping. However, farmers were no longer able to rely on farm-cropping as their only source of income. Wulitang was located in a mountainous area, which made it difficult for local farmers to explore different ways of developing their agricultural activities, such as aquaculture, because of problems with product distribution and marketing. Furthermore, for historical reasons, within the administrative village and township of Wulitang, there was no local enterprise that farmers were willing to work for. Therefore, most villagers in Wulitang chose to work as migrants in big cities on the east or south coast regions of China. The income from migrant jobs was relatively stable and reasonably good. Therefore, they had little demand for credit to invest in production in their own village. The farmers who remained in Wulitang were mostly elders, children and females. They regularly received income from their relatives working in the big cities, so they had no requirement for credit either. The problem of interest rates was another important determinant of households’ non-participation in the formal credit market in Wulitang. Indeed, the farmers’ concern for interest rates in Wulitang was very similar with the one raised in Yao,4 except for their particular criticism of exceptionally high interest rates. Some farmers claimed that the interest rates from the RCCs were extremely high; they even referred to them as‘usury’. The farmers’ perception of very high interest rates on formal loans was mostly based on their previous borrowing experience. Table 5.5 gives details of some of the loans taken out by the villagers. However, when examined closely, the so-called interest rates claimed by the farmers were not the nominal interest rates officially charged by the RCCs. Based on the fact that none of the loans was repaid on time, the so-called ‘usurious’ interest rates condemned by the villagers was literally the interest rates calculated by the farmers themselves, when they fully repaid their loans. Indeed, the calculated interest rates consisted of two parts: the nominal lending interest rate when a loan was issued and the extra interest charged by formal lenders as a penalty for late repayment. However, it is also important to point out that, regardless of the farmers’ misunderstanding about the interest rates, as well as the necessary charge for late repayment of their loans, the rate of interest which farmers paid to the RCCs was still high, especially in relation to households (a) and (c) in Table 5.5. This implied that the farmers’ argument regarding ‘usurious’ interest rates was not so much the problem of how much interest formal financial institutions were charging their customers. It was, in fact, the problem of overcharging interest. Our research showed that the uncontrolled operation of credit by the formal financial institutions in rural areas was the cause of this problem.

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Households’ indebtedness and borrowing behaviour in Wulitang

Table 5.5 Transactions relating to the view of usurious interest rates on loans received by the farmers in Wulitang Households Year of borrowing and amount of loan

Repayment year and Approximate annual total amount repaid interest payment

a

1998, RMB600 for cotton planting

2005, RMB7,000

RMB900, interest rate = 150% per year

b

1998, RMB700 for cotton planting

2003, RMB2,100

RMB280, interest rate = 40% per year

c

1995, RMB800 for fertilizer for 1996, RMB1,500 planting cotton

RMB700, interest rate = 87.5% per year

d

Between 1991 and 1995, they had three loans, totalling RMB1,200

1999, RMB3,000

RMB450 , interest rate = 37.5% per year

e

Between 1985 and 1987, Mr Yu had several loans from the RCCs. By the end of 1987, RMB570 had still not been repaid.

18 February 2005, RMB1,100

Annual interest payment RMB41.25, interest rate = 7.23% per year

The RCCs ask them to repay RMB1,900 initially. ‘It is too much. We asked somebody who knew the RCCs to say something good for us and also gave a present and it reduced to RMB1,100. Details of the transactions are as follows (see also Plate 5.1): 05/2/18 Date of issue Loan size (RMB) Interest 1985 15/3 70 1986 15/7 120 1987 11/2 100 1987 10/3 180 1987 24/4 100 Total amount 570 330 1100

Plate 5.1 A receipt from the local RCC to Mr Yu (household (e) in Table 5.5), Wulitang

Households’ indebtedness and borrowing behaviour in Wulitang 83 The fact that Chinese rural farmers are normally poorly educated left plenty of room for local credit officers to take advantage of farmers’ ignorance on this matter. One farmer complained about ‘How much [the RCC] charged us, how much we paid to them.’ In addition, the experience of household (e) in Table 5.5 represents a good example of how the interest rate charged to farmers was affected by the method of gifting to the local credit office.

Informal credit General status of households’ informal borrowing In contrast to households’ rare participation in the formal credit market, 59 informal loans, taken out by 22 households, were recorded in Wulitang between 2001 and 2005. Of those 22 households, 3 households had borrowed from both formal and informal lenders, and the other 19 had borrowed exclusively in the informal sector (Table 5.6 summarizes some major characteristics of informal loans in Wulitang). As with the findings of many studies of rural credit in developing countries, informal credit in Wulitang was characterized by a diverse range of personal loans. Education (37.3 per cent), building or buying a house (15.3 per cent) and medical care (13.6 per cent) were the three top reasons for farmers taking out loans. Moreover, regarding the source of finance, unlike the loans system in Yao, where a large number of informal loans were issued by merchants, such as the fodder delivery-man, or by the fodder-production factory, the majority of informal loans in Wulitang – around 76 per cent – were undertaken between friends and relatives. Usually these loans were interest-free and did not require collateral, and were of different sizes and had open-ended repayment arrangements. Based on the fact that the source of 76 per cent of the informal loans in Wulitang was friends and relatives, this chapter will give an in-depth qualitative analysis of this type of borrowing. Moreover, in considering that a large share of informal credit was borrowed for the purposes of education and medical care, and more importantly, the critical role that these two issues played in relation to the san nong problems in rural areas, this chapter will describe in detail the loans borrowed for these two purposes. Loans between friends and relatives In rural areas of China, friends and relatives are the most common source of credit. These transactions are very personal. Research in Wulitang showed that when farmers met financial difficulties, they usually considered relatives as the primary source of borrowing because relatives were closest to them. As indicated in Table 5.6, 42 per cent of informal loans came purely from relatives. Normally, these loans were verbal, open-ended, interest-free and not requiring any collateral. The family of Qu Dasheng was in need of credit for building a new house for his son’s wedding in 2005. According to Mr Qu, the loans came only from their

84

Households’ indebtedness and borrowing behaviour in Wulitang

Table 5.6 Characteristics of the informal loans in Wulitang, 2001–5 Purpose of borrowing

Total (59)

Percentage %

Fixed-production investment Production inputs Fixed-production investment and production inputs Durable consumption goods Daily consumption goods Education Building/buying house Medical care Weddings or funerals Others

2 0 5 2 5 22 9 8 2 4

3.4 0 8.5 3.4 8.5 37.3 15.3 13.6 3.4 6.8 100

Method of borrowing Verbal Written (da bai tiao) Guarantor Others

50 7 1 1

84.7 11.9 1.7 1.7 100

Loan size (annually, CNY) 1–1,000 1,001–5,000 5001–10,000 10,001–30,000 >30,000

29 15 2 5 8

49.2 25.4 3.4 8.5 13.6 100

Interest rate (% per month) 0 >0–0.5 >0.5–1 >1

48 7 3 1

81.4 11.9 5.1 1.7 100

Source of borrowing Friends and relatives (specified relatives) (specified friends) (did not specify) Buying on credit Others

45 25 11 9 8 6

76.3 (42.4) (18.6) (15.3) 13.6 10.7 100

Maturity of loan (year) 0– 1 >1–3 No duration restraints

13 1 45

22.0 1.7 76.3 100

Repayment rate On time Delay Have time constraint, but still on-going No time requirement and still on-going No time requirement and repaid

26 4 6 13 10

44.1 6.8 10.2 22.0 16.9 100

Households’ indebtedness and borrowing behaviour in Wulitang 85 relatives, including Mr Qu’s brother, Mrs Qu’s younger sister and brother. The amount raised from each party was at least RMB5,000. When we interviewed Mr Qu, his sister-in-law was also visiting. She was staying at the county centre and her husband was engaged in the Chinese medicine business. Regarding the loan she had given to her sister, she said, ‘If we can think about any solution to help her, I would. In return when I need help, I am sure she will help me as well.’ I asked her: ‘Will you feel bad at losing interest in the bank for this amount of money?’ She replied with a big smile, ‘No. It does not matter [to lose a bit of interest], as qinqing [meaning, family closeness] is more important [than the money]. We normally say zi mei qin ma [meaning, sisters are closest to each other].’ As well as borrowing from relatives, farmers also frequently borrowed from friends, especially good friends, in their words, for financial help. Similar to credit between relatives in rural areas, loans between friends were also typically verbal, open-ended and interest-free. Farmers considered that borrowing between each other was mutual help (hu xiang bang zhu); the borrowers were also expected to provide a loan to the lender in the future (this is called reciprocity). However, as some farmers pointed out, although borrowing between friends was very common, ‘if [a farmer] is poor, nobody bothers to lend money to [him]’. The borrowing experience of family Lin represents a clear example of how villagers responded differently to borrowing requests from a household who possessed different levels of family finance. To some extent, there is strong evidence that family and friends have an ‘advantage in information’ over the formal credit market. According to Hoff and Stiglitz (1993), informal lenders have more information about borrowers’ repayment abilities, and information shared between borrowers and lenders within these markets appear to be negligible. Lin Weibin’s family used to be one of the poorest in Wulitang. In 1999, their family finances were in serious difficulties. Due to heavy rain, their house collapsed, so they had to build a new one. However, when they asked for help from other villagers, they all refused to lend them money. Quoting Mrs Lin’s words, ‘At that time, we were very poor. Other villagers looked down on us and nobody wanted to lend us money. They were worried that we would not be able to repay money. Whenever I recall that period, I want to cry.’ In the end, Mrs Lin borrowed RMB5,000 from her mother who lived in Sichuan province, so they could build a new house to live in. In 2003, the financial circumstances of the Lin family changed dramatically when Mr Lin started to work as a team-manager in a shoe factory in Shanghai. In Mrs Lin’s words, ‘Other villagers call my husband a successful man now.’ By the time they were interviewed, the Lin family had just moved into a newly built house. The total cost of the house, including decoration expenses, was RMB10,000. In contrast to their circumstances in 1999, they did not have any difficulties in borrowing money from other villagers. Of a total of RMB10,000 for building their new home, RMB30,000 was lent by other villagers in Wulitang. While the majority of loans between friends and relatives in Wulitang were openended, interest-free and not requiring any collateral, and were ‘non-profit’ and for ‘mutual aid’ (Feder et al., 1990b), many informal loans in the village were issued with an official repayment date, collateral requirement5 and especially with a diverse

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range of interest rates. According to recent literature, the prevalence of diverse interest rates can be explained by a complex combination of factors – for example, the restricted size of the rural credit market, the associated power of the lender, the personalized nature of credit contracts, the unequal relationship of power between borrowers and lenders, and interlinkages with other markets (Swaminathan, 1991). Informal lending in Wulitang indicated that personal relationship was the most important factor in determining the difference in interest rates of loans between friends and relatives. Specifically, the issue of the family home – i.e. whether a farmer was born in the place where he was living or had migrated from another area – played an essential role in farmers’ personal relationship in Wulitang. As an example, Mr Ruan originated from Anhui province and migrated to Wulitang in 1976. In 1990, he built a house costing about RMB4,000 in total. In addition, RMB500 was borrowed from friends who lived in the same village, but with a monthly interest rate of around 1 per cent because he was a wai xiang ren (a person who was not born in Wulitang). Lending between friends and relatives was also determined by other factors, such as the maturity, the size and the purpose of the loans. In particular, with regard to the purpose of the loans, if a loan was borrowed for production purposes (commercial or profit-making businesses), it would be charged at a highest interest rate. By contrast, if a loan was to be used for an urgent matter or a special event, such as a wedding or funeral, it was charged at a relatively low rate. Other purposes – for example, building houses and education – were between these two extremes. Table 5.7 summarizes the borrowing history of Yu Xi, which delivers a fine illustration of how the issues, including personal closeness and the purpose of borrowing, determine the interest rates on loans between friends and relatives. Yu Xi, 46 years old and the head of a four-member family, was an administrator in the township high school in Wulitang. Apart from his monthly salary of RMB600, he also owned, with his brother-in-law, a small lime factory, which opened in 2004. Between 2004 and 2005, he obtained loans from his friends (mainly colleagues) and relatives, for a total amount of RMB450,000. The loans were mainly used for investment in the factory and occasionally for everyday family needs. Although many informal loans in Wulitang were issued without interest, they were not completely interest-free. By implementing the traditional Chinese view of the ‘debt of favour’, there was a transaction cost of ‘paying back a favour’ in credit transactions between farmers. One farmer explained: ‘Borrowing money is borrowing a favour. The more you borrow, the bigger you are in debt of favours. Sometimes, the debt of favour is much heavier than the money.’ In Wulitang, in order to pay back the favour of lending, farmers typically brought gifts in appreciation of the lenders’ help when borrowers repaid the debt, or at some special occasion such as the spring festival. One farmer said, ‘[Bringing gifts with repayment] is inevitable and necessary, otherwise it does not look good [meaning, it does not show sincere appreciation].’ Borrowers were not expected to bring any luxurious or very expensive gifts to lenders. This is because the starting point of lending was to help friends’ in an

Households’ indebtedness and borrowing behaviour in Wulitang 87 Table 5.7 The borrowing of Yu Xi, 2001–5 Source of borrowing

Size of loans RMB

Purpose of borrowing

Personal closeness

Method of borrowing

Interest rates % per month

A sister in Hubei

50,000

Lime factory

Least close

1.2

A sister in Hangzhou

50,000

Lime factory

Close

A sister in Wuning

45,000

Lime factory

The closest

Mr Yu wrote down in his own notebook the exact date when he borrowed the money and how much interest he had to pay.

5,000

Personal consumption Lime factory

Colleagues

2004: 100,000 2005: 200,000 The amount of individual loan varies: RMB50,000 RMB80,000 RMB90,000 RMB100,000

Bank lending interest rate, 0.8–1 No interest

1% The interest is paid annually

emergency or when they were in difficulty. Therefore, borrowers had only to bring something in appreciation. They did not have to spend a large amount of money to buy presents in most cases.6 As one farmer explained, ‘If [a borrower] buys very cheap tobacco and cigarettes, it does not show his sincerity. However, if [a borrower] buys expensive goods, it gives a burden to the lender, as [the lender] will think his original intention of help has not been made in this case.’ Villagers normally expressed their appreciation by giving such agricultural produces items as rice, pork and eggs; home-made products, such as rice wine; and other items, such as a bottle of alcohol (RMB20–40 per bottle, with the brand name of site, baisha), a box of cigarettes (RMB30–200 per box, with the brand name of furongwan, jipingjinsheng or jinsheng). Loans for education As shown in Table 5.6, 37.3 per cent of informal loans in Wulitang were used for education, which ranked the top among the various reasons for households’ borrowing. Indeed, the cost of education has become one of the most important concerns of many households in rural areas. One farmer remarked, ‘In a standard rural family, if one or two children are studying, especially in high school or in college,7 it is very likely that the finances of this family are in difficulty.’ In Wulitang, some households had adequate income, but continued to live in very poor conditions. This was due to high cost of their children’s education, so

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much so that ‘there was no money left for rebuilding or decorating their houses’. It was also noted by some villagers that the main reason they had migrated to other cities in search of work for was to pay for their children’s education. Yu Siubing and his wife had left Wulitang and worked in Nanchang city for more than four years. Mr Yu’s father explained: They chose to work outside in order to support my granddaughter’s university education. She is an undergraduate of a university in Shandong province. She studies Art. My son and daughter-in-law have not returned home for a long time because the burden of the children’s education is so heavy! According to one farmer, ‘If a loan is borrowed for children’s education, everyone is supportive.’ The loans are typically open-ended, without interest, as well as governed by the seasons. Farmers normally borrow in August or September when an academic term starts, and repay the loan in the spring or summer of the following year. At the beginning of another new academic term in September, they take out another loan and repay it in the spring or summer of the third year, and so on, for the duration of the studies. Between 1998 and 2003, Mr Zhang borrowed around RMB1,000 each year from other villagers for his three children’s studies. He told us: ‘Those years were very hard; we always borrowed money, repaid, borrowed again and repaid. In order to repay the debt, we did not even dare to use oil when we cooked, as oil was expensive.’ Apart from borrowing from friends and relatives, some villagers in Wulitang were paying fees on credit to schools. In most of those cases, students were allowed to attend class without any collateral or guarantee. However, as Mr Ruan explained, in September 2001 he was unable to provide money for his son’s registration fee. Only through the guarantee of a teacher, who was in the same production team, was his son able to attend classes. With regard to borrowing for their children’s education, it was very common to hear villagers complaining that, ‘Nowadays, children’s education expenses are so expensive. The burden on us is too heavy.’ This claim raises further questions – for example, why was the financial burden of children’s education so heavy on farmers? Why were those costs so high? Drawn from interviews with the households who had borrowed credit for their children’s education between 2001 and 2005, the following section answers these questions from two perspectives: compulsory education and non-compulsory education. Compulsory education From the perspective of compulsory education, the issue of ‘unregulated charges’ was the key determinant of the the high cost of education that concerned farmers. Chinese education law stipulates that children must be sent to school by their parents or legal guardians at the age of six for nine years of education – six years in junior school and three years in junior high school. The Compulsory Education

Households’ indebtedness and borrowing behaviour in Wulitang 89 Law stipulates that the state compulsory education should be free of any tuition fees. Thus, school-age children and adolescents receiving compulsory education do not pay tuition fees. However, when the law was implemented, it was impossible for the fiscal budget to entirely fund compulsory education in China. Therefore, according to actual local situations, the authorities stipulated that it was appropriate for schools, with the implementation of compulsory education, to collect a certain amount of student fees, under the category ‘miscellaneous’. Miscellaneous refers to the public expenses incurred in relation to students’ drinking water, sanitation, heating and other general expenses. It differs from tuition fees. It is a type of special cost, mainly to cover the state schools’ funding deficiencies. However, many schools misused these funds and the problem of unregulated charges was extremely serious in rural areas. The subject of unregulated charges in relation to compulsory education was serious in Wulitang and its surrounding areas, especially before 2004. The various types of fees8 being collected for students in junior or junior high schools when Wulitang was visited included miscellaneous fees, fees for textbooks and notebooks, operating costs, accommodation fees, catering fees, supervisors’ fees, bicycle parking fees, photography fees, uniform fees, insurance premiums, travelling fees, desks and chairs fees,9 immunization fees and fees to raise funds for education.10 Local villagers calculated that the overall annual expenses a parent were charged for a junior school student were typically around RMB1,000–2,000. On the other hand, for a junior high-school student, the annual education expenditure was about RMB1,000, not including the cost of accommodation, which was normally around RMB30–50 per week, per student. Mrs Liu Shi explained that the annual cost of educating her daughter, including tuition and accommodation fees and other expenses in 2002, was around RMB4,000. Non-compulsory education In addition to compulsory education, expenses for non-compulsory education also concerned farmers in Wulitang. There are two types of non-compulsory education in China: senior high school and higher education. Students attend senior high school at the end of their nine-year compulsory education. Students normally spend three years at senior high school after theyhave completed their junior high-school education. They start university or college after a university entrance examination at the end of high school. University or college education, broadly speaking, refers to all education that takes place after secondary education. This can be at a college, university, workers university, or higher vocational technical college. Compared with compulsory education, farmers in Wulitang took out loans mainly for non-compulsory education. Out of a total of 22 loans for education, 15 were used for non-compulsory education. Li Benshu had borrowed around RMB4,000–5,000 every year between 1999 and 2004 for his two sons’ studies. His older son studied at a technical college between 1999 and 2003 (at a cost of around RMB20,000 in total) and the younger son

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attended a specialist college between 2002 and 2004 (with an annual education expenditure of RMB10,000). According to Mr Li when he was interviewed, the family had an outstanding debt of about RMB4,000. More specifically, the farmers’ concern for the high cost of non-compulsory education centred around three reasons. First, standard fees were allowed to be charged in non-compulsory education institutions, including tuition fees, miscellaneous charges, the cost of textbooks (materials) and operating costs. Many households argued that the tuition fees for non-compulsory education were very expensive and often beyond their financial means to cover. Mr Chen, who had two sons (one was in junior high school and the other in senior high school), said, ‘I am very concerned about my financial situation in a few years when my children will go to high school and college or university. As you know, the tuition fees for senior high school are about RMB2,500 per year, and college or university costs are at least RMB10,000 per year. Nowadays, life is getting harder. Earning money in other cities is not as easy as before.’ Second, there were accommodation costs and other related costs of living. Commonly, in rural areas, students who undertook non-compulsory education had to board, as non-compulsory education institutions are mostly located far away from their home villages.11 In particular, higher education institutions, such as colleges or universities, are mainly situated in large cities. Parents discovered, therefore, that boarding costs and related costs of living accounted for a large part of their children’s education expenses. The two sons of Li Benshu studied in the provincial capital of Nanchang. Due to the high cost of their living expenses, they constantly requested financial support from their parents when they were students. Mrs Li explained: ‘Whenever they ran out of money, they called me. During those years, I was terrified and was worried about picking up the phone, as I knew they needed the money.’ Third, there were unregulated charges of fees in higher education institutions. In particular, with respect to high school education, the very high fees for so-called ‘selected students’12 have received a great deal of attention by the press in recent years. On the other hand, regarding higher education institutions, the problem of so-called ‘two-track’ fees, which referred to the charging of dissimilar rates of fees to different groups of students studying for the same degree and the problem of various types of unauthorized fees, such as sponsorship fee, enrolment expansion fee, targeted fee, school-constructed fee, donations fee, cross-regional fee and cross-subject fee, have been of serious concern to society. Loans for medical care Medical care accounted for another vital part of households’ informal borrowing in Wulitang. Table 5.6 shows that 14 per cent of informal loans were used for medical purposes, ranked as the third most important reason for farmers’ indebtedness. Indeed, nowadays, despite expensive education expenses, unaffordable medical

Households’ indebtedness and borrowing behaviour in Wulitang 91 care was considered as another very significant problem in rural areas. Table 5.8 lists selected farmers’ experience of medical care in Wulitang. As shown in Table 5.8, those farmers could be classified into four categories. Table 5.8 Selected farmers’ experience of medical care, Wulitang Patient Year of illness Type of illness

(a) Elders who were ill 1 Regularly Cough

Total Outpatient or medical hospitalization? cost (RMB)

Borrowed or not?

400 / year

Sometimes from relatives His son paid for him in Nanchang

10

Regular, worse recent two years

Tracheitis

11

Dec. 2005

Vascular sclerosis

4,000

12

2004

Gastric (or stomach) ulcer

4,000

(b) Elders who were ill and had to stay in hospital 2 1987 Hyperthyroidism 6,000

4

2004

5 6

2005 Feb. 2005

Gallstones operations Rheumatism Vascular bleed

3,000 + 1,000+ 600

Take medicines Monthly medicine RMB100 each month Stayed in county hospital for one month, afterwards monthly expenditure on drugs is RMB200 10 days in hospital Stayed three days in Nanchang city One week at County hospital One week Emergency operation

(c) Elders who were ill and received outpatient treatments 3 2003 Heart problem 560 Outpatient 7 2005 Nerve pain 700 Outpatient 8 2005 Pneumonia 1,000 County, outpatient (d) Others 9 2003

Broken leg

13

Diabetes

2005

1,000

Asked barefoot doctor and also bought medicine themselves Takes medicine at the moment

His son paid for him in Nanchang each month

Support by sons RMB3,000 from two relatives, repaid in three years Yes, relatives No Neighbour paid first Yes, friends Yes, friends No

Yes, all from a relative, repaid this year

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Households’ indebtedness and borrowing behaviour in Wulitang

1

Elders who were ill. Of the four elders who were ill, farmers 10, 11 and 12 had regular financial support from their children. By contrast, farmer 1 occasionally borrowed from relatives to purchase medicines. Farmers who were ill and had to stay in hospital. Among the four farmers who had stayed in hospital, apart from one who had an emergency operation which cost around RMB600, the expense of medical care for the other three was RMB6,000, 3,000 and 1,000 respectively. In particular, farmers 2 and 4 had to borrow from others for their stay in hospital. Farmers who were ill and received outpatient treatment. The three farmers spent RMB1,000 for each treatment, of which two had to borrow from friends. Others. Both farmers in this category needed to go to hospital. However, due to their financial difficulties, they either asked for treatment from a private doctor (farmer 9) or they only received medical care at home (farmer 13).

2

3 4

In addition, three households were poor or relatively financially disadvantaged on account of the cost of family members’ medical care. By contrast, previously they were in a reasonably good financial situation. However, due to the high cost of medical care when some members of the family were ill, they suffered financial disaster. This is called yin bing fan qiong. Farmers frequently expressed the view that ‘medical care is too expensive nowadays!’ According to an internal report at the Jiangxi Provincial Health Department (2005), the reason that medical care was unaffordable for rural people was the high cost of the following: drugs, especially high-quality, imported drugs or antibiotics; surgery; medical equipment; hospitalization; and over-medication, meaning that doctors treated a mild illness as if it was a serious one. The cost of hospital expenses Villagers explained that if a farmer had a mild illness, such as a cold or fever, which would cost about RMB100 to treat, the cost was affordable for them. However, if it was necessary to stay overnight in hospital, the cost put a strain on the family’s finances. Usually, the family had to borrow the money from another source. Xu Ya explained as follows: The cost of staying in hospital is too high – normally, around several thousand RMB. At our county hospital, it costs at least RMB2,000 to stay for one night. We usually have to borrow money when the cost of medical care goes above this amount. In the worst case, if a serious illness would cost RMB10,000–20,000 to treat, our only choice is to wait to die. Where are we supposed to get hold of such a large amount of money? We are not willing to participate in dangerous activities, such as selling blood, which we heard happens in other provinces, to obtain the money. Statistics from the provincial Health Department strongly uphold Mr Xu’s argument. According to them, in 2003, the estimated medical expenditure per patient

Households’ indebtedness and borrowing behaviour in Wulitang 93 for staying in hospital in Jiangxi was RMB2,522. The estimated medical expenditure per patient for staying in a hospital located in the provincial capital Nanchang totalled RMB5,118. If a farmer stayed only once in hospital, based on the official statistic that a farmer’s per capita net income was RMB2,953 in 2004 in Jiangxi, 85.4 per cent of his income earned in 2003 would be spent on medical expenses. Even worse, if he stayed in a hospital in the provincial capital, he would spend double his income before he was recovered. The cost of over-medication Over-medication also accounted for unaffordable medical expenses. In farmers’ own words, ‘Nowadays, doctors are not so-called white angels any more; they are white wolves.’13 The following is Mr Chen’s story (farmer 3 in Table 5.8). Mr Chen brought RMB600 with him when he went to hospital for treatment for heart disease. However, the doctors asked him: ‘How much money did you bring with you?’ He replied: ‘Do you mean, how much do I have? How much medicine are you offering me?’ In the end, the doctor offered him a total of RMB560 worth of medicine. Due to the high cost of medical care, the cases of deferred care, untreated illness and financial disaster for the family or even poverty are regular occurrences in rural areas in recent years. According to a report on medical care in the 9th provincial Chinese People’s Political Consultative Conference session (2005), financial difficulty was considered to be the most significant factor in determining farmers’ untreated illness, accounting for 27.3 per cent of the listed reasons in selected sample villages. On the other hand, at national level, a survey by the Ministry of Health showed that one-third of poor rural patients chose not to go to hospital, and 45 per cent of farmers in hospital asked to be discharged before they had recovered. In Wulitang, the cases of farmers 9 and 13 in Table 5.8 were caused by their financial difficulties. Mrs Li said they could not afford to go to the county hospital because they had used all their money for their son’s education. They borrowed about RMB1,000 from a relative and asked a private doctor at the township to see her mother’s broken leg. However, as the private doctor was not competent, the broken leg did not heal completely. According to farmer 13, the cost of the injections and medical expenses for Mr Yu’s diabetes was around RMB10,000. However, the family could not afford it at the moment, so he was simply taking medicine. Nowadays, villagers have some sayings to express their feelings about the cost of medical care: Xiao bing tuo, da bing ai, kuai si cai wang yi yuan tai. Delay treating a mild illness, suffer serious diseases and only bring to hospital when a farmer is about to die. Tuo pin san wu nian, yi bing hui cong qian, zuo ge lan wen yan, bai geng yi nian tian. Having left poverty behind for five years, one illness could bring you back

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Households’ indebtedness and borrowing behaviour in Wulitang to where you were before and the cost of an operation for appendicitis would use up the the income from a whole year’s farm-cropping.

Credit in goods (land) A particular type of informal lending – credit in goods – was frequently conducted in Wulitang. Out of a total of 44 households who were interviewed, 21 had more leased land than cultivated land; of those, 17 households had not cultivated any land in 2005 and 6 of them had leased land to others. By contrast, 23 households had the same amount or less of leased land than cultivated land; of those, 4 households admitted that they had leased from others. Leasing without charge In Wulitang, most farmers who did not participate in farm-cropping leased land to others without charge, especially to friends or relatives staying in the same natural village. Generally, this type of leasing took place by verbal agreement and the duration of the lease was one year. However, if the government wanted to claim the land back for public development, the borrowers were expected to return the land to the lenders immediately, and compensation for the claimed land, paid by the government, would be given to the households who initially owned the land rights. With regard to those who leased land for free, some would give a gift to the lenders on special occasions or at the end of the year in appreciation, although this depended on the relationship of the two parties. Mr Qu’s family cultivated a total of 11.5 mu of land in 2005, including 5 mu of leased land and 6.5 mu of land rented from two other households: one was from Wulitang and the other from another village. ‘It is a shame that land is left over there without being ploughed,’ Mr Qu said. ‘Although the others [the households who gave the land to him] gave us [land] for free, I would still give them 10 jin14 of sticky rice in appreciation of their favour by the end of year.’ By contrast, Ruan CG, who leased 2.5 mu of land from his son-in-law for free, said that it was not necessary for him to give the landowner a gift as the lender was the younger generation. Leasing with rental Some lenders did ask for rent when they leased out land in rural areas. At the end of year 2005, Yu Tui leased 1 mu of land from another household in Wulitang. In return, he had to pay 40 jin of paddy or cash, which was equivalent to the market price of 40 jin of paddy to the lender. Usually, depending on the difference in the quality of the land, as well as the personal relationship between the lender and borrower, the amount of rent varied. Yu Tui had leased his land to other farmers for many years. According to him, in Wulitang or its near area, Before agricultural tax was abolished, the rental of 1 mu of land was generally equal to 100 jin of paddy, either in goods or in cash valued at the market price

Households’ indebtedness and borrowing behaviour in Wulitang 95 for the same amount of goods. Nowadays, due to the abolition of agricultural tax, most lenders no longer charge rent. Even when they do, the amount is very small. Charging rent is just a formality, ranging from 40 to 60 jin of paddy, either in goods or in cash valued at the market price of the same amount of goods in that year.

Summary Wulitang, which represented a specific typology of the villages of central China, was characterized by its consistently poor agricultural development and the outflow of migrant labourers to the eastern and southern regions. Owing to the village’s unique economic characteristics, households’ borrowing in this village concentrated on personal loans, in both the formal and informal credit markets. Formal credit As a large number of villagers in Wulitang were outflow migrant workers who had no need of production investment at home, they rarely participated in the formal credit market. From 2001 to 2005, out of a total of 44 households interviewed, only three had borrowed credit from the RCCs, of which two loans were borrowed for non-production purposes. While the farmers’ participation in the formal credit market was extremely limited, some households were willing to enter into the formal credit market at the current interest rates. However, because formal lenders rationed credit, villagers found it difficult to obtain formal credit. As in the village of Yao, there were four factors that determined whether the households of Wulitang would be granted credit by the local township RCC: their individual circumstances, production skills, previous credit history and their ability to provide collateral. With regard to Wulitang and its near neighbours, the credit officer addressed the problem of households’ credit history in rural areas. On the other hand, in contrast to the credit suppliers, the credit demanders – the local villagers – explained that the three most important factors that limited their access to credit were collateral, communication with formal lenders and transaction costs. Villagers believed that communication with formal lenders was the most important factor. As well as households’ access to formal credit in Wulitang, this chapter has also given an in-depth qualitative analysis of the households’ participation in the formal credit market – an issue that focuses more on the credit demand-side. The findings show that among three participants in the formal credit market, two borrowed for non-production purposes. Notably, they only borrowed from the RCCs because they were unable to find another lender . The non-participation in the formal credit market by households in Wulitang was for three main reasons. First, a large number of households in Wulitang had no specific demand for formal credit because their migrant jobs in other cities provided them with a reliable source of income. Second, the farmers who required a formal loan had difficulty in obtaining credit from formal lenders. Third, because of the

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high interest rates charged by formal lenders, a large number of households were not willing to enter into the formal credit market. This research reveals that the farmers’ criticism of high interest rates, which some villagers said were ‘usurious rates’, did not simply relate only to interest rates. In fact, it also related to the overcharging of interest by local credit officers. The discovery of the undisciplined operation of the management of credit by the RCCs in the past, was a matter of serious concern. Informal credit From 2001 to 2005, farmers’ borrowing in the informal credit market was extremely active in Wulitang. In particular, the households’ demand for informal credit was usually for personal loans, and these were provided mostly from friends and relatives, without the request for collateral and interest charges. Based on an explicit analysis of loans from friends and relatives, the results in Wulitang showed that they were highly personalized, had advantages in information and offered diverse interest rates. Our findings also show that informal lending in rural China features highly by the nature of mutual help between farmers. However, it is important to stress that, while a considerable number of loans from friends and relatives were issued without interest, the custom of giving presents to lenders in appreciation of their help, was a common practice. This chapter has also discussed the two most important reasons for farmers’ informal borrowing in rural areas: their children’s education and the family’s medical care. With regard to borrowing to pay for their children’s education, the findings in Wulitang showed that farmers’ concern about the high cost of education had two main causes: unregulated charges in compulsory education and high financial expenses in non-compulsory education. With regard to the cost of medical care, our research shows that, due to the problem of unaffordable medical expenses, especially the cost of hospitalization, informal borrowing for medical care was very common. Due to family financial difficulties, cases of deferred care, untreated illness, financial disaster and poverty were all found in this village. Apart from lending money, another form of informal credit – lending in goods, particularly land – was also found to be prevalent in Wulitang. Typically, this type of leasing arrangement took place verbally, without rental charges and on a shortterm basis of one year. However, some leases were issued with rental costs, which were determined by the quality of the land and the personal relationship of the borrower and lender

6

Households’ indebtedness and borrowing behaviour in the natural village of Xiaobu

Unlike the economies of the natural villages of Yao and Wulitang, Xiaobu had already started the process of agrarian transformation towards modernization, specializing in the cultivation of orange and tangerine trees. This chapter first gives an explicit analysis of two issues relating to households’ formal borrowing in Xiaobu: their access to formal credit and the determinants of credit rationing by formal lenders; and their participation in the formal credit market, as well as the determinants of that participation. However, by considerating the extensiveness and popularity of one particular type of formal credit in Xunwu county – microcredit loans issued from the RCCs to rural households – which were different from the type of loans issued in Yao and Wuliang that mainly focused on normal loans – i.e. loans requiring collateral – the discussion of households’ indebtedness and borrowing behaviour in Xiaobu is mainly focused on microcredit. Next, in addition to the analysis of formal credit in Xiaobu, this chapter also presents a picture of households’ informal borrowing. In particular, as Xiaobu mainly specialized in the cultivation of orange trees, households’ borrowing in this village was largely dominated by loans for production. Therefore, analysis of informal credit in Xiaobu mainly focuses on loans for production purposes.

Formal credit General status of households’ borrowing in the formal credit market Among the 50 households interviewed in Xiaobu, 16, with a total of 28 loans, had participated in the formal credit market between 2001 and 2005. Compared with the villages of Yao and Wulitang, this represented a relatively optimistic picture about the rural households’ participation in the formal credit market. More specifically, this was largely the result of the popularity of microcredit loans, issued by the RCCs in Xunwu county in recent years. As already mentioned, owing to its favourable geographic position and climate, Xunwu is ideal for the cultivation of fruit trees. From the late 1980s, the local county government had encouraged the development of fruit production and set a long-term strategic aim

98

Households’ indebtedness and borrowing behaviour in Xiaobu

of establishing Xunwu as the number one county for the production of tangerines and oranges. Accordingly, farmers in Xunwu had vigorously engaged in the cultivation of fruit trees. However, in the meantime, they faced serious financial problems as they were short of capital. Microcredit loans – a unique credit product given without the requirement of collateral – had not surprisingly become a popular means for farmers to solve their financial difficulties since their launch in 1999. Table 6.1 summarizes the main characteristics of the formal loans issued in Xiaobu between 2001 to 2005. First, except for one loan that was used to Table 6.1 Characteristics of formal loans in Xiaobu, 2001–5 Village

Xiaobu

Number of participants Number of loans

16 28

Purpose of borrowing Fixed-production investment Production inputs Fixed-production investment and production inputs Others, specified Total

Number of loans 2 8 17 1 28

Share (%) 7.1 28.6 60.7 3.6 100

Method of borrowing Credit Others guarantees Collateral on house-ownership certificate Collateral on liquidity Others Total

24 3 0 1 0 28

85.7 10.7 0 3.6 0 100

Loan size (annually, CNY) 1–5,000 5,001–10,000 >10,000 Total

23 3 2 28

82.1 10.7 7.1 100

Interest rate (% per month) 0.5–1, of which: 0.69 0.80

28 24 4

100 85.7 14.3

Maturity of loan (year) ⱕ1 >1–3 Total

25 3 28

89.3 10.7 100

Repayment rate On time Delayed On-going, will repay on time On-going, but likely to default Total

17 2 4 5 28

60.7 7.1 14.3 17.9 100

Households’ indebtedness and borrowing behaviour in Xiaobu 99

Plate 6.1 A picture of one household’s credit book for microcredit loans

repay a business debt, 27 out of a total of 28 formal loans were exclusively used for fruit cultivation, of which 7.1 per cent was for fixed-production investment, 28.6 per cent for production inputs and 60.7 per cent for both fixed-production investment and production inputs. Moreover, disregarding a very small number of loans that were issued through guarantees by others or collateral on liquidity, the majority of formal lending in Xiaobu (85.7 per cent of the total loans) was through microcredit loans (see Plate 6.1). These loans typically lasted with a maturity of one year or even less, with an average monthly interest rate of 0.69 per cent.1 The loan repayment rates were about 60.7 per cent if they were repaid on time.2 Microcredit loans Microcredit loans are a unique type of lending for which households are assigned maximum credit limits based on an evaluation of each household’s creditworthiness. They are then allowed to borrow freely up to the credit limit without additional conditions (for example, no collateral or guarantors are required) (Park et al., 2004: 256). In general, microcredit loans can be characterized by three qualitative criteria: 1 2 3

they are issued to rural households; they are small, short-term loans; they are based on the households’ creditworthiness (credit ratings).

These criteria, by their very nature, can help to reduce risks (Xie et al., 2005). As Xie et al. (2005: 19) noted, the microcredit loans issued from the RCCs are a unique type of microfinance in China. They differ from the microfinance loans issued by Grameen Bank and other international organizations in three ways: interest rates, clients’ gender and repayment rates (see Table 6.2).

100

Households’ indebtedness and borrowing behaviour in Xiaobu

Table 6.2 Differences between microcredit loans from RCCs in China and microfinance loans from Grameen Bank

a) Interest rates

b) Gender of clients

c) Repayment rates

Microcredit loans from RCCs

Microfinance loans from Grameen Bank

Lower than the interest rates charged by the RCCs on other loans, which are also much lower than the interest rates charged by other grantsupported microfinance projects; interest is usually below 10%. Extended by the RCCs on a creditworthy basis. Mainly targeted heads of households, more than 95% of whom are males. Have a single repayment on the due date.

The interest rates of microfinance loans under the Grameen model are not subject to the central bank’s regulations, and are normally between 15–20% Women preferably.

High repayment with frequent instalments and group guarantees.

Source: Xie et al. (2005: 19)

Households’ access to formal credit Status of households’ access to formal credit Since the majority of formal loans in Xiaobu were microcredit loans, discussion in this section of households’ access to formal credit in Xiaobu focuses on microcredit. In Xiaobu, 21 households – around 42 per cent of the total number of households interviewed – were credit constrained. These included 3 households who received fewer loans than they had applied for, 9 households who were rejected and 9 households who wanted formal credit but did not apply for various reasons. By contrast, 29 households were found to be credit non-constrained, including 13 households who received the full amount of the loans they had applied for and 16 households who chose not to borrow at the current interest rate from formal lenders. Determinants of credit rationing CREDIT SUPPLY-SIDE

The author first visited the township RCC of Xiaobu to gain a perspective from the credit supplier for credit rationing. Introduced by the local credit officer Wu, microcredit loans were issued on the basis of the creditworthiness of rural households, not on their ability to supply collateral, as in the past. Specifically, through the process of credit rating, the RCC decides whether to offer loans and the amount of the loans they intend to issue to potential borrowers. Moreover, the creditworthiness of potential borrowers was based on four specific criteria:

Households’ indebtedness and borrowing behaviour in Xiaobu 101 1 2 3 4

the loan applicants’ personal qualities; the operation of the production; the viability of the production; the ability to repay the loan.

Credit officer Wu pointed out that of these four criteria, the first – the applicant’s personal qualities – was the most critical determinant for the RCCs’ decision to supply microcredit. Of course, the other factors were also important in their decision, but they were not considered as the most critical determinants for the issue of microcredit. In practice, the information relating to these four specific criteria of the loans applicants was gathered with the help of village committees who were asked to obtain the complete information on local villagers. Table 6.3 gives a comparison of the detailed characteristics of households who obtained the full amount of loans (type A) and those who were rationed by the RCC (types B and C). While many households in group A were categorized as wealthy households who obtained high numerical results in the listed indicators, including the living index, durable goods score and farmer’s per capita income,3 5 out of 14 households in this group, including households 317, 319, 326, 347 and 349 who did not belong to the upper-income group, were still granted full loans. These results show that although factors (2), (3) and (4), which related to a household’s wealth, were important in the selection of borrowers, they were not the most critical for obtaining microcredit. Since the author did not have the information available on the personal qualities of each household in Xiaobu, it is impractical to draw the conclusion from Table 6.3 that personal qualities are the most important criteria in the selection of microcredit borrowers by the RCCs. However, it would certainly seem that, apart from the criteria relating to households’ wealth, other factors, which might be farmers’ personal qualities, had been employed by the RCCs to select potential borrowers. CREDIT DEMAND-SIDE

As well visiting the township RCC, a qualitative examination of credit rationing was carried out among the households in Xiaobu. Categorizing the households who were credit-constrained into three groups, the results of determinants of credit rationing from the credit demand-side in Xiaobu are summarized in Table 6.4. First, three households who had been granted fewer loans than they had applied for were unable to give an explicit reason for their credit rationings. One of them explained: ‘I don’t know why I received less. Frankly speaking, I don’t know how much they lent to us, how much we accepted.’ It appeared to rural households that, without any conditions for collateral, it was fortunate that they had already been granted loans from formal lenders. Whether the loan was as much as they needed or what they had applied for, did not seem to matter very much. Second, regarding the rejected applicants, research in Xiaobu shows that four out of nine rejected households had not attempted to ask why their application had been declined. The other five households had managed to receive answers, not directly

311 314 320 321 327 332 333 335 338

C

40 58 34 31 68 29 34 50 36

47 37 30

3 2 2 3 4 3 3 3 3

3 3 3 1.9 1.5 2.6 3 0.5 2.5 3 1.8 2.23

1 3 4 1.9 1.5 2.6 3 4.5 2.5 5 4.8 1.23

1 3 4

307 309 310

B

2 2 3 1.7 0 4.5 4 3 6 3.88 3 2.44 3.3

1 0.8 3 1.7 0 3.6 4 1.1 6 3.88 3 2.44 3.3

2 4 3 2 3 3 4 4 4 3 3 2 4

301 302 303 304 306 308 317 319 322 326 347 349 351

A

34 37 44 42 30 45 57 39 51 42 42 37 40

Contracted land (mu)

Types of Households’ Age of the Educational Operating households index head of level of land of households head of household household

6 2 5 3 6 5 5 7 4

4 6 3

4 4 4 4 3 4 3 4 6 4 5 6 4

Number of people in a family

0.5 0 0.6 0.33 0.33 0.2 0.2 0.57 0.5

0 0.67 0.33

0.5 0.5 0 0.5 0.33 0.25 0 0.5 0.17 0.5 0.4 0.67 0.5

Net income from secondary industry

13,500 30,000 7,000 0 –5,000 8,400 –2,000 3,600 –2,000 7,200 9,000 4,200 6,000 6,300 0 0 –1400 6000

9,000 0 –15,000 20,000 15,000 0

17,500 0 16,700 0 23,000 0 26,000 800 10,500 0 3,200 5,000 1,000 3600 0 0 –16,000 88,000 3,000 7,200 7,000 6,000 0 4,000 6,900 4,725

Dependency Net ratio income from primary industry

0 0 0 0 3,000 3,600 0 0 0

5,000 0 18,000

10,000 15,000 0 8,800 17,000 7,000 3,600 0 0 0 0 0 0

Net income from tertiary industry

13,500 5,000 –5,000 –2,000 –2,000 9,000 6,000 –4000 –1400

6,600 –15,000 15,000

17,500 15,500 23,000 26,000 10,500 3,200 –2,000 0 –16,000 0 3,000 –1,000 6,000

Net family operating income from primary industry

0 0 0 0 0 0 0 0 0

0 20,000 0

0 0 0 0 0 0 0 0 0 3,600 0 0 0

Net family operating income from secondary industry

Table 6.3 Comparison of the households who obtained full loans (type A) and the households (directly) rationed by the formal credit market (types B and C) in Xiaobu

0 0 0 0 0 0 0 0 0

0 0 18,000

1000 1,5000 0 8,800 17,000 7,000 3,600 0 0 0 0 0 0

Net Family operating income from tertiary industry

1 2 2 1 1 0 0 0 2 0 0 0 0 2 0 0 0 0 0 0 2 1 0 0 0

47 16 1 2 5 16 16 16 5 11 45 27 7 27 27 11 7 16 27 27 27 16 16 47 27

11 14 15 19 18 14 11 14 15 10 11 9 12 8 9 16 13 9 6 10 14 10 15 7 8

21 9 5 1 2 9 21 9 5 25 21 30 16 39 30 3 14 30 46 25 9 25 5 44 39

6,875 8,645 10,750 8,900 9,167 3,800 2,783 0 12,000 2,550 2,600 667 2,906 3,500 833 11,000 7,250 3,860 680 533 1,453 3,360 2,494 30 1,150

Note The index order indicates the following: the higher the number the better, the lower the number, the worse. Thus, 1 = best; 51 = worst. Schooling indicator: 1 = illiterate; 2 = junior school; 3 = junior high school; 4 = senior high school or medium high technical school; 5 = college/university or higher degrees.

C

B

0 0 0 0 0 1 2 0 3 0 1 1 1 0 1 0 2 0 1 0 1 2 0 0 1

13 7 4 6 5 20 27 47 2 30 28 44 25 21 42 3 11 19 43 45 37 24 31 46 41

2 5 10 9 8 5 5 5 8 6 3 4 7 4 4 6 7 5 4 4 4 5 5 2 4

1 0 2 1 1 2 1 2 0 2 2 1 1 2 1 2 1 2 1 2 1 1 4 3 1

A

301 302 303 304 306 308 317 319 322 326 347 349 351 307 309 310 311 314 320 321 327 332 333 335 338

Living Order of Possession score Order of Per capita farmers’ Order of farmers’ index living index of durable goods possession score net income per capita income of durable goods

Types of Households’ Number of workers Number of Number of households index in primary industry workers in workforce secondary in tertiary industry industry

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Households’ indebtedness and borrowing behaviour in Xiaobu

Table 6.4 Determinants of credit rationing (farmers’ view), Xiaobu Number of households Not received full loans No reason Rejected households No reason Cannot satisfy the criteria for microcredit No quota left Pre-emptively rationed households Inability to manage the loans due to own family difficulties No close contact with formal financial institutions Not close with village head Total households who were credit-constrained

Percentage (%)

3 9 4 2 3 9 6

14.3 42.9 19.1 9.5 14.3 42.9 28.6

1 2 21

4.8 9.5 100

from the RCC, but through the village head acting as an intermediary between local farmers and the RCCs. One farmer argued, ‘We did not have any contact in the formal financial institutions. The only person we know who is able to speak to the RCC is the village head.’ The village head told two applicants that they were rejected because they had failed to meet the criteria for being granted loans, and the other three applicants were declined because there was no credit quota in the township RCC left for the village of Xiaobu – a point that very much frustrated the rural households. Xie Xirao, who cultivated 300 orange trees, applied for a production loan of RMB5,000 from the local RCC in 2005. He explained: I asked the village head why the RCC did not give me a loan. He said [the officer in the RCC] told him that there was no quota left for our village. But why was there no quota left? My friends in other villages were able to get loans. They did not have this problem at all, only this village did. In an attempt to further clarify these two particular reasons given by the village head to the applicants, the village head, Xie Wenfei, was interviewed. According to him, in December each year, the RCC would normally conduct an investigation into farmers’ demand for production loans in each village in Xunwu county. Typically, this information collection process was carried out by members of village committees (in the natural village of Xiaobu, it was done by the village head). The villagers were questioned about whether they needed loans and how much they wanted. Afterwards, the village committee would submit a form, including the names of the loan applicants (as a unit of one household), the basic family characteristics of the applicants – i.e. how many fruit frees they had planted and the total expected inputs (in cash) – and the financial requirements of the applicants – i.e. how much they needed to borrow and how much their own financial resources were – and this was signed by the farmers and himself, and submitted to the local RCC. Later, an official in the local RCC was expected to carry out an evaluation of each

Households’ indebtedness and borrowing behaviour in Xiaobu 105 applicant. If the applicant satisfied the criteria of the evaluation, he would be deemed a credit-borrower (a borrower of microcredit loans) with a certain grade of credit rating and lending limit. The applicants would be issued loans within the amount of their lending limit from the RCCs the following year. More specifically, the credit rating was determined by the following four factors: the household’s personal qualities, the condition of the production, the viability of the production and the ability to repay the loan. These were consistent with the factors demanded by the official at the township RCC. In principle, the evaluation process would be undertaken by both credit officers and village committees. However, for various reasons (to be discussed later), the practical work was mostly decided by the village head himself who obtained precise information about each farmer in the village. With regard to two rejected households who were told that they had failed to meet the criteria, Mr Xie pointed out that the financial status of the family was precarious: his family had only planted 300 trees. His production abilities and in particular, his health, were not good, and it seemed unlikely that he would be able to repay the loan on time. In the case of the other rejected applicant, his personal qualities were not satisfactory – ‘He was not hardworking,’ he explained. Regarding the issue of limited credit, Mr Xie explained that the issue was not as simple as it seemed. Actually, the term ‘no quota left’ had two meanings. Due to the rapid development of the fruit industry in Xunwu, there was an enormous demand by farmers for microcredit loans. However, the RCCs only had a certain amount of money in the form of microcredit loans that could be issued to rural households. Of course, they could not satisfy every applicant’s requirements. Therefore, the RCCs had an allocated quota for how many farmers could receive loans and the total size of the loans that could be issued in a single village. This was the first meaning of the so-called loan quota constraints. As noted by Zeller et al. (1996: 49), access to credit markets depends crucially on various characteristics of households and it also counts on ‘the set of constraints under which the formal sector operates’, although this latter point has not been emphasized in many publications. Our findings in Xiaobu provided strong evidence in support of this argument. Furthermore, and specifically addressed by Mr Xie, this phrase had another meaning in Xiaobu. Since the initial distribution of microcredit loans in 2001, a number of households who received credit in 2001/2002 had not fully repaid their debts. Due to low repayment rates, the RCC had further restricted its quota of microcredit loans distributed in Xiaobu. This was why the farmers were told there was no quota left. In fact, if we look at the formal loans in Xiaobu, out of a total of 24 microcredit loans, 2 loans were declared as defaults. On the other hand, 5 out of 9 on-going loans were debts that had been rolled over. During the time this research was conducted, loans were still graded in the traditional way into the following four categories: pass loans, overdue loans, idle loans and bad loans, of which loans that had being rolled over were not defined as non-performing loans.4 However, if the loans

106

Households’ indebtedness and borrowing behaviour in Xiaobu

that had been rolled over are considered, half of the borrowers (7 out of 14 in total) were not able to repay their debt on time. Such poor performance of the farmers’ loan repayment history had a serious impact on new applicants in Xiaobu. The village head told us that the credit officer, who was responsible for issuing credit in Xiaobu, said to him: ‘Your villagers have not even repaid their previous debts, how I am going to issue new ones?’ The village head added: ‘I also felt ashamed about this result. The RCCs told me that they did not trust our village committee’s judgement any more. The above findings raise an interesting question. The microcredit loan system was based on a credit rating system that depended on the personal qualities of the loan applicants. At the same time, the creditworthiness of a household was evaluated mostly on the advice of local committees who were supposed to obtain almost ‘perfect information’ on the villagers. So why were the repayment rates of microcredit loans in Xiaobu so low? Was the village head who obtained precise information on the villagers not aware of the expected result? The answers to these questions can be derived from the interviews with the households who had been pre-emptively rationed. As shown in Table 6.4, the main reason that farmers were discouraged from applying for microcredit was that they were not close enough to the village head. Two out of nine households who were pre-emptively rationed ranked closeness to the village head as the main reason that their request for a formal loan had been rejected. One household explained: There is no way I can receive credit. In our village, the overall application process is determined by the village head. The credit officer never comes to the village. [The RCC] only relies on the village committee, who I am not close to, to select borrowers. [The village head] would not recommend me for sure. He only recommends the ones who are close to him. To some extent, this argument seemed to explain why historically the repayment rates of microcredit loans in Xiaobu were low. Recalling the village head’s introduction of the credit evaluation procedure, while principally the staff in the RCCs were expected to carry out a credibility evaluation for each applicant with the village committee, the actual work was mainly undertaken by him. This practice unfortunately left plenty of room for malpractice by the village committees. In fact, the credit supplier also observed this problem. The village head explained: ‘the RCCs told me they no longer trusted our village committee’s evaluation’. Two other reasons – a family’s financial difficulties and having no contact with formal financial institutions – were also cited by the pre-emptively rationed households in Xiaobu as significant determinants for credit rationing. First, six out of nine pre-emptively rationed households argued that they did not believe they would be granted loans on account of their family’s financial difficulties. As noted previously, although a household’s wealth was an important factor when financial institutions were considering issuing loans, it was not the most important one. Xiaobu was at the start of the development of its fruit production

Households’ indebtedness and borrowing behaviour in Xiaobu 107 industry and a large number of households began participating in the cultivation of orange trees in 2000/2001 and also in 2003/2004. Normally, an orange tree begins to produce fruit three years after it was first planted and those planted on the hillsides would fruit only four years after planting. One farmer explained: ‘I want to borrow money from the RCCs. However, I don’t think they would issue credit to me, because my orange trees have not yielded any fruit yet and they would think I would be unable to repay the loan.’ Furthermore, one householder pointed out that he did not have any contacts in the RCCs, so he presumed that he would be unable to obtain loans by simply following the standard loan application procedures. Xie Lang explained the problem: Everybody needs capital and credit in our village. However, the RCCs only grant loans to a limited number of villagers. Why have they given me a loan, but not to others? What is the difference between giving to one household and not to another? It’s all about contact. If you know somebody who works there, you will receive a loan; otherwise, do not think about it. Households’ participation in the formal credit market In addition to the credit supply-side of farmers’ access to formal credit, this chapter will also discuss the credit demand-side of households’ participation in microcredit by using information gathered from two sources: farmers who had participated in the formal credit market and those who had not. Participants Between 2001 and 2005, 16 households had participated in the formal credit market. Due to the simple agricultural structure of Xiaobu that was experiencing the start of agrarian transformation to modernization, specializing in the cultivation of orange and tangerine trees, the pattern of farmers’ demand for credit was relatively straightforward. Although a few of the households were involved in the cultivation of fruit trees for a comparatively long time, the majority of households had only been participating in this kind of income-generating activity for between three and five years. As one villager said, ‘Everybody in our village is desperately in need of capital and credit for production.’ Our research shows that between 2001 and 2005, 27 out of 28 formal loans were borrowed and used for production purposes. Apart from those 27 borrowers who requested formal credit for production, the remaining one borrower used the loan to repay the debt on his own business – a motorcycle repair shop. This borrower considered the RCCs as his last resort for a loan, as no other source of credit was available to him at the time. Non-participants Between 2001 and 2005, 34 interviewed households did not participate in the formal credit market. Of these households, 9 were rejected applicants, 9 desired

108

Households’ indebtedness and borrowing behaviour in Xiaobu Table 6.5 Determinants of households’ unwillingness to enter into the formal credit market, Xiaobu Determinants

No. of households

No need for formal credit Interest rates Product design problems Other reasons ( previous bad experience) Total number of the households

11 1 2 2 16

formal loans but did not apply and the other 16 chose not to apply at the current interest rates. Unlike households in Yao and Wulitang where a large number of non-participants were prompted by their unwillingness to enter into the formal credit market, the majority of non-participants in Xiaobu were the result of the difficulties they had with access to microcredit (18 out of 34 households were rationed from the formal credit market, including 9 rejected applicants and 9 households who wanted formal credit but did not apply at the current interest rates5). With regard to the remaining 16 households who chose not to apply for formal credit, it appeared that their unwillingness to enter the formal credit market could be categorized into four groups (Table 6.5). First, 11 households (22 per cent of the total interviewed) explained that they had no need for formal credit. Among them, 3 had sufficient financial resources of their own and had not borrowed from the formal or informal credit markets. The other 8 households only had a few informal loans, mainly for fertilizer bought on credit. More specifically, this group of households could be divided into two main categories: those who had been involved in the cultivation of fruit trees for more than four years, in which case, they had a relatively adequate and stable income; those who had members working in non-agricultural activities. In addition, one household was represented by an elder who lived alone. His finances were entirely dependent on his sons in the same village. Second, interest rates were regarded as another key factor that prevented farmers from entering into the formal credit market. However, our findings showed that the importance of this issue in Xiaobu was not as great as it was in Yao and Wulitang,where one household ranked it as the most important determinant for his credit rationing. This was mainly caused by the fact that households were desperately in need of production capital to plant their fruit trees. In fact, the households who regarded this issue as a substantial reason for their unwillingness to enter into the formal credit market were mainly from the lowest income group of households in Xiaobu, which makes this argument highly understandable. Third, two households pointed out that the product design problems of microcredit loans, especially the maturity of the loans, meant that they were not suitable for investment in the early stage of of fruit-tree cultivation. According to the villagers, it took three to four years for an orange tree to start producing fruit. In the first year of harvesting, the yield of fruit was relatively low, and it was not until four

Households’ indebtedness and borrowing behaviour in Xiaobu 109 years later that farmers were able to obtain a profit from fruit production. Xie Jiechong, who planted 400 orange trees in 2003, said: [The microcredit] is very problematic. It is small, less than RMB10,000, and it is short, usually on a one-year maturity basis. However, my family had only just started cultivating orange trees one or two years earlier and we had no income to repay the loan if I borrowed money. Currently, I rely on income for the odd jobs I do in our county to obtain capital to invest in next year’s production. However, despite these concerns, there was still a great demand for microcredit loans from farmers in most cases. In addition, two households indicated other reasons, such as previous bad experience,6 for their non-participation.

Informal credit General status of households’ informal borrowing From 2001 to 2005, a total of 163 informal loans, taken out by 42 households, were issued in Xiaobu. Among those participants, 15 households had also borrowed from the formal credit market during this period and the other 27 households were exclusive participants in the informal sector. Table 6.6 summarizes the main characteristics of the informal loans issued in Xiaobu. As indicated in Table 6.6, the majority of informal loans were for production purposes, of which 3 loans (1.8 per cent of total loans) were used for fixed-production investment; 110 loans, around 67.5 per cent, were used for production inputs; and the other 16 loans, 9.8 per cent, were used for both fixed-production investment and production inputs. On the other hand, farmers also frequently borrowed for personal use, of which the three most important reasons were education, building a home and big family occasions, such as weddings and funerals, which accounted for 10.4 per cent, 4.3 per cent and 3.1 per cent respectively of the total number of loans. Friends and relatives were the most important source of loans for informal borrowing by farmers. A large number of loans were lent as credit for production inputs – for example, fertilizers or pesticides – from suppliers of goods. Accordingly, around two-thirds of loans were based on written records, of which 5.8 per cent were written on notepaper and 58.9 per cent were recorded in loanrecord books. The other one-third of the loans were issued mainly for personal use. It is interesting to point out that the total number of loans recorded on notepaper and in loan-record books totalled 109, which was larger than the number of loans bought on credit (104). This was because a few loans obtained from friends or relatives were also recorded on paper. Moreover, in terms of the loan size, due to the relatively small scale of fruit-tree cultivation at each family farm in Xiaobu (usually less than 1,000 trees), most of the

110

Households’ indebtedness and borrowing behaviour in Xiaobu

Table 6.6 Characteristics of informal loans in Xiaobu, 2001–5 Purpose of borrowing

Total number (163) Percentage (%)

Fixed-production investment Production inputs Fixed-production investment and production inputs Durable consumption goods Daily consumption goods Education Building/buying house Medicines Weddings or funerals Others

3 110 16 0 1 17 7 2 5 2

1.8 67.5 9.8 0 0.6 10.4 4.3 1.2 3.1 1.2 100

Source of borrowing Friends and relatives (specified relatives) (specified only friends) (did not specify) Buying on credit

62 24 7 31 101

38.0 (14.7) (4.3) (19.0) 62.0 100

Method of borrowing Verbal Written on notepaper (da bai tiao) Recorded in loan book (ji zhang)

54 13 96

33.1 8.0 58.9 100

Loan size(annually, RMB) 1–1,000 1,001–5,000 5,001–10,000 10,001–30,000 >30,000

31 79 30 15 8

19.0 48.5 18.4 9.2 4.9 100

Interest rate (% per month) 0 >0–0.3 0.5–1 >1–2

50 97 10 6

30.7 59.5 6.1 10.2 100

114 1 0 48

70.0 0.6 0 29.4 100

95 8 12 16 27 5

58.3 4.9 7.4 9.8 16.6 3.1 100

Maturity of loan (year) 0–1 >1–3 >3–5 No restriction on time Repayment rate On time Delay Have time constraint, but still on-going No time requirement and still on-going No time requirement and repaid No time requirement but cannot repay in a near future

Households’ indebtedness and borrowing behaviour in Xiaobu 111 loans, around 66.9 per cent, typically ranged from RMB1,000 to RMB10,000. Of the remaining loans, 9.2 per cent of the total loans were for between RMB10,000 and 30,000 and the other 4.9 per cent exceeded RMB30,000, which were used for various purposes. Ignoring the loans that were open-ended, a large proportion of households’ informal loans (58.3 per cent) in Xiaobu were repaid on time. According to the local villagers, the credit used for production inputs in Xiaobu was usually set for one year, as the period of fruit production was one year. In order to secure the consistency in the supply of production inputs the following year, repayment was usually on time in Xiaobu.7 In particular, there were even occasions when farmers borrowed from other sources to repay their debts of production inputs that were bought on credit. In short, due to the unique economic background where almost every family farm was participating in the cultivation of orange trees and desperately required production capital, the informal credit found in Xiaobu was mostly dominated by production loans, which was similar to the situation in Yao. However, compared with the complications of informal credit centred on the duck-breeding and eggprocessing businesses in Yao, the process of informal credit in Xiaobu was much simpler. Apart from a small number of transactions that were conducted between friends and relatives, the majority of the informal loans were exclusively for production materials sold on credit by the suppliers of goods to local farmers. More specifically, the following section gives a brief introduction to how this method works in Xiaobu. Key methods of households’ informal loans for the cultivation of orange trees With regard to the production process of the cultivation of orange trees, five types of participants were defined: (P1) the suppliers of fixed-production materials; (P2) the selling agency of short-term production inputs; (P3) the small dealer of shortterm production inputs; (P4) farmers who cultivated orange trees; and (P5) buyers of the final goods. Table 6.7 illustrates the functions and locations of those participants. Since the fieldwork of this research was focused on the households’ borrowing behaviour taking place within the geographic context of the natural village. This section is only subject to analyses of the borrowing methods of two specific types of participants located in Xiaobu, which were: (P3) the small dealer of shortterm production inputs and (P4) farmers who cultivated orange trees (summarized in Table 6.8). Farmers who cultivate orange trees (P4) According to local villagers, during the process of fruit production, most of the capital investment was in the first year. This was for the purchase of saplings and fertilizers, and the cost of digging holes for planting each tree, etc., which totalled around RMB8 per tree in 2005. From the second year onwards until first harvest, which usually took about three to four years, the annual capital investment per orange tree was about RMB20 in 2005. As summarized in Table 6.8, farmers in Xiaobu

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Households’ indebtedness and borrowing behaviour in Xiaobu

Table 6.7 Functions and locations of the participants of the cultivation of orange tree, Xiaobu Participants

Functions

Locations

P1: Suppliers of fixedproduction materials

Providing fixed-production material: saplings

County

P2: Sellers of short-term production inputs

Providing short-term production inputs: selling fertilizer and pesticides to two types of customers: 1 delivery-men, who require large quantities of materials; 2 individual farmers

County

P3: Small dealers of production inputs

Intermediary between big dealers of production materials and farmers in the village: purchasing production materials and then selling to farmers in the natural village

Natural village

P4: Farmers

Planting trees and selling tangerines/oranges

Natural village

Buying tangerines /oranges

County/other provinces

P5: Buyers

Table 6.8 Borrowing methods of small dealers of production inputs and farmers, Xiaobu Participants

Borrowing methods

P4: Farmers

Friends and relatives, without interest Friends and relatives, with interest Buying on credit from the production materials dealer Borrowing from the RCCs Friends and relatives, without interest Friends and relatives, with interest Buying on credit from the production input agency Borrowing from the RCCs

P3: Small dealers of production inputs

characteristically used four types of credit to deal with their financial difficulties: friends and relatives, without interest; friends and relatives, with interest; buying on credit from the dealer of production inputs; and formal loans from the RCCs. Among these four types of borrowings, the former two methods would normally take place in the first year, when capital was needed most, as fixed-production materials were mainly required to be purchased in cash. Moreover, in order to grow orange trees, farmers needed to purchase such items as fertilizers and pesticides. The farmers in Xiaobu usually purchased these materials from the local store, owned by the village head, where the main road joined the natural village of Xiaobu towards the township centre. Here, local residents were allowed to purchase goods on credit. At the time that this fieldwork was conducted, one bag of fertilizer cost RMB100 in Mr Xie’s shop. According to the local villagers, if the fertilizer was bought on

Households’ indebtedness and borrowing behaviour in Xiaobu 113 credit, it would normally cost an extra RMB1–2 per bag, depending on certain factors, such as their personal relationship with the village head, the length of time that the orange trees had been cultivated (typically, the extra charges were higher if the trees had not been growing for long). As in the natural village of Yao, based on the mutual trust between the local residents, this type of borrowing was mostly written down by the village head himself in his notebook (there was no need for farmers’ signatures). Farmers bought on credit when they needed to and typically repaid the debts at the end of year when they sold their oranges. The same method was repeated the following year. However, for farmers who could not repay the full amount of debt on the goods he had bought on credit, a monthly interest rate of 1–2 per cent was charged. For the farmers in Xiaobu, unlike those in Yao, no delivery fee was charged by the seller of production goods. There were four reasons for this: sellers of production goods went to the county centre to purchase materials less often than sellers in Yao (in Xiaobu it was approximately once a week, while in Yao it was approximately every day; sellers in Xiaobu transported their goods by truck, while those in Yao used bicycles; the need for fertilizers for orange trees was not as great as the need for fodder for ducks; additionally, it was also possible that the cost of delivery was included in the price of the fertilizer. Small dealers of production inputs (P3) The farmers in Xiaobu usually purchased production inputs from the local village shop, owned by the village head, Mr Xie WF, the only dealer of production inputs in Xiaobu and the surrounding area. Mr Xie was the head of a four-person family (he had a wife and two children). Apart from his job on the village committee, Mr Xie also cultivated 500 orange trees, as well as running a small retail shop at the front of his house. The shop sold both household goods, such as biscuits, salts, cigarettes, etc., and production materials, such as fertilizers and pesticides, to local farmers. Xie WF, a production inputs dealer, acted as an intermediary between the medium or large production inputs selling agencies and the ordinary fruit producers in Xiaobu, as the fodder delivery-man did in Yao. However, unlike the operation in Yao, while Xie WF sold production inputs to the farmers on credit, he did not provide any service to purchase fixed-production capital for the farmers in Xiaobu. As a rough calculation, Xie WF could earn around RMB200,000–300,000 for his production materials business each year. According to Xie WF, his income was derived mainly from four sources: 1 2 3 4

his own savings; loans from friends and relatives; buying on credit from the medium or large production-input selling agencies located in the Xunwu county; formal loans from the RCCs (RMB50,000) with an interest rate of less than 1 per cent per year.

114

Households’ indebtedness and borrowing behaviour in Xiaobu

More specifically, regarding the second of these borrowing methods, the credit arrangement could either be between him and his close friends or relatives, without any interest rate, or charged with interest, which was normally at a monthly rate of 1 per cent. With regard to the type of credit relationship between the agency of production inputs in Xunwu county and Mr Xie, which normally stood at an outstanding amount of RMB80,000–100,000, it was usually recorded on paper and based on an annual repayment. Similarly, as in Yao, the price of a bag of fertilizer or pesticide bought on credit was no different from the cost of one bought for cash. However, a discount was granted on the cost of the goods purchased with cash. Informal credit in land Apart from monetary debts, informal credit, expressed in terms of land, was also found in Xiaobu. There were two types of leasing: the leasing of land for irrigation and the leasing of mountain land. Leasing of land for irrigation In Xiaobu, 10 households had more contracted land than they were leasing in and 12 households had less contracted land than they were leasing out.8 Unlike the leasing of land in Yao and Wulitang, where most of the leasing was free, the majority of land leasing in Xiaobu was based on rentals, priced at 150, 250, 300 or even 350 jin paddies or an equivalent market price, per mu of land per year. Moreover, due to the fact that the use of land was mostly for the cultivation of orange trees, excluding the cases where leasing was conducted between subhouseholds within a large family, most of this lending was set to mature in 25–30 years. Usually, both a contract and also a signature were required. Leasing mountain land Our research showed that five households had leased out their mountain land in Xiaobu. Official contracts were prepared and signed by the farmers. Among those leases, four were signed for in the early 1990s that still had a period of 14–15 years left to run to the end of their contracts, and the other was signed in 2000. The rentals of those leases were extremely low at the time they were signed for, which was typically around RMB1,000 for 5 mu of mountain land for a period of 30 years. For the only contract that was signed in 2000, the rental was about RMB5,000 for a 25-year period for around 5 mu of mountain land.

Summary Based on a distinctive economic background that the majority of the households living in this village had participated in the cultivation of orange trees for a relatively short period (3–4 years), Xiaobu was a typical village in the early stages of

Households’ indebtedness and borrowing behaviour in Xiaobu 115 developing towards agricultural modernization – a phase when farmers are desperately in need of capital to finance production inputs for both short-term and long-term investments. Formal credit Unlike households’ lack of participation in the formal credit market, their engagement with the RCCs was much more active in Xiaobu. From 2001 to 2005, about one-third of the interviewed households (16 out of 50) had borrowed from the RCCs. In particular, of a total of 28 loans, 24 were categorized as microcredit loans. Microcredit loans, launched in China in 1999, were a unique microfinance product that required no collateral but were offered on the basis of households’ creditworthiness. In recent years, it was specifically promoted by the RCCs of Xunwu to support the development of its fruit industry. Owing to the fact that collateral was not required to obtain a loan, it had quickly become one of the most favourable sources of finance for rural households to obtain credit to solve the shortage of capital for production. Due to the urgency and extent of farmers’ demand for microcredit, the issue of credit rationing was very worrying in Xiaobu. Around 42 per cent of the households interviewed claimed to be credit-constrained. It was argued by the credit supplyside that the procedures of credit-rating were adopted as the main device for RCCs to select potential borrowers. More specifically, an applicant’s credit rating was determined by four factors: their personal qualities, the operation of the production, the viability of the prodution and ability to repay the loan. Of these four aspects, the applicant’s personal qualities were considered the most important in evaluating a household’s credit-rating. In practice, it mainly relied on the knowledge provided by the village committees who obtained accurate information about the local residents. Complementary to the credit supply-side, from the view of credit demandside, it was pointed out by the pre-emptively rationed households in Xiaobu that three further issues – farmers’ close relationship with the village committees, the network with the formal lenders and credit quota constraints – also acted as key issues that significantly affected their access to microcredit. Specifically, farmers’ close relationship with the village committees largely contributed to the poor rate of the repayment of microcredit in Xiaobu. In addition, other factors, including the lack of demand for formal credit, high interest rates and the problem of the loan product’s design, also accounted for the fact that a large number of households were unable to obtain formal credit in Xiaobu. Informal credit Despite borrowing from the formal lenders (RCCs), the households in Xiaobu had also rigorously used informal finance to resolve their financial difficulties, mostly for the same purpose as formal borrowing – production capital. A total of 163 informal loans, taken out by 42 households, were issued in Xiaobu between 2001 and

116

Households’ indebtedness and borrowing behaviour in Xiaobu

2005, of which 79.1 per cent of the total loans were used for the cultivation of orange trees. In particular, it was found that borrowing between friends or relatives and buying production goods on credit were the two most important loan methods adopted by farmers in Xiaobu. By analysing the borrowing behaviour of the two major participants who were involved with the cultivation of orange trees in the natural village of Xiaobu – i.e. the farmers who cultivated the trees and the small dealer of production inputs – the results showed that the method of buying on credit played an important role in the informal credit market in rural areas. However, owing to the fact that the development of its agriculture was in the early stages of modernization, this type of credit and borrowing behaviour was not as complicated as the one that operated in Yao (where interlinked contracts were issued). Instead, in Xiaobu it was exclusively and simply obtaining credit for production purposes. It is important to note that while production loans played a major role in the informal loans sector, there was also a wide range of personal loans in the informal credit market in Xiaobu. Those loans were mainly taken out for three reasons: education, building houses and big family events. In addition, as the research in the other two villages discovered, the informal credit in goods, in particular land, had frequently occurred in Xiaobu. Unlike the leasing that exclusively focused on land for irrigation, the leasing of mountain land also existed in Xiaobu. These leases were mostly conditional on rentals and contracted with a maturity of between 25 and 30 years.

7

Analytical summary of the three villages

Chapters 4, 5, and 6 gave a detailed and vivid description of the status of households’ indebtedness and their borrowing behaviour between 2001 and 2005 in the natural villages of Yao, Wulitang and Xiaobu respectively, based on their unique economic and social backgrounds. Following on from that discussion, this chapter will portray a more comprehensive picture of the pattern of the credit demanded by rural households, the sources of finance they obtained credit from and the degree of their accessibility to the credit market, etc., in the current economic transformation of China. First, there is a summary of the status of households’ indebtedness in the three villages and the characteristics of their borrowing from the formal and informal credit markets respectively. In particular, a comparison of the differences in households’ borrowing behaviour in those villages is given. Second, by explicitly discussing the two specific issues related to households’ borrowing from the formal credit market – households’ access to formal credit and the determinants of credit rationing, and households’ participation in the formal credit market and the determinants of their participation – this chapter delivers a brief evaluation of the performance of the RCCs after the pilot program, as well as the limitations contained in the design of the pilot program. Finally, an analysis of the main findings of the households’ informal borrowing in the three villages and a discussion related to the two key reasons for informal borrowing in rural areas – education and medical care – is given at the end of this chapter.

Status of households’ borrowing in the three villages Overview Drawn from the fieldwork findings in the villages of Yao, Wulitang and Xiaobu, Tables 7.1, 7.2 and 7.3 summarize the major characteristics of households’ borrowing in these three villages, in terms of the purpose of borrowing, the source of borrowing, the method of borrowing and the rates of interest, etc. Table 7.1 gives an overview of the status of households’ indebtedness in those villages between 2001 and 2005. The results show that informal finance played a dominant role in households’ source of finance in rural areas in the period under

118

Analytical summary of the three villages

Table 7.1 Overview of the status of households’ indebtedness in the three examined villages, 2001–5 Village

Yao

Wulitang

Xiaobu

Total

Interviewed households Formal Participants Number of loans Informal Participants Number of loans

52 8 14 35 158

44 3 3 22 59

50 16 28 42 163

146 27 45 99 380

examination. From a total number of 146 households interviewed, 27 (18.5 per cent), with a total number of 27 formal loans, had participated in the formal credit market, and 99 (67.8 per cent), with a total number of 380 informal loans, had participated in the informal credit market. Characteristics of households’ borrowing from formal lenders More specifically, as can be seen from Table 7.2, from a total of 45 formal loans, except for one borrowing, which was a national student loan (NSL) issued from the Industrial and Commerical Bank of China (ICBC) in Nanchang, the remaining 44 loans were exclusively issued by the RCCs. This result was strong evidence that the RCCs was the most essential, and also the only formal financial institution providing credit service to grass-roots residents in rural China. Second, with regard to the purpose of borrowing, the majority of loans were borrowed for production purposes in this sector, of which the fixed-production investment was a very important reason (including 17.8 per cent for pure fixed-production investment and 42.2 per cent for the purpose of both fixed-production investment and production inputs). Third, in terms of the method of borrowing, our research shows that the farmers’ borrowing from formal lenders were typically categorized into two types: a normal household’s loan, which required collateral (6.7 per cent of collateral on a houseownership certificate and 15.6 per cent of collateral on liquidity), or guarantee by a third party (13.3 per cent), and microcredit loans – a specific type of policy loans issued by the RCCs based on farmers’ creditworthiness (accounting for 60 per cent of the total number of formal loans). In addition, most of the formal loans were issued on a short-term basis (80 per cent) or medium-term basis (17.8 per cent), and also had a relatively reliable repayment rate. Characteristics of households’ borrowing from informal lenders Informal credit was widely distributed in Yao, Wulitang and Xiaobu. As with the findings of many studies in other developing countries, friends and relatives (46.6 per cent of the total number of informal loans) were still the most common source of households’ informal credit in these three villages. Most of the borrowing between friends and relatives was by verbal arrangement, without any collateral requirement or constraint on the repayment period. However, with regard to the purpose of the loans, informal credit in rural areas was not simply for personal use.

Analytical summary of the three villages 119 While a large number of loans found in the three villages were still used for personal purposes, especially for children’s education (9.7 per cent), building or buying a house (7.9 per cent) and medical care (3.9 per cent), the majority of the loans were used for production purposes (6.8 per cent for fixed-production investment, 48.4 per cent for production inputs and 16.6 per cent for both fixed-production investment and production inputs). In particular, a relatively large number of loans were diverted from merchant lenders (42.4 per cent), and these loans were issued on the basis of being recorded on a single sheet of notepaper (25.8 per cent) or in the lender’s own loan-record book (32.6 per cent) (see Table 7.3). Table 7.2 Summary of the characteristics of households’ formal borrowing, three villages, 2001–5 Purpose of borrowing

Yao

Xiaobu

Total number

Shares (%)

1

2 8 17

8 11 19

17.8 24.4 42.2

2

1

1 6

2.2 13.3 100

1

24 3

2

1

27 6 3 7 2

60 13.3 6.7 15.6 4.4 100

Fixed-production investment Production inputs Fixed-production investment and production inputs Schooling Others, specified

1 3

Method of borrowing Credit Others guarantee Collateral on house-certificate Collateral on liquidity Others

3 2 3 4 2

Loan size annually (CYN) 1–5,000 5,001–10,000 >10,000

1 5 8

2 1 0

23 3 2

26 9 10

57.8 20.0 22.2 100

1 0 13

0 0 3

0 24 4

1 24 20

13 1

3

28 1

44 2.2

2.2 53.3 44.4 100 97.8

Interest rate (%/month) 0–0.5 >0.5–0.8 >0.8–1 Source of borrowing RCC ICBC

5 3 2

Wulitang

100 Maturity of loan (year) ⱕ1 >1–3 >3 Repayment rate On time Delay On-going, will repay on time On-going but likely to default

10 3 1 9 1 2 1

1 2

25 3

36 8 1

80.0 17.8 2.2 100

2 1

17 2 4 5

26 3 8 7

57.8 6.7 17.8 15.6

120

Analytical summary of the three villages

Table 7.3 Summary of the characteristic of the famers’ informal credit, three villages, 2001 Purpose of borrowing Fixed-production investment Production inputs Fixed-production investment and production inputs Durable consumption goods Daily consumption goods Education Building/buying houses Medical cares Marriage or funerals Others, please specified Method of borrowing Orally Written on papers Written on book-leafs Others Loan size (annually, CNY) ⱕ1,000 1,001–5,000 5,001–10,000 10,000–30,000 >30,000 Source of borrowing Friends and relatives (specified only relatives) (specified only friends) Production merchants (small) Large production merchants Others Maturity of loan (year) 0–1 >1–3 >3–5 >5 No duration restraints Interest rate (% / month) 0 >0–0.5 >0.5–1 >1 Repayment rate On time Delay Have time request, but on-going No time request, and still on-going No time request, but repaid No time request, but obviously cannot repay in a near future

Yao

Xiaobu

Total number

21 74

2 0

3 110

26 184

6.8 48.4

38 0 1 2 14 5 3 0

5 2 5 22 9 8 2 4

20 0 1 13 7 2 5 2

63 2 7 37 30 15 10 6

16.6 0.5 1.8 9.7 7.9 3.9 2.6 1.6 100

53 78 27

50 7 1 1

54 13 96

157 98 124 1

41.3 25.8 32.6 0.3 100

0 38 42 31 47

29 15 2 5 8

31 79 30 15 8

60 132 74 51 63

15.8 34.7 19.5 13.4 16.6 100

70 43 1 52 36

45 25 11 8 0 6

62 24 7 101

177 92 19 161 36 6

46.6 24.2 5.0 42.4 9.5 1.6 100

31 3

13 1 45

158 5 0 0 217

41.6 1.3

124

114 1 0 0 48

50

48 7 3 1

50 97 10 6

148 104 121 7

38.9 27.4 31.8 1.8 100

26 4

95 8

154 13

40.5 3.4

6

12

18

4.7

13 10

16 27

75 111

19.7 29.2

5

9

2.4 100

108

33 1

46 74 4

Wulitang

Shares, (%)

57.1

Collateral

Method of borrowing

RCC

1 year

64%

Loan issue institutions

Maturity of loans

Repayment rates, on time

Loan sizes (CNY) Large amount, >10,000

Production purposes, especially industrial investments

No constraints

less than 5,000 Friends and relatives; merchants (interlinked contracts) No constraints More than 1 year Mostly still on-going

RCC

Written on notepaper Collateral or in loan books (interlinked contracts) Large amount, >10,000 Medium

Production purposes

Other purposes

Formal

Formal

Generally good (time-limited loans) No constraints

No constraints

Friends and relatives

Varied (less than 5,000)

Personal loans. in particular for medical care and children’s education Verbal

Informal village characteristics

Agriculture, traditional methods Migrants in other big cities

Scaled husbandry industry (duck-breeding) Towards modern agriculture/industrial economy Informal

Wulitang

Yao

Purpose of loans

Village

Table 7.4 Comparison of the characteristics of households’ borrowing in the three villages, 2001–5

Less than 1 year 60.7%

RCC

Relatively small, mostly

Credit

Production

58.3%

Less than 1 year

Friends and relatives; merchants

Less than 5,000

Recorded in loan books

Production, mainly short-term

Beginning period of agrarian transformation and industrialization (cultivation of fruit trees) Formal Informal

Xiaobu

122

Analytical summary of the three villages

Informal credit occurred in various ways. Despite the borrowing of loans in monetary terms, this research also revealed that the method of leasing land as another form of households’ informal credit frequently took place in rural areas.1 Comparison of the characteristics of households’ borrowing behaviour, three villages As illustrated in the previous chapters, the natural villages of Yao, Wulitang and Xiaobu represented three distinct typologies of rural communities along the dynamics of agrarian transformation in rural China. According to Mellor (1967), based on the differences in distinct stages in the process of agricultural development, patterns of credit are varied (he defined credit as ‘a device for facilitating the temporary transfer of purchasing power from one individual or organization to another’ (Mellor, 1967: 314). Table 7.4 shows that, based on the variability of agriculture and the economic background of the villages, the pattern of credit demanded by farmers in these regions was varied and characterized by their own preferential emphasis, as well as the source of finance. Yao Yao was mainly characterized by large-scale aquaculture, mostly duck-breeding, and was experiencing fast transformation towards a modern agriculture or industrial economy. The farmers’ demand for credit in Yao largely focused on production purposes, from both formal and informal resources. In the formal credit market, the majority of loans were borrowed for fixed-production investment, in particular, industrial investments. Although a few microcredit loans were taken out by farmers between 2001 and 2002, the majority of loans between 2001 and 2005 were categorized as normal households’ loans. These loans were typically for a large amount (more than RMB10,000) and issued on condition of collateral or guarantee by others. In addition, most of these loans were short-term. By the time the village was visited, 64 per cent of the total loans had been repaid on time. In the informal credit market, based on farmers’ sound standard of living in Yao, personal loans did not play a dominant role. Instead, informal borrowing in Yao was characterized by loans for production. Most significantly, local farmers had created a unique credit chain to solve their financial problems relating to their duckbreeding and egg-processing businesses. In particular, two key methods – interlinked contracts and buying (production materials) on credit – played a vital role in the various types of informal loans in this village. Wulitang Agriculture in the natural village of Wulitang was still based on traditional methods, especially crop-farming. However, it enjoyed a unique characteristic for an inland provincial village in contemporary rural China in that most labourers were migrants to the eastern or southern regions. In Wulitang, farmers rarely participated in the formal credit market. Only three loans, taken out by three farmers, were issued between 2001 and 2005. They were all

Analytical summary of the three villages 123 issued by the RCCs as normal households’ loans and two were borrowed for non-production purposes. Furthermore, these three loans were moderately large and two of them were issued on a medium-term basis. As most of the loans were still outstanding, the repayment situation was uncertain when the research was being conducted. Owing to the fact that many farmers in Wulitang were outflow migrant workers, households had little demand for production investments in their home village. On the other hand, research into the reasons for informal credit in Wulitang gave a consistent result, with many other studies in other developing areas of the country. The informal credit market was exemplified by a diverse range of personal loans, without the requirement of collateral, and friends and relatives were the main sources. Apart from building houses, the two most important reasons for farmers’ loans were to pay for medical care and their children’s education. Xiaobu Xiaobu was at the start of its development into a modern agricultural economy, specializing in the cultivation of orange trees. Villagers desperately needed capital for both fixed-production investment and production inputs. Based on the availability and promotion of microcredit loans from the RCCs in Xunwu county, microcredit loans, which were categorized as small (less than RMB5,000), short-term (less than one year), without collateral and based on the credit-rating of farmers, acted as the most significant formal source from which households received credit. As well as obtaining credit from the formal lender, households in Xiaobu also widely used informal finance for solving their financial difficulties in production. Thus, production loans played a significant role in farmers’ total informal borrowing between 2001 and 2005. However, due to the fact that Xiaobu was still in the early stages of its agricultural development, the village had not established a credit chain for the production of oranges similar to the one relating to duck-breeding in Yao. By the time this fieldwork was conducted, friends and relatives, and buying production materials on credit, were the two most important sources of informal finance from which households obtained credit.

Households’ access to formal credit and participation in the formal credit market Since Jiangxi province belonged to the first group of the eight experimental regions of the pilot program of the RCCs, following the aim of evaluating the performance of the RCCs after reform, two specific issues in relation to households’ formal borrowing – households’ access to formal credit and the determinants of households’ credit rationing by formal lenders, and households’ participation in the formal credit market, as well as the determinants of households’ participation – have been specifically investigated in each village. This section gives an analytical summary of households’ engagement with the formal financial institutions, mainly the RCCs, in the three villages. Later, there will be a brief assessment of the RCCs’ performance in Jiangxi after the pilot program.

124

Analytical summary of the three villages

It is worth noting that, based on the different types of loan in different villages, the discussion of these two specific issues previously concentrated on the different types of credit product in each village. Specifically, the formal loans borrowed by households in Yao and Wulitang were mainly for normal households’ loans, whereas the ones in Xiaobu were mostly microcredit loans. The analytical summary in this section is therefore divided into two subsections: Yao and Wulitang (normal households’ loans) and Xiaobu (microcredit loans). Yao and Wulitang By combining the analytical results of the credit supply-side problem – households’ access to formal credit – and the credit demand-side problem – households’ participation – in the villages of Yao and Wulitang together, Table 7.5 presents a collective picture of households’ engagement with the RCCs, centred on normal households’ loans. Households’ access to formal credit The empirical results in Yao and Wulitang show that, by the end of 2005, farmers’ difficulties in gaining access to formal credit were still critical, but not as impossible, as was expected. According to households’ self-assessments, the share of households who were credit-constrained accounted for 32.7 per cent and 27.3 per cent of the interviewed households in Yao and Wulitang respectively. In an attempt to understand the determinants of credit rationing by formal lenders, the RCCs revealed that four major factors were involved when they were selecting potential borrowers: 1 2 3 4

the household’s individual characteristics; the household’s production skills; the household’s previous credit histories; the household’s ability to provide collateral.

Of those four factors, both credit officers of the township RCCs in Yao and Wulitang highlighted the importance of the first and second factors – two issues that largely contributed to households’ repayment abilities – in their decision to issue a loan or not. They argued that the quality of loans nowadays had a direct connection with the salary they obtained after the launch of the pilot program. In addition, the credit officer in Wulitang specifically emphasized the issue of farmers’ negative repayment histories – a point that, to a certain extent, largely relates to the bad credit record of farmers in rural areas. In addition to the findings of the credit officer (the credit supply-side), the preemptively rationed households (the credit demand-side) believed that three issues were the most important determinants for credit rationing: 1 2 3

inability to provide collateral; lack of network with the formal financial institutions; transaction costs.

17 32.7

Yao

RCC

a) Characteristics of the household, especially the major economic activities participated b) Production skills of the household, i.e. whether the household is capable enough to generate the expected income/profit c) Household’s previous credit history d) Whether the household can provide collateral or not

12 27.3

Wulitang

a) Unavailability of collateral (insufficient collateral) Guaranteed by a third person 1) Farmers’ view: Chinese moral value of ‘debt of favour’ 2) Third-party’s view: legal responsibilities emotional willingness of helping, determined by factors, such as ‘personal closeness’ or ‘future returns of favour’ Collateral on physical goods 1) Unwilling to use house as collateral (traditional Chinese culture) 2) Farmers who would like to use their house certificate as collateral, a) Estimated value usually low b) Problems of obtaining a house-certificate: were not issued in the 1970s, 1980s large transaction costs involved in new issuing Collateral on liquidities Not well designed b) No close contact with formal institutions c) High transaction costs in application process d) No reason

Analysis of determinants of credit rationing Supply-side Demand-side

Number of households (credit constained) Percentage

Access (supply-side)

Table 7.5 Farmers’ engagement with the RCCs, Yao and Wulitang

8 44

3 41

Wulitang

Other reasons (previous bad experience)

Afraid of being taken to court or being punished for late repayments

No knowledge of formal financial institutions

Product design

Interest rates (too high or with interest)

1) Rich: for business, having network (cadre) 2) Last resort

No need for formal credit

Two particular groups

Determinants of participation Participants Non-participants

Participants Non-participants

Participation (demand-side) Yao

126

Analytical summary of the three villages

INABILITY TO PROVIDE COLLATERAL

Consistent with the argument made by many scholars (Bingswanger and Rosenzweg, 1986; Braveman and Guasch, 1986), this research shows that a large number of farmers, in particular small or less wealthy farmers, experienced great difficulty in providing standardized or efficient collateral to formal lenders. As many studies have pointed out, this outcome was largely based on the fact that those farmers had limited collateral or even no collateral to give to formal lenders. However, this research revealed that the unavailability of collateral was actually caused by a complexity of reasons (summarized in Table 7.5). Apart from the reasons of limited collateral or no collateral, other issues also largely affected farmers’ inability to provide suitable collateral to formal financial institutions. In particular, the issue of the unreasonable design of the collateral requirement was regarded as the most critical problem faced by both lenders and potential borrowers in rural areas of China. Based on the traditional Chinese view that a house is the key to successful living, the majority of farmers refused to use their home as collateral for formal credit. Many Chinese scholars have argued that one of the key reasons for the difficulties described above is the problem of property rights in China, especially the ownership of land in rural areas. Based on China’s unique political and economic background, unlike in many other developing countries, farmland cannot be used as collateral for loans issued from formal financial institutions. This problem causes great difficulty for rural financial institutions to practise the use of collateral to select potential borrowers in rural areas. Nowadays, a popular view among Chinese scholars is that the system of land ownership in China should be reformed towards privatization. However, this view poses a dilemma. Such a system would make ordinary farmers lose their life insurance, as the system of ‘distributing land to a family unit’ was created with the intention of giving farmers security for their entire lives. LACK OF NETWORK WITH THE FORMAL FINANCIAL INSTITUTIONS

It was the shared view of farmers in rural areas that ‘without having a network in the financial institutions, it was almost impossible to be granted formal credit’. Strongly criticized by the pre-emptively rationed households, the farmers who enjoyed the network with the formal financial institutions were either rich or cadres (from a good social background), or they knew somebody working inside the formal financial institutions. Moreover, some farmers also regarded this issue as evidence that the RCCs staff were corrupt. Indeed, it is an undeniable fact that the undisciplined behaviour of the RCCs staff largely contributed to the popularity of the phenomenon of networking in rural areas. However, Barham et al. (1996) point out that the practice of networking was also partially caused by the nature of the rural credit market – i.e. disparities in information between formal lenders and borrowers. In highly inegalitarian societies, wealthier borrowers may be more visible and known to the owners and managers of lending institutions, based on

Analytical summary of the three villages 127 experiences with one another in schools, clubs, neighbourhoods, and social events. The relative anonymity of poorer borrowers means, in effect, that the cost of acquiring information on riskiness is negatively correlated with wealth, leading to a higher degree of rationing among the poor because of adverse selection. (Barham et al., 1996: 797) Households’ participation in the formal credit market As well as households’ access to formal credit, our research also examined households’ participation in the formal credit market – a demand-side problem. In Yao and Wulitang, it was discovered that a number of underlying problems critically affected the decision of farmers to enter the formal credit market. These were: there was no need for formal credit; interest rates; difficulties with the design of the loan products; limited or no knowledge of the formal financial institutions; fear of being taken to court or being punished for late repayment; other reasons.2 With regard to interest rates, our findings showed that farmers’ concerns for this issue typically resulted from three factors. First, some farmers pointed out that they were not willing to enter into the formal credit market because the lenders actually charged interest on top of the credit. They argued that they could receive the same amount of credit, especially for personal use, usually from their friends and relatives who would not charge them any interest. Second, a number of households claimed that they would be prepared to borrow from the formal financial institutions and pay interest if the rate could be reduced so that it was only slightly higher than the savings rate. Third, the findings in Wulitang indicated that the farmers’ opinion that they would be charged high interest rates by the formal lenders was a result of their previous experience of being overcharged interest by local credit officers. To some extent, this finding is strong evidence of the misconduct of credit management at the lower levels of rural financial institutions in the past. In addition to the problem of interest rates, the issue of the loan products design was also given as a main reason by farmers why they would prefer not to participate in the formal credit market. Specifically, three problems were contained in the current design of a normal household’s loans: inappropriate maturity of a loan; complicated, time-consuming process in the loan application; no reward for prompt repayment or penalty for late repayment. Taking into account all the problems relating to credit rationing by the RCCs, as well as the reasons given by households who preferred not to participate in the formal credit market, farmers’ participation in the formal credit market for normal households’ loans was very limited during the period of research. By contrast, people who borrowed normal households’ loans from the RCCs did so mainly for two specific reasons: either as a business investment, in particular industrial investment (for large amounts of money); or as a last resort, as there were no other alternatives for obtaining credit. One old farmer expressed the following view: ‘Nowadays, in

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rural areas, apart from those who need credit for big business, the ordinary farmers seldom participate in the formal credit market except when they have no other alternative.’ Another farmer said: ‘Rural Credit Cooperatives are not “credit” anymore.3 It is a bank for the rich, for cadres.’ Xiaobu (microcredit loans) In Xiaobu, unlike the situation in Yao and Wulitang, households mainly borrowed microcredit loans from the RCCs. In considering the importance of micro-lending as part of the RCCs’ reforms in recent years, based on households’ access to and participation in microcredit loans (Table 7.6), the following section will give a specific analysis of the performance of microcredit loans in China since their implementation in 1999.

Evaluation of the RCCs’ performance in Jiangxi after the pilot program As can be seen from our research on the credit supply-side since the launch of the pilot program, following the three strategic goals that the provincial RCCU set up for the reform and development of the RCCs in Jiangxi (including developing business, improving effectiveness and preventing risks), and also the creation of the new operations and management mechanism in the RCCs system, the RCCs staff at the lowest level paid enormous attention to the improvement of the quality of loans, in terms of repayment facilities and collateral control.

Table 7.6 Farmers’ engagement with the RCCs, Xiaobu Access (supply-side)

Participation (demand-side) Xiaobu

Number of creditconstrained households Share, %

Xiaobu

21

Participants

16

42

Non-participants

34

Determinants of credit rationing

Determinants of participation

Supply-side

Demand-side analysis

Participants

Non-participants

Credit rationing: a) personal qualities b) production conditions c) production abilities d) repayment abilities

No reasons Personal financial difficulties/cannot satisfy the standards of loans No quota left No close contact with formal lenders No close contract with village head

15 households borrowed for productions

No need

1 household borrowed for other reason

Product design

Interest rate

Other reasons

Analytical summary of the three villages 129 Moreover, from a broad perspective of the overall RCCs system in Jiangxi, it was evident from the fact that some progress, in terms of the financial performance of the RCCs, had been achieved so far after a short period of reform. According to the Jiangxi Provincial RCCU annual report, by the end of 2005, compared with the figures before the reform, the ratio of NPLs dropped by 32 per cent, and the accumulated financial losses were RMB1.9 billion between 2004 and 2005, accounting for 76.8 per cent of its original value. Furthermore, the capital adequacy ratio increased from –2.42 per cent at the end of 2003 to 12.04 per cent by the end of 2005. It is important to note that nowadays the performance of the RCCs is still facing a number of problems. In particular, our research found two significant problems at the households’ level: undiversified ranges of products, and the problem of implementing rules, regulations and operation routines in grass-roots institutions and in standardization management. With regard to the first of these problems – undiversified ranges of products – based on the difference in the type of credit needed by customers, the products provided by financial institutions should be flexible or adequate enough to satisfy the needs of its customers. However, as can be seen from the discussion relating to the problem of loan product design, the RCCs’ credit products were not broadly diversified. Also, regarding the credit products of the RCCs, they were not efficient enough to match the complexity of farmers’ demands for credit in rural areas. With regard to the second of these problems – the problematic implementation of rules, regulations and operation routines in grass-roots institutions and in standardization management – since the establishment of the provincial RCCU, an innovative mechanism in management and operations had been set up in the RCCs in Jiangxi. A series of rules, regulations and standardized routines were formulated and distributed from the top provincial RCCU to the grass-roots RCCs in the system. However, as our fieldwork discovered, many farmers argued that without a ‘close contact with a formal lender’, it was very difficult to obtain credit. This illustrates that a considerable number of staff in the RCCs had not fully learned and practised those innovative mechanisms. Irregularities were still common, especially in the lowest grass-root units. The issue of implementing the new mechanism became the key. It was also pointed out by officials at the provincial RCCU level that the RCCs were facing other serious problems in Jiangxi by the time this research was carried out, including: disparity in financial performance among individual RCCUs; hidden risk profile; heavy pre-existing financial burden; poor quality staff; impractical location of some networks; difficult macro-environment for creditworthiness. As a whole, it appeared that since the launch of the pilot program, while some financial achievements had been made by the RCCs, it was evident that many problems

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that were part of the RCCs system before the reforms still existed. Furthermore, the design and progress of the most recent RCCs reform did not address some core fundamental issues in the RCCs and the reform itself had many limitations. In particular, this research will address two specific issues, as follows. First, the ownership structure of the RCCs was still problematic. As described in the Introduction, for many years the RCCs in China had lost the tradition of working as cooperatives and acted as ‘small scale and locally based quasi state banks in rural China’ (Xie, 2003). In the 2003 reforms, one of the most important objectives was to clarify the ownership structures of the RCCs, which ‘open up to a variety of forms based on different regions’ local circumstances’ (Document 15). Ignoring the forms of commercial and cooperative banks4 and purely considering the form of the consolidated county RCCU, our findings showed that by the time this research was completed, the RCCs had not been subjected to control by their members. Many scholars asserted that this round of RCCs’ reforms merely emphasized the ‘merging and changing titles of institutions’ (Agricultural Development Bank of China , 2005: 33). This point is also related to problems, such as corruption, that still existed in the system and the question of inside control remained unchanged. Second, the policy objective of the reforms undermined the RCCs’ sustainability. In this round of the reforms, the central government and regulation authority continued to emphasize the role of the RCCs in serving agriculture and farmers. In other words, the policy objective of the RCCs remained unchanged. The RCCs still carried on issuing loans, in particular microfinance loans, at low interest rates to rural households. In some areas, the distribution quota was even set up with the aim of supporting san nong. However, due to disparities of information, the scattered location of rural customers and the weak corporate governance of the RCCs themselves, the cost of agricultural loans was high. This created great difficulty for the RCCs to obtain long-term sustainability. Moreover, by taking into consideration agricultural risks – for example, natural calamities and the problem of the lack of an agricultural insurance system in rural areas – a serious question faced by the RCCs was who was responsible for non-performing agricultural loans under the current operational principle of being autonomous and responsible for their own losses and developments. Scholars point out other problems, such as concern about the RCCs independent operation and governance in relation to provincial RCCUs and the fact that little progress was made regarding competition in this round of reforms (Agricultural Development Bank of China, 2005; Cheng, 2006). In addition, some studies argue that the pilot program overlooked some aspects of reform. These included, for example, interest rate liberalization and improvement in market conditions for rural credit and finance, such as the credit bureau system, collateral, rural insurance, training and TA support (Xie et al., 2005). However, these issues will not be discussed here.

Informal credit Unlike the gloomy picture of households’ borrowing in the formal credit market during our period of research, households’ informal borrowing was widely

Analytical summary of the three villages 131 distributed and occurred in all kinds of ways in Yao, Wulitang and Xiaobu. Compared to other types of finance, informal finance was the dominant source of credit available to rural households (see Table 7.7). For decades, informal finance in rural finance areas was not favoured, as it was considered a barrier to fair and sustainable development (Zoetelief, 1999). In particular, usurious finance, in which moneylenders, perceived as ‘monopolists’, ‘usurers’ or ‘exploiters’ (Scott, 1976), charging exorbitant interest rates to the poor, was regarded as one of the most ancient and ubiquitous forms of agrarian oppression (Institute of Pacific Relations,1939). Many studies, written either about Europe – for example, Dobb (1954); Postan (1967, 1973); Duby (1969); Scott (1976); Holton (1985); or about Asia, such as Darling (1924); Mao (1933); Tawney (1932); Buck (1937); Fei (1939); Institute of Pacific Relations (1939), have vividly described how this type of finance acted as a curse on the rural poor in the old days. However, in the late 1970s, due to the failures in the performance of most formal financial institutions and the fact that informal finance had flourished in rural areas for an incredibly long time – although without absolute disappearance – researchers started to identify the role of informal finance from another perspective. It was found that the scope of informal finance was not just constrained within the traditional context of usurious finance, but also included other types – for example, merchants, pawnbrokers, loan brokers, friends and relatives, rotating savings and credit associations (ROSCAs), etc.5 Moreover, through detailed studies of informal finance – for example, Bouman and Houtman (1988); Bouman (1990, 1994); Adams (1992); Adams and Ghate (1992) – many scholars pointed out that it was necessary to ‘take a fresh look at informal finance’ (Adams, 1992). It was argued that, in many ways, informal finance had made a ‘positive contribution to both production and consumption activities to rural people’ (Kashuliza, 1993). The idea of eliminating informal finance and replacing it with formal financial institutions was criticized by many researchers. Also, it was suggested that the policy direction should be on the basis of learning from informal finance and to create a combination of formal and informal financial institutions in rural financial markets (Bouman, 1990; Adams, 1992; Adams and Ghate, 1992). Overview of the status of households’ borrowing from informal lenders In general, the rural households interviewed in the fieldwork villages had adopted three significant sources of informal finance:

Table 7.7 Share of households’ informal borrowing, three villages Village

Yao

Wulitang

Xiaobu

Total

Informal loans Total number of loans Share

158 172 91.8

59 62 95.2

163 191 85.3

380 425 89.4

132 1 2 3

Analytical summary of the three villages friends and relatives; merchants/traders (linked credit arrangements or buying on credit); private money lenders (very rarely).6

First, Chapter 5 gave an in-depth qualitative analysis of how informal borrowing between friends and relatives in Wulitang, especially borrowing for personal purposes, worked in rural areas of China. Our findings showed that the majority of these loans were issued by verbal agreement, without the requirement of collateral, at very low interest rates, or interestfree, and involved reciprocal obligations. Moreover, in rural areas the lenders had a feeling of giving mutual help and there was evidence of three distinctive features of loans in the informal credit market in developing countries: they were highly personalized, information was freely available and interest rates were variable. In particular, it was revealed that, although much of the lending between friends and relatives was interest-free, the traditional Chinese custom of gifting in appreciation of the help given, was still involved. Listed in the order of the simplest to the most generous gift, the method of gifting can be summarized as follows: • • • • • •

verbal thanks; crop-farming products – for example, vegetables, fruits; agricultural products – for example, eggs, pork, chicken; processed products – for example, home-made rice, wine, processed eggs); other goods – for example, tobacco, alcohol; currency (interest).

The gift of currency was similar to the interest rates charged in the commercial world. Second, excluding borrowing from friends and relatives, the method of borrowing from merchants/traders, which included buying on credit and interlinked contracts, accounted for a significant share of rural households’ informal borrowing, especially for production purposes. Chapters 4 and 6 illustrate how these two types of loans worked in Yao and Xiaobu respectively. With regard to buying on credit, Adams (1992) points out that the economics of scope is the main motivation for merchants to provide purchase on credit. Alternatively, with regard to interlinked contracts, the research showed that, compared with formal lenders, the credit supplier of interlinked contracts enjoyed comparable advantages of managing two specific problems in the informal credit market – the problems caused by the disparities of information and high operating costs (Nagarajan and Meyer, 2005: 23; Pearce, 2003). This type of credit transaction increased with growing commercialization in the different regions (Coetzee, 2002: 29). In addition, apart from the monetary form of borrowing, other types of informal credit, in particular the leasing of land, including irrigation land and mountain land, was also prevalent in the villages researched. Depending on the differences in the quality of the land, as well as the personal relationship between lenders and borrowers, the terms of the leases varied – for example, some leases involved rental charges, while others were absolutely free.

Analytical summary of the three villages 133 Comparison of the characteristics of households’ informal borrowing behaviour in three villages Based on a summary of the differences in the characteristics of farmers’ borrowing in the villages of Yao, Wulitang and Xiaobu (Table 7.3), according to the differences in their development towards agricultural modernization, the source of informal credit adopted by rural households was similar in each village. More specifically, both Yao and Xiaobu were moving towards agricultural modernization – the stage when farmers are desperately in need of capital for production investment. As can be seen from our findings, production loans played a dominant role in farmers’ informal borrowing in these two villages. Moreover, the pace of change was different in Yao and Xiaobu – i.e. Yao was approaching agricultural industrialization, while Xiaobu was only at the first stage of agricultural modernization. Therefore, the characteristics of the informal borrowing of the two villages varied considerably. In Yao, the farmers had established a credit chain centred around the production process of its major income-generating activities, with an emphasis on the method of interlinked contracts, and buying production materials on credit. However, the pattern of households’ informal borrowing in Xiaobu was not the same as in Yao. The former mainly focused on the method of buying production inputs on credit; the interlinked contract had not yet become a popular borrowing method in Xiaobu as it was in Yao. Nevertheless, unlike the villages of Yao and Xiaobu, informal borrowing in Wulitang focused more on personal loans – the most basic needs of rural farmers. These loans were mostly supplied by friends and relatives. Informal borrowing for education and medical care Among the copious literature related to informal credit, borrowing for personal reasons has always been an area of active research. This study reveals that beyond the scope of traditional borrowing purposes for informal credit – for example, building or buying houses and special occasions, such as weddings and funerals, two particular issues– children’s education and medical care – were the most significant causes for farmers’ indebtedness in the informal credit market in contemporary rural China. Using Wulitang as an example, Chapter 5 gave an explicit discussion about the characteristics of these two issues and how the borrowing methods operated to pay for them. By considering the importance of these two issues in relation to rural households’ lives and, more broadly, san nong problems on the basis of our previous discussion in Chapter 5, the remainder of this chapter will give a further analysis of these two themes from a policy-evaluation point of view. Education As the research in Wulitang indicated, owing to the high cost of children’s education, some farmers constantly borrowed from friends and relatives. Relentlessly criticized by the interviewed households, the cost of children’s education had become one of the most burning issues in their family’s finances. As shown in

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Wulitang, farmers’ concern about the the burden of their children’s educational expenses was for two main reasons: 1 2

unregulated fees charged for compulsory education studies; high financial expenses for non-compulsory education studies.

Specifically, it was illustrated by local villagers that, first, the unregulated fees for compulsory education were being charged to students beyond the scope of standard miscellaneous items in schools. Second, the high costs charged in non-compulsory education were essentially for tuition fees, living costs and various additional charges such as the extra fees to selected students in senior high schools or fees for the two-track system in higher education institutions. In recent years, the central government of China has been aware of the severity and urgency of the high costs of education. In order to lighten the burden on farmers to pay for their children’s education, and more importantly to create a healthy system of fees for education in China, the government has paid particular attention to regulating education fees in various types of educational institutions. First, regarding compulsory education, the ‘one fee’ pricing policy and also the new policy of exemption from tuition and miscellaneous school fees for compulsory education schools were implemented. In 2004, in order to regulate school fees and to lighten the financial burden on rural parents, the Ministry of Education, the National Development and Reform Commission and the Ministry of Finance issued a joint document entitled ‘A Few Comments on the “One Fee System” in Compulsory Education Schools’. The ‘one fee’ system refers to strictly approved standard once-only fee charges to students for compulsory education. The standard charges in this system include miscellaneous fees, book (materials) costs and administrative costs. It was stipulated that those fees must be charged each semester, not each academic year or in crosssemesters. Furthermore, on 23 December 2005, the State Council issued a ‘Circular on Deepening Reform of the Framework for Guaranteeing Rural Compulsory Education Funding’. It stipulated that, first, from 2006 all students receiving compulsory education in rural areas would be completely exempt from tuition and miscellaneous school fees; students from underprivileged families would be provided with free textbooks and a certain proportion of boarding students would be provided with subsidies for boarding expenses. This implied that China had entered a new era of educational development where the rural compulsory education system had finally become ‘free for all’. From autumn 2005, Jiangxi began to fully implement a ‘one fee’ pricing policy for compulsory education schools in the entire province, and the exemption of both tuition and miscellaneous school fees was completed across the entire province at the beginning of 2007. By the time this research was conducted in Wulitang, the policy of a one fee system had already been launched for a short period of time.7 According to local farmers, this policy did help to lighten the burden of their

Analytical summary of the three villages 135 children’s education expenses, although it did not account for a significant share of the total amount they spent. From the perspective of non-compulsory studies, first, regarding the issue of ‘selecting students’ in public senior high schools, the Ministry of Education issued in July 2003 a policy of the ‘three limits’ which stated that high schools must strictly limit the number of students, limit the grades of students and limit the money charged to them. Second, for higher education, the government also banned the ‘two-track fees’ system and the creation of different names for unregulated charges. In order to solve the problem of the financial difficulties of students from poor families who attend higher education, the PBOC has studied and designed a National Student Loans (NSLs) policy with relevant agencies and begun to distribute NSLs nationally. In this fieldwork, one transaction of NSL was found in the village of Yao. National Student Loans are specialized bank loans to students who come from poor families. Led by the government and subsidized from the fiscal finance, the NSL is jointly operated by banks, educational and administrative departments and higher education institutions. In addition, the fiscal finance and higher education institutions will grant certain risk compensation to banks each year. Compared with other types of loans, the most distinguishing feature of the NSL is that students are not required to provide any collateral or guarantee for the loan applications. However, it still requests a repayment schedule and also assumes related liabilities from students. In principle, there are three parts to the NSL: school tuition fees, accommodation costs and general living expenses; the maximum amount of each loan is RMB6,000. Students apply for the loans (to the banks) through the institutions where they are studying, and repay the debts, with interest, within six years after graduation (of course, they can repay the loan before that). The total national student loan cannot exceed 20 per cent of the total number of full-time students enrolled in higher education (Xiang, 2007). In Jiangxi province, depending on where students come from, NSL applications are divided into two types: 1 2

Standard national students’ loans for students who are originally from other provinces. Following the standard application procedure, students apply for an NSL through the institutions where they are currently studying. Local students loans for those who are originally from Jiangxi province – an innovative education loans product that replicates the one used nationally from August 2006. This group of students apply for loans from the financial institutions where their parents are kukou (registered as permanent residents).8

In general, student loans are issued from the ICBC in Jiangxi. For a student whose kukou is retained at a lower level than a county, the ICBC would commission the local RCCs to investigate the student’s family status and the loan would be granted through the county branch of the ICBC. However, at three places – Jiujiang, Jingdezheng and Shangrao – local students’ loans are directly issued by the Rural

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Credit Cooperative Union (RCCU). In other places, student loans are issued by the ICBC. Until September 2006, the actual amount of student loans reached RMB69.998 million in Jiangxi, supporting 12,869 students in this province (Xinhuanet, 2006). Medical care Medical care was ranked as another important reason for farmers’ informal borrowing. As discussed in Chapter 5, farmers’ experience of medical care in Wulitang was classified into four categories: 1 2 3 4

elders who were ill; family members who were ill and stayed in hospital; family members who were ill and received outpatient treatment; others whose care was deferred or illness left untreated.

Among these four categories, the farmers’ borrowing mainly focused on the cost of hospitalization. It was also revealed that in Wulitang, three families were in financial difficulty or poverty as a direct result of family members’ serious illnesses and related large amounts of debt already incurred. In recent years, the issue of medical care, in particular the problem of unaffordable medical expenses, has become one of the most important issues that the Chinese government must solve in rural areas. With the aim of solving this problem, the Chinese government took a significant policy step at the end of 2002 and launched a program for a new cooperative medicalsystem in rural areas. The introduction of this policy not only addressed the problem of unaffordable medical care, it was a milestone achieved by the Chinese government to rebuild the overall devastated rural healthcare system afterit was dismantled by communism in 1978. To give the background to this policy, in the first decades under communism, the Chinese government adopted a cooperative medicare system. During those years, the communes in rural China provided healthcare through a three-tier system, which was managed and financed locally. The first tier of the system included parttime barefoot doctors in health clinics for the provision of preventive and primary care. The second tier consisted of commune health centres, which might have 10–30 beds, and an outpatient clinic (serving a population of 10,000–25,000), which was staffed by junior doctors, providing services for patients with more serious illnesses. The third tier was made up of county hospitals staffed with senior doctors for the treatment of the most seriously ill patients. This collective-based rural medical system was part of the commune system and was financed by the communes’ welfare funds (Chow, 2006: 3). This system was very successful and was recognized by the World Heath Organization in the 1970s and 1980s as the template for developing countries to solve their own healthcare problems. Since 1978, the rapid economic development brought by free-market reforms has ironically led to the dismantling of this system. The provision of public healthcare became the responsibility of local governments. Some of them did not have the

Analytical summary of the three villages 137 financial resources from taxation to supply adequate healthcare. Many underfunded hospitals and clinics refused to treat the poor or were simply abandoned as professional staff left to work as farmers, which was more profitable (Chow, 2006). On the other hand, with the shift of a planned economy to a free-market one, many hospitals were privatized. As a result, the facilities and services of the rural healthcare system deteriorated. In addition, when the government started to encourage hospitals and doctors to achieve profits (by selling drugs and expensive treatments) to make up for the loss of subsidies (these were eliminated as part of the country’s transition to a free-market economy), some healthworkers tried to maximize their own interest and make as much money for themselves from their profession. Due to the limited supply and increasing cost of medical care, low-income farmers cannot afford to pay for healthcare, and millions are left without basic medical care. According to the World Bank (1997: 3), Only about 10% of the rural population is now covered by some form of community-financed healthcare, down from a peak of 85% in 1975. . . . As a result, some 700 million rural Chinese must pay out of their own pockets for virtually all health services. Chinese Health Minister, Gao Qiang, is quoted as saying, In addition to that, some 79 per cent of Chinese farmers have no medical welfare in any form and have to pay medical fees all by themselves; 80 per cent of China’s public health resources were in cities and large hospitals, and rural areas lacked medical resources. (People’s Daily, 1 January 2006) Therefore, the question of rebuilding a devastated rural healthcare system, and in particular, the inadequate and unaffordable medical care for farmers, became a pressing issue that Chinese leaders had to solve. From the end of 2002, with the aim of rebuilding the devastated rural healthcare system, and more specifically addressing the problems of inadequate and unaffordable medical carefor rural farmers, the Chinese government has launched a new rural cooperative medical care system in China’s rural areas on a trial basis. The new rural cooperative medical service is organized, guided and supported by the government, but has voluntary rural resident involvement. It is a new cooperative medical system that focuses on planning for serious medical conditions, mutual aid and fraternity among rural residents in healthcare. Based on major illness health insurance coverage, this cooperative medical care system follows a payment plan by the individual, financial support from the collective and subsidies from the government. In pilot sites, individual rural residents have to pay no less than RMB10 per person annually, rural collectives offer some sponsorship to residents and local financial departments have to subsidize participating rural residents annually with no less than RMB10 per person. Since 2003, central government provides each participating rural resident in the central and the western regions of

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China (excluding cities) with annual subsidies of RMB10 (since 2006, central government decided to double government allowances paid by the central and local governments of 20 yuan (US$2.5) for each farmer participating in the rural cooperative medical care system). Thus, a farmer puts 10 yuan (US$1.25) a year into his personal medical care account and the government adds another 40 yuan (US$5). If a farmer who has joined the cooperative medical care system is hospitalized, the cost incurred can be reimbursed according to a sliding scale and the government would pay a maximum of 65 per cent of his medical expenses per year. In addition, a monitoring and administrative system on medical care in rural areas was set up (Wang, 2007). By the end of 2005, this program had covered 671 of some 2,000 counties in China, with a total of 177 million rural residents and the average participated rate of 75.7 per cent (Wang, 2007). It is expected that this program would cover all of China’s rural areas in 2008, or no later than 2010. In Jiangxi province, according to an official document (Jiangxi Health Office, 2007) a new rural cooperative medical system was adopted as the standardized model, giving ‘family compensation as an outpatient + proportional hospitalization compensation + serious illness (chronic) compensation as an outpatient’. In particular, the financial mechanism and the minimum amount of compensation and the ratio of compensation for each level are set out in Tables 7.8 and 7.9. In addition, there was a maximum amount of compensation, which was stipulated as RMB15,000, and maximum maternity pay of RMB150. By October 2005, 3.1853 million rural residents from 11 counties (towns and townships) participated in the pilot projects in Jiangxi, accounting for 80.66 per cent of the agricultural population (total 4 million) in those areas (Jiangxi Daily, 24 November 2005). However, by the time this research was conducted in Wulitang, the program had not yet been implemented. Therefore, this study cannot provide an evaluation of the implementation of the program in Wulitang. However, it is certainly true that the local farmers felt less worried about the expensive medical expenses when they heard about this policy. One farmer said: ‘If the government can pay towards the expenses, it would lighten our burden.’ However, despite the positive comments that have been received so far on this program, as pointed out by many scholars and business practices, this program still has many problems to deal with – for example, ‘relative low financing’, ‘the small scale of its funds’, ‘the low compensation ratio’ and ‘the complication of practical Table 7.8 The financial mechanism of the new rural cooperative medical system in Jiangxi province Annual contributions per individual in CNY

RMB

Personal County (area) government City government Provincial government Central government

10 3 3 14 20

Analytical summary of the three villages 139 Table 7.9 Minimum amount of hospitalization compensation and the ratio of compensation in Jiangxi province

Township institutions County institutions Institutions outside the county Non-sentinel medical institutions outside the county

Minimum hospitalization compensation

Compensation ratio, %

100 300 600 800

60 50 40 30

procedure’, and it may only go a limited way towards curing the health crisis in rural areas (Wang, 2007; Financial Times, 3 October 2007). However, as these issues are beyond the scope of the main subject of this research, this chapter will not discuss them here.

8

Conclusion

Among a diverse range of san nong problems, rural finance and the related issues have already been an essential topic in China. Based on the fieldwork in three natural villages characterized by dissimilar economic and social backgrounds, Yao, Wulitang and Xiaobu, in Jiangxi province – one of eight designated provinces in the first batch of pilot programs in the round of RCCs reforms initiated in 2003 – this book studies one of the most important themes in the field of rural finance – the credit needs and the borrowing behaviour of rural households in contemporary China. The study of credit needs was based on an in-depth analysis of the status of rural households’ indebtedness in these three villages between 2001 and 2005. It covers various aspects, including the purposes and sources of households’ borrowing, the difficulties or dilemmas faced by farmers when they required credit and a variety of interactions between the terms of borrowing with other factors such as land leasing, input sales transactions or personal closeness in the local community. The study of the borrowing behaviour was based on the performance of Rural Credit Cooperatives (RCCs), as well as the sources of informal finance. The research in Yao, Wulitang and Xiaobu reached a number of conclusions. First, following an adjustment in agriculture from traditional to modern practices and a structural transformation of the entire economy from an agricultural base to a non-agricultural base, farmers’ demands for credit and financial services went beyond the traditional context of crop-farming. In the case of Jiangxi province, an inland province that mainly specializes in aquacultures, farmers’ demands for credit and the borrowing of money were largely for production purposes, from both the formal and informal credit markets. In particular, in some more commercialized regions – for example, in the village of Yao – capital for business investments also much in needed. Second, consistent with Mellor’s theory (1967) due to the variation in economic and social structures in different areas or regions, the pattern of farmers’ credit need is diverse and characterized by their own preferential emphasis. Correspondingly, the source of finance and the characteristics of the types of credit arrangements are also varied. Third, by comparing the households’ borrowing behaviour from differentiated segments of the rural credit market, informal finance plays a dominant role in

Conclusion 141 households’ source of borrowing. This is largely due to farmers difficulties in gaining access to formal credit and the factors relating to their willingness to enter the formal credit market, and the advantages of informal finance in its nature. Fourth, with regard to farmers’ limited engagement with formal lenders, specifically and almost exclusively the RCCs, it shows the following: 1 2

3

Since the reform of the rural financial system in the late 1990s, the RCCs were acting as the primary and also sole credit providers to the grass-roots level of farmers in rural financial markets. Through the discussion of the two key issues relating to rural households’ formal borrowing from the RCCs, including first, households’ access to formal credit products and the determinants of households’ credit rationing, and second, households’ participation in the formal credit market, as well as the determinants of households’ participation, it appears that, after the pilot program, the RCCs did not seem prepared to meet the divergent demands for credit (and services) of rural households’ farmers today. While some progress had been achieved in the financial performance of the RCCs after the launch of the pilot program, many critical problems are still unsolved in the RCCs system, including large volumes of accumulated NPLs, unspecified ranges of products, the problematic implementation of rules and regulations, poor quality staff, etc. All of these unresolved issues hindered the RCCs to truly work as sustainable, market-based rural financial institutions under the framework of the new rural finance paradigm. In addition, while microfinance lending has made great progress since its launch in 1999, under the current operation fixed interest ceiling, it seems that the RCCs can hardly sustain their microfinance operations in the long run. This is due to their over-dependence on PBC lending for agriculture, and also deficiencies in its very nature – for instance, high transaction costs and small loan sizes. Regarding the pilot program, two specific limitations were contained in its nature: the ownership structure of the RCCs; the conflict between policy objective of the reforms and commercial sustainability.

Fifth, unlike the picture in the formal credit market, informal lending was widely distributed and occurred in all kinds of ways. Apart from a diverse range of personal loans, loans borrowed for production purposes played a leading role in the informal credit market. In particular, two specific methods of informal borrowing, including interlinked contracts and buying production materials on credit, were widely and intensively adopted by farmers in rural areas for production purposes. On the other hand, through the explicit discussion of personal loans in Wulitang, this research highlighted three characteristics of the informal credit market: it was highly personalized, there were advantages in the availability of information and diverse interest rates on informal credit in the developing counties. It also pointed out two critical issues: education and medical care are ranked as the two most significant causes for farmers borrowing.

142

Conclusion

Sixth, it is evident that numerous factors are lagging behind in the operational environment to enable the development of a rural financial system – for example, poor record of creditworthiness in some rural areas, waning agricultural insurance, and various legal and policy constraints relating to efficient substitutes for collateral and the guarantee of formal lending. Together with economic transformation, the pattern of rural households’ demand for credit and the source of their borrowing are characterized as a complex picture in contemporary rural China. Although the Chinese government has attempted to establish a rural financial system that is healthy, sustainable and suitable for the Chinese characteristics, so far it seems it has not yet found an effective solution to all the problems in the system (Cheng, 2006: 26). The task ahead is still challenging. Following the central government’s development strategy of ‘groping for stones to cross the river’ (Nolan, 1995), the fact that the Chinese government still refers to the latest round of RCCs as pilots, indicates that the reform could be modified in the light of the impact of the initial change (Cheng, 2006). Based on the findings of this study, the author proposes the following policy recommendation for the future improvement of the rural financial system in China. First, in order to promote the RCCs towards the market-oriented institutions and also to meet the increasing demand from farmers for variant financial services in the process of economic transformation in rural China, an efficient mechanism needs to be built up to manage and operate the RCCs. ‘Such a mechanism should enable the RCCs to make profits on loans to rural households and to achieve economies of scale while satisfying the local demand for financial services’ (Xie et al., 2005: 36). In particular, in places where provincial governments have already achieved a great success in innovations in operations and management of the RCCs – for example, in the case of the RCCs in Jiangxi – the essential problem faced by the RCCs is whether innovative mechanisms can be truly implemented and effectively practised in the whole system, especially at the lowest level of the system. Therefore, it is suggested that the local RCCs system finds more solutions in ways to implement those ideas. Second, regarding the current dual objectives of the RCCs in both commercial and policy orientations, and the identification of cost-inefficiency and non-sustainability of policy loans (in particular, microcredit loans), in the long-run the central government and related regulatory bodies are advised to redefine the objectives of the RCCs. Following on from the idea of promoting the RCCs towards marketoriented institutions and becoming autonomous entities responsible for their own losses and developments, the government should transfer policy functions of the RCCs to other forms of financial institutions which specialize in policy issues for rural finance, or to other feasible solutions, such as transferring this set of services or responsibilities to departments of civil affairs. Third, based on the current monotypic position of the RCCs in the formal credit market in rural China and their failure to satisfy rural households’ credit demand and to provide financial services to farmers and small enterprises in rural areas, it is strongly recommended that central government and the financial regulatory institutions should introduce and permit the entrance of various types of financial

Conclusion 143 institutions, and furthermore create a competitive environment. Apart from formal financial institutions, commercial banks, microfinance institutions, agricultural cooperative/associations, or even informal finance, should all be considered (Xie et al., 2005). Fourth, with regard to informal finance, by recognizing that it is an institutional innovation initiated by rock-bottom mass and has advantages in many aspects in nature compared with formal financial institutions, it is advised that the government adopts it as a supplementary institutional arrangement for the rural financial system. If it is possible, it would be favourable for the government to incorporate informal finance into legislation and provide a legal platform for the development of informal finance (Chen, 1993; Dekle and Hamada, 2000). For example, ‘the criminal code should be amended to address the crimes of illegal fundraising and the offences of disrupting financial order. These crimes or offences should be addressed by laws and regulations cracking down on usury’ (Xie et al., 2005: 32). However, it is also suggested that informal financial institutions should be incorporated into the supervision system of the central bank to avoid fraud, irregularities and failings in this sector. Fifth, given a considerable number of factors relating to the lack of progress in developing a sound and sustainable rural financial system, some innovative measures should be introduced, such as agricultural insurance, the liberation of interest rates on microfinance loans, and the provision of substitutes for collateral and guarantees for rural households and small and medium enterprises (SMEs), to create a favourable and enabling environment for its development. Sixth, in considering the additional problems associated with the issue of rural credit, in particular education and medical care, it is strongly advised that the government should strengthen the inputs of the other factors related to san song problems. As the problem of households’ indebtedness is not just a problem within the scope of rural finance, it is an issue relating to the whole system of the rural economy. In March 2008, the central government allocated RMB562.5 billion (US$82.2 billion) as a budget related to agriculture, rural areas and farmers. This was a year-on-year increase of RMB130.7 billion, said Premier Wen Jiabao in his work report at the opening of the first session of the 11th National People’s Congress (NPC). Most recently, from 9 to 12 October 2008, the Communist Party of China (CPC) Central Committee held a four-day plenum of the Third Plenary Session of the 17th CPC Central Committee. On the last day of the close of plenum, the CPC Central Committee approved a landmark policy document as a guideline to further rural reform and development – ‘a decision on major issues concerning rural reform and development’, which is ushering in a new round of rural reforms in the country. The document clearly addresses reform: ‘We will firmly push forward the rural reform.’ In the document, the importance of rural finance is specifically highlighted. It sets the direction to establish a modern rural financial system in an effort to boost the rural economy More specifically, the document says:

144

Conclusion The country should promote innovation in the rural financial system and lower the threshold for establishing rural financial institutions. . . . it should build up a sound and safe rural financial system with the integration of commercial, cooperative and policy-based finance. . . . Financing channels should be widened to steer more credit and social investment funds for rural development . . . and various financial institutions should be called upon to better support rural economic growth. . . . a market operating rural credit guarantee mechanism with government support and public participation should also be set up. Rural insurance and agricultural futures market should be enhanced. (China Daily, 24 October 2008)

However, the plenum was held at the time of the international financial market crisis and the economic downturn in global economic growth. As well as suffering from some long-established domestic contradictions and problems, the Chinese government also faces a number of increasingly uncertaint and unstable factors in the international economic environment. Therefore, the task ahead of the Chinese government is challenging indeed.

Appendix

Possession score for living conditions The living conditions of households in this study are estimated by seven categories: (1) sanitation; (2) main kitchen energy use; (3) cooling equipment used in summer; (4) source of drinking water; (5) size of housing (per capita) in the village; (6) size Table A Measure of living index Category

Points

Sanitation

Modern sanitation Traditional sanitation with water flush without waterflush 2 1

0

Gas, liquid gas or biogas 2

1

Firewood, grass or others 0

Air-conditioning

Fans

No equipment

2

1

0

Tap water

Well water 1

Water from ponds, rivers, lakes or other resources 0

More than 40 m

20–40 m2

Less than 20 m2

2

1

0

Main kitchen energy use Cooling equipment used in summer Source of drinking water

2 Size of housing in the village (per capita) Size of housing area outside the village (per capita) Housing structure

2

Coal

No such facility

More than 20 m

10–20 m

Less than 10 m2

2

1

0

Reinforced concrete

Masonry

2

1

Brick and wood, or others, including mud bricks, twitch grass, etc. 0

2

2

146

Appendix

of housing area (per capita) outside the village – for example, township or county; and 7) housing structure. Each category has three levels, with a score of 2, 1 and 0 (2 is the best and 0 is the worst). In total, the maximum living index totals 14 points. Table A lists the calculation details.

Table B Measure of possession score of major durable consumer goods owned by household Points Indicators a) Home appliances and daily necessities Beds (if more than 2) Soft luxury bed Tables (more than 2) Glass tables Sofa Leather or mahogany sofa Wardrobe Washing machine Fans Refrigerators Air conditioning Smoke absorber Pressure cooker Rice cookers Water heaters Sewing machines Drinking fountains b) Traffic and communication tools and supplies Bicycles Electric cars Motorcycles Cars (non-production) Fixed telephone Mobile phone c) Culture, education, sports, entertainment supplies Colour television Of which: 29-inch and above Black-and-white television Video recorder Video disc player Hi-fi stereo component systems Radio cassette players Camera PCs Medium and high-grade musical instrument d) Others Gold and silver jewellery or equivalent

Consumer Consumer goods goods owned not owned 1 1 1 1 1 1 1 1 1 2 2 1 1 1 1 1 1

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

1 2 2 3 1 1

0 0 0 0 0 0

1 1 1 1 1 1 1 1 3 1

0 0 0 0 0 0 0 0 0 0

1 42

0

Appendix 147

Possession score for major durable consumer goods The possession score for major durable consumer goods owned by households can be defined by four categories: (a) home appliances and daily necessities; (b) traffic, communication tools and supplies; (c) culture, education, sports and entertainment supplies; and (d) other possessions. Depending on the prices (with reference to the data in the census of provincial rural households in Jiangxi) and also the frequency of those goods used by rural households, there are different levels of scores: the higher the score, the more expensive the item and the less likely it is to be found in afarmer’s home. In total, the maximum number of points achievable is 42. Table B summarizes the details.

Notes

1 San nong problems and the challenges of the rural financial system in China 1 Especially in a macro environment in which the overall money supply has beentightened. 2 Applying the concept of the frontier that differentiates between the formal and informal sectors of the financial market (Coetzee, 2002: 5, citing Von Pischke, 1991), Von Pischke (1991: 1) points out that the formal financial institutions, which are inside the financial frontier of the rural financial market, tended to be formally organized, structured and hierarchical (Coetzee, 2002: 6). They are ‘principally impersonal’ and ‘operate under government charters, and reporting requirements, and are restricted by usury laws and by limitations on the types of services they may offer’. Institutions, such as nationalized and specialized agricultural development banks, rural branches of commercial banks, and village and regional cooperatives, are typically categorized within this group (Bouman, 1990). Alternatively, there are some participants in the rural financial market that are beyond the formal financial frontier. The financial transactions of these group of institutions are mostly personalized and small (Von Pischke, 1991), and often involve simultaneous exchanges of cash, goods and services. Typically, the operation of these institutions is strongly regulated by the norms or customs of local societies (Coetzee, 2002: 5). The institutions – for example, friends and relatives, moneylenders, pawnbrokers, loan brokers, and rotating savings and credit associations (ROSCAs), etc. – all belong to this group. 3 For more details, see Cheng, 2006: 26, Watson, 2003 and Shang, 1989. 4 The ABC was initially found in March 1955. Its detailed function refers to IFAD (2001: 7) 5 From the mid-1980s, the ABC was allowed to diversify its business into non-rural lending and encouraged to engage in profit-making activities. 6 According to Cheng (2006: 28), this new system comprised three main participants: commercial banks, policy banks and cooperative financial institutions. The commercial banks had to run their businesses with an objective of maximizing profits. Policy banks were expected to extend loans which served policy objectives. Their lending activities could yield very low or even negative profits. Cooperative financial institutions were designated to serve the interests of the cooperative members. 7 It is worth noting in addition that in 1998, the State Council decided to transfer the businesses related to poverty alleviation and comprehensive agricultural development loans back to the ABC, and the ADBC was only responsible for purchasing and storing grain, cotton and oil businesses. 8 In addition, the ABC also administered the government’s official subsidized poverty loans. 9 Between 1999 and 2000, various experimental tests had been carried out nationwide: 65 city (regional) credit unions, 6 provincial credit unions and 5 provincial credit

Notes 149

10 11 12 13 14

associations were set up. On the other hand, experiments to change the legal structure of the RCCUs to incorporate conversion to the Rural Commercial Banks (RCBs) and establish provincial or autonomous regional RCCUs were also being undertaken (Jiangxi provincial RCCU annual report, 2005: 62). The meaning of this element will be explained later in this section. The English version of Document 15 is cited in Xie et al. (2005). The new approach of opening up a variety of ownership forms means that it is not necessary to preserve the cooperative nature of the RCCs. When the fieldwork of this research began. Or, more exactly, the ‘dominant supplier, or in some places the sole supplier’ of formal financial institutions which provide credit services to grass-roots level farmers.

2 Literature gap and research objectives 1 Among the data analysing households’ access to credit services, a large number of studies focus on the problem in developing countries or transitional countries where agricultural households, especially small or low-wealth/poor farmers, have difficulties in accessing credit, arising from rationing, particularly by formal lenders (Braveman and Guasch, 1986; Swaminathan, 1991; Yadav et al., 1992; Mushinski, 1999). Based on the discussion of various interpretations of credit rationing by Jaffee and Stiglitz (1990), Petrick (2005: 192) summarizes that ‘a potential borrower is regarded as being credit rationed if his private demand for credit persistently exceeds the loans amounted offered by the lender’. 2 It is important to stress that, as noted by Zeller et al. (1996), the concepts of households’ access to and participation in rural credit markets are easily confused with each other and often used interchangeably in many studies. However, they are explicitly different. Quoting Zeller et al. (1996: 16), in general terms, ‘access is defined as the ability of the households or its members to enter into contractual arrangement for savings and credit services’. It is determined entirely by the lender’s decision in screening potential borrowers, which is influenced mostly by various characteristics of the households of loan applicants, as well as in some cases ‘by the set of constraints under which the formal sector operates’, for example, the program’s criteria for member eligibility or loan sizing (Zeller et al., 1996: 49), although this issue is not usually underlined in many studies. In contrast, regarding the issue of households’ participation in rural savings and credit markets, which is observed as ‘when a household applies for and successfully enters into a contractual arrangement for a credit or savings service’. It is first determined by households’ access and, second, and more importantly, the households’ demand for such services (Zeller et al., 1996: 49). Therefore, the access is more a supply-side problem which is entirely determined by the financial institution and how they perceive a potential clients’ entrance into the credit market. On the other hand, the participation is more of a demand-side problem made by the households (Diagne, 1999). 3 Including land, capital, the number of adults, number of dependants, education, farm experiences, savings in financial institutions, total initial liquid assets, outstanding debt to financial institutions, total outstanding debt, last season’s income and previous loan default dummy. 4 It was found that between 1996 and 2000, 633 out of 1,199 households had borrowed money. The number of loans from the informal credit market accounted for 85 per cent of the total number of loans. 5 Defined by Meyer and Nagarajan (2001) and Nagarajan and Meyer (2005), the development that occurred in rural finance paradigms can be generally classfied into three phases: (1) the old rural finance (RF) paradigm; (2) the microfinance revolution, and (3) the new rural finance (RF) paradigm.

150

Notes

(1) In the 1950s and 1960s, policymakers assumed that farmers lacked access to formal credit; at the same time, under the consideration that informal lenders charged usurious interest rates and short-term, high-cost informal loans were unsuitable for financing productive investments, the supply-leading directed agricultural credit policies were implemented to overcome the perceived imperfections in the financial market. Financial institutions were assigned a significant role to address numerous economic and social issues in rural areas (Meyer and Nagarajan, 2001), and credit programs funded by donors were extensively injected into rural areas. Moreover, under this paradigm, heavy interventions were dedicated by governments and donors to rural financial markets to target credit for specific purposes (Nagarajan and Meyer, 2005: 3, cited in Adams et al., 1984; Meyer and Nagarajan, 2001; Meyer and Larson, 2002). However, the majority of credit programs that followed the old paradigm failed; the performances of most formal rural financial institutions in underdeveloped countries had been dismal. The problems of poor loan recovery, operational losses and decline in the real value of the loanable fund as a consequence of high inflation and low lending rates were pervasive (Adams and Vogel, 1986; Braverman and Guasch, 1986). (2) In the late 1970s, a new financial development – microfinance, which mostly specializes in offering small loans – was emerging in developing countries. By acclimatizing the technology learned from informal finance – for example, interest rates, collateral and collection methods – the approach of microfinance challenged the traditional view that the poor were incapable of being offered loans (Nagarajan and Meyer, 2005). In the 1980s, the development of microfinance gained momentum and researchers began to assess the experiences of microfinance institutions, especially non-governmental organizations (NGOs). (3) In recent years, along with the movement of rural finance paradigms to the most recent phase – the New Rural Finance paradigm – the development of microfinance is still in progress, and continues to be explored and advanced in many areas. Based on the criteria of self-sustainability and outreach, three microfinancial institutions have been considered as pioneers of the new paradigms of rural financial institutions in developing countries in recent years, including Grameen Bank (GB) in Bangladesh (Hossain, 1985; Yaron, 1994; Khandker, 1996; Khandkeret et al., 1996; Yaron et al., 1997; Matin, 1998; Meyer, 2002), the Bank Rakyat Indonesia (BRI) in Indonesia (Martokoesoemo,1994; CGAP, 1997; Meyer and Nagaragan, 2001; Remenyi, 2002); and the Bank for Agriculture and Agriculture Cooperative (BAAC) in Thailand (Sacay et al., 1996; Muraki et al., 1998; Meyer and Nagarajan, 2001; Poramacom, 2001; Meyer, 2002a). 6 Chen (2004) investigated the model of the transformation of RCCs to rural commercial banks based on a case study of Jiangsu province, whereas Xie et al. (2005) gave an examination of the RCCs’ pilot program in Gansu province, one of China’s poorest provinces, which is located in the west. 7 It is important to note that, as well as these three typical sources of finance, there is a fourth type of institution that also provides credit to rural households in China – donor or government-sponsored microfinance programs. However, because the clients of these programs are specifically from the rural poor and the geographical coverage of the programs throughout China is relatively limited, especially in Jiangxi province, they are not included in this conceptual framework. 3 Fieldwork villages, procedures and the RCCs’ pilot program in Jiangxi province 1 Or more exactly, the formal rural credit market. 2 The main context in this section is summarized from:

Notes 151 1 Jiangxi Provincial Bureau of Statistics (2001). Fifty Years of Jiangxi. 2 Jiangxi Provincial Government (2005). Jiangxi in Brief. 3 Data is calculated at the current price for that year. 4 The contextual basis in this section is mainly derived from: (a) ‘Nanchang’ in Jiangxi Provincial Bureau (2001). Fifty Years of Jiangxi; (b) Jiangxi Provincial Bureau of Statistics (2006). Key Statistic Indicators of Jiangxi 2005 (Jiangxi Tongji Zhaiyao). 5 The contextual basis in this section is derived from: 1 Jiangxi Provincial Bureau (2001) Jiangxi Fifty Years, Chapter Wuning. 2 Jiangxi Provincial Bureau of Statistics (2006). Key Statistic Indicators of Jiangxi 2005 (Jiangxi Tongji Zhaiyao). 6 The contextual basis in Xunwu is mainly derived from : 1 Jiangxi provincial Bureau of Statistics (2001). Jiangxi Fifty Years, Chapter Xunwu. 2 Jiangxi Provincial Bureau of Statistics (2006). Key Statistic Indicators of Jiangxi 2005 (Jiangxi Tongji Zhaiyao). 7 The description of the natural village of Yao is based mainly on the author’s fieldwork and the information provided by the village committee of the administrative village of Yao. 8 The administrative village comprises four natural villages and nine farmers’ production teams. 9 ‘mu’ is the measure of a unit of area which is typically used in the countryside of China. 1 1 mu =  hectare or 666.67 square metres. 10 Yao had 53 households, with a population of 234, but a total cultivated land area of only about 180 mu. 11 Due to the small number of employees in Mr Tu’s fodder-processing farm, it was not officially recorded as a local private enterprise (factory) in the administrative village of Yao. 12 It is worth noting that, due to hard-working of Chinese farmers, most farmers in Yao engaged in more than one industry. It was common to see that as well as engaging in aquaculture, a household might also participate in celery planting or sometimes even in migrant jobs. 13 The description of the natural village of Wulitang is mainly based on the author’s fieldwork and the information provided by the village committee of the administrative village of Wulitang. 14 During the 1980s and early 1990s, the village had a few private or village-owned enterprises. However, in the late 1990s, for to various reasons, all those enterprises were closed down. Since then, the village has not established any enterprises. 15 Paddy is the only type of crop planted. 16 The description of the natural village of Xiaobu is mainly based on the author’s fieldwork and the information provided by the village committee of the administrative village of Xiaobu. 17 The total fruit-planting area was around 3,000 mu in this village. 18 This is the key reason that the author chose Xiaobu as one of the fieldwork villages for this research. 19 The largest number of trees planted by one family was about 1,500 trees. 20 In general, it takes around 3–4 years for an orange tree to produce fruit and 5–6 years to achieve a full yield (i.e. a relatively large and reliable crop). 21 These two measures were used in this research for the following reasons. First, income is one of the most typical methods which has been used to define households’ wealth.

152

Notes

However, as argued by many scholars – for example, Casely and Lury, 1987; Pincus, 1993; Graham, 2003 – this method raises a variety of problems. These include, for example, the difficulty with defining income. Should agricultural production consumed within the household be considered as part of their income? If so, how is it to be valued? Moreover, this method also encounters many difficulties in obtaining the correct value in practice – for example, some farmers might be reluctant or be hesitant to divulge or reveal their personal details. Alternatively, the method of ‘possession score’ has been adopted by many scholars – for example, Sender and Smith, 1986; Jodha, 1989; Pincus, 1993 – as an indirect way of measuring rural households’ economic well-being in developing countries. This method is applied under the rationale that personal possessions represent the income and expenditure levels of rural households, especially from a relatively long-term perspective. Also, it is simple and easy to apply this method in the field. However, it is worth noting that, although this method has many advantages, it is insufficient to estimate the type of households in which the majority of family members are migrant workers – a case that is frequently presented in the natural village of Wulitang in this research. It is very common to see in those families that, while they obtain a relatively high and stable income from the migrant workers in distant large cities, few durable goods have been found at their village homes. Therefore, by considering the pros and cons of these two methods, this research has applied both measures as being complementary to each other to measure the difference in the levels of economic well-being among the households interviewed in the three villages of this research. 22 The information in this section is mainly derived from Jiangxi Provincial RCCU (2004): Internal Report: A Few Points Related to the Reforms of RCCs in Jiangxi. 23 The information in this section is mainly derived from Jiangxi Provincial RCCU Annual Report 2004, 2005, unless otherwise stated with specific reference. 24 Here, meaning the provincial RCCU. 4 Households’ indebtedness and borrowing behaviour in the natural village of Yao 1 This enjoyed a very low interest rate of below 0.5 per cent per month. 2 Stiglitz and Weiss (1981: 394) shared a similar idea of defining credit rationing. 3 It is important to note that, throughout the empirical analysis of this work, the names of interviewed subjects mentioned have been changed to protect their privacy. 4 Household 51 (in Table 4.2) obtained a loan from 2001 to 2005 in this way. 5 She also had two daughters, both married. In China, If a daughter is married, she is no longer considered to be a household member. 6 In Nanchang county, the provision of national education loans to college and university students from the rural areas were only restricted to the business scope of the ICBC. RCCs were not responsible for this type of loan in this county. Details of education loans to college and university students from the rural areas in Jiangxi province will be discussed in a later chapter. 7 Details of this type of transaction will be described later in this chapter. 8 Owing to the unique economic background of Yao and the special role that the production loans played in farmers’ lives, the analysis of informal credit in Yao mainly focuses on production loans. 9 This information is derived from patient discussions with local villagers in the fieldwork. 10 In particular, it is worth noting that Figure 4.3 is an in-depth description that specifically draws on the production activities of participator 4 – farmers who conducted duckbreeding on their farms. 11 Some might argue that the delivery-man can be also defined as a friend and relation.

Notes 153 12 Each household always gave the total amount they owed the delivery-man. It was very difficult to collect information about every single transaction for which households borrowed. 5 Households’ indebtedness and borrowing behaviour in the natural village of Wulitang 1 Microcredit loans were not found in Wulitang. According to local farmers, they had heard the term ‘microcredit loan’. However, they supposed that such loans had not been implemented in their village yet. Instead, all loans they applied for required collateral or a guarantee. 2 Banks here mean all kinds of financial institutions, including RCCs. 3 The village committee means the administrative village committee. 4 The text here will not repeat the discussion on this topic in Chapter 4. 5 Regarding interest rates, some farmers said that, during the 1980s and 1990s, usury existed in Wulitang. The monthly interest rate of usurious loans varied from 1 per cent, 3 per cent and even as high as 5 per cent or 10 per cent. However, no usurious loan was found during the examination period of this research. According to one farmer: ‘Though sometimes we still hear about the stories relating to usury, they happen in another village about 20 minutes’ walk from here. It is certainly not within this administrative village.’ 6 It is worth noting that, in some areas where the economy is more developed, such as Yao, buying cigarettes or alcohol is very common. 7 Or in technical collegesor higher education institutions, such as universities. 8 It is important to note that the listed fees do not only refer to unregulated fees. These also include the miscellaneous fee which was allowed to be charged by the government. 9 Before 2004, local villagers said that the students needed to purchase desks and chairs themselves, which cost RMB45 per person. 10 The ‘education raising funds’ were charged to students within the township areas of Wulitang before 2004. It was stipulated locally that each student should pay fees to raise funds for education of RMB60 per year to the township government. 11 Here, home means natural villages. 12 ‘Selected students’ refer to certain groups of students who are permitted by the government to be recruited additionally by public high schools, on condition that the school has completed its annual enrolment quota. Due to the approval of difference in fees charged between selected students and students within the ‘normal’ enrolment quota from the government, the fact that unregulated charges and related issues occurred was not surprising. Some schools charged higher fees to selected students compared to the normal ones and even relaxed their entrance requirements.The number of selected students increased and in some institutions the ratio of general students and selected students enrolled was reversed. 13 It means they are very corrupt. 14 Jin is a Chinese measurement of weight, 1 jin = 0.5 kg. 6 Households’ indebtedness and borrowing behaviour in the natural village of Xiaobu 1 The average interest rate of normal households’ loans in Xiaobu (four loans) was around 0.8 per cent per month. 2 However, a large number of these loans had been extended, which may impact on these percentages. By the time this research was conducted, the RCCs still keep the traditional way of grouping non-performing loans, in which extended loans are not categorized as non-performing loans.

154

Notes

3 It leads to a reasonable hypothesis that the wealth status of households who demanded credit, which related to factors (2), (3) and (4), was one of the instruments used to select loan applicants. 4 For this reason, the credit officers in the lower level of RCCs system typically adopted the method of rolling over credits to reduce the ratio of non-performing loans in practice. 5 For the analysis of this group of households, an in-depth qualitative analysis in relation to credit rationing has been given in the previous section. 6 This point has been specifically discussed in Chapter 4. 7 If a loan for production materials was not paid in the first year, it was very unlikely that the supplier would give credit the following year. 8 Not all households in Xiaobu had leased out their land to farmers who stayed in the same natural village. They also leased out land to farmers who belonged to other natural villages nearby. 7 Analytical summary of the three villages 1 This characteristic is not included in Table 7.3. 2 For example, households’ previous bad experience. 3 The word ‘credit’ has two meanings in Chinese: one means ‘the money or goods available for a client to borrow’ (noun), the other means ‘creditable’/‘creditworthy’ (adjective). 4 These two forms are not major typologies in the Jiangxi case. 5 Adams (1992) summarizes ten different types of informal financial institutions. 6 For example, in Yao, a fodder-producing factory (Table 4.8). 7 The policy of exemption of both tuition and miscellaneous school fees had not been implemented. 8 Compared with the standard national student loans, the local student loans have three outstanding advantages: (1) students apply for loans in local areas, the local financial institutions can easily investigate any financial difficulties students may have and its operation is more convenient, with no collateral requirement and lower costs; (2) students can obtain loans in the local area, making the enrolment procedure easier; (3) it is easy to facilitate the tracking and management of student loans repayments in local areas. 9 ‘Barefoot doctors found it more profitable to work full-time in farming or to set up private practices outside the system’ (Chow, 2006: 3).

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Index

ability to repay 101 access to formal credit 32, 123–8, 149: Wulitang 76–80, 95, 124–7; Xiaobu 100–7, 128; Yao 47–57, 124–7 accommodation costs 90 accumulated aggregate losses of RCCs 36 Adams, D. 56, 132 Agricultural Bank of China (ABC) 3, 4, 5, 6, 7, 148 Agricultural Development Bank of China (ADBC) 5, 148 agricultural insurance 143 agriculture: fruit growing 24, 29–30, 97–8, 106–7, 108–9, 111–14, 115–16; Jiangxi province 20; Nanchang county 22; Wulitang 27–8; Wuning county 23; Xiaobu 29–30; Xunwu county 24; Yao 24–5 agriculture-production cooperatives 2 animal husbandry 25–6; duck-breeding 25, 63, 65–72 Bank of China (BOC) 3 Bardhan, P. 14 barefoot doctors 136 Barham, B.L. 126–7 Baydas, M. 47 business innovation 39–41, 43 business operations 34–5 buying on credit 132, 141; Xiaobu 112–13; Yao 63, 69, 70, 72 characteristics of household borrowing 117–20; comparison of the three villages 121–3, 133; from formal lenders 45–7, 75–6, 98–9, 118, 119; from informal lenders 63, 64, 83, 84, 109–11, 118–20, 133 Chen, F. 14

Cheng, Y.-S. 142 China Banking Regulatory Commission (CBRC) 9 ‘Circular on Deepening Reform of the Framework for Guaranteeing Compulsory Education Funding’ 134 citrus fruit production 24, 29–30, 97–8, 106–7, 108–9, 111–14, 115–16 clinics 136, 137 collateral 118, 119, 143; demand-side determinant of credit rationing 52–4, 79, 124, 125; inability to provide 126; supply-side determinant of credit rationing 48–9, 76, 124, 125 commercial banks 5, 10, 16, 17, 148 commune health centres 136 communes 2–3, 136 Communist Party of China (CPC) Central Committee plenum 143–4 ‘company plus farmers’ model 40 compensation schemes 9 competition 142–3 compulsory education 88–9, 134–5 conceptual framework 15–18 Construction Bank of China (CBC) 3 consumption, loans for 63 contact/network with formal financial institutions 52, 54–6, 79–80, 106–7, 124, 126–7 cooperative financial institutions 10, 16, 17, 148; see also rural credit cooperatives (RCCs) cooperative medical system 136; new rural system 137–9 credit communities 40–1 credit cooperatives management office 34 credit history 48, 76–7, 124, 125 credit products, new 39–41, 43 credit rationing 13, 124–7, 149;

Index 165 approaches to measuring 47; demandside determinants 49–57, 73, 77–80, 101–7, 124–7; supply-side determinants 48–9, 50–1, 73, 76–7, 78, 100–1, 102–3, 124, 125; Wulitang 76–80; Xiaobu 100–7, 115; Yao 48–57, 73 creditworthiness assessment centre 41 ‘creditworthy farmer’ loans 40 criminal code 143 ‘debts of favour’ 53, 86 delivery fees 113 demand-side determinants of credit rationing 124–7; Wulitang 77–80; Xiaobu 101–7; Yao 49–57, 73 Dexing copper mine 20 duck-breeding 25, 63, 65–72; credit status of participants 67–72 durable goods, possessions scores of 32, 49, 51, 77, 78, 101, 103, 146, 147 econometric analysis 14 education, loans for 84, 87–90, 96, 109, 110, 116, 133–6 egg-processing 25–6, 65, 66; small-scale egg-processing farm 66, 67, 71–2 electronic procedures 37 ‘eliminating the last’ method 41 employment 26–7, 28, 30 enterprise culture 42, 43 evaluation of loan applicants 104–5, 106 experimental tests 7, 148–9 family businesses 26, 28, 30 family events 109, 110, 116 farmers: duck-breeding 67–70; orange tree cultivators 111–13 ‘favour, debts of’ 53, 86 fear of being taken to court or punished for late payments 62–3, 80, 81 Feder, G. 13 Fei Hsiao-tung 15 fieldwork locations 19–30; Jiangxi province and fieldwork counties 19–24; natural villages 24–30, 31 fieldwork procedure 30–3 financial difficulties 106–7 financial losses liability system 42 financial product innovation 39–41, 43 fixed-production investment 45, 118, 119 fodder, purchasing 69–70 fodder delivery-man 66, 67–9, 70–1; loans from 61, 67–9

forestry 23 formal credit 18, 32; access to 32, 47–57, 76–80, 95, 100–7, 123–8, 149; comparison of the three villages’ borrowing behaviour 121–3; general status of households’ borrowing 45–7, 75–6, 97–100, 117–18, 119; participation in the formal credit market 13–14, 32, 57–63, 80–3, 95–6, 107–9, 115, 123–8, 149; Wulitang 75–83, 95–6; Xiaobu 97–109, 115, 128; Yao 45–63, 73; see also rural credit cooperatives (RCCs) formal financial institutions 148 friends and relatives, loans between 67, 72, 83–7, 112, 118, 132 fruit growing industry 24, 29–30, 97–8, 106–7, 108–9, 111–14, 115–16 fund transfer and service platform 41 Gao Qiang 137 gender of client 99–100 general status of households’ borrowing see status of households’ borrowing gifting 79–80, 82, 83, 86–7, 94, 132 ‘Good Heart’ preserved eggs 71–2 goods, credit in 94–5, 96 Grameen Bank 99–100 guarantor 52–3, 56–7, 118, 119 Guixi smelter 20 health insurance 137–8 higher education 89–90, 135–6 Hoff, K. 85 hospitalization 91, 92, 136; compensation 138, 139; cost of hospital expenses 92–3 hospitals 136, 137 house building 83–5, 86, 109, 110, 116 house-ownership certificate 52, 53–4 households: access to formal credit see access to formal credit; analysis of 13–14; characteristics 48, 76–7, 101, 102–3, 124, 125; economic and social background 32; participation in formal credit market see participation in formal credit market; per capita net income see per capita net income huaqian mai jizhi 7, 9 illness 90–4; see also medical care implementation of rules, regulations and operation routines 129 incentives 37 income see per capita net income

166

Index

Industrial and Commercial Bank of China (ICBC) 3, 135–6 industry 20, 22, 23, 24; Wulitang 28; Yao 26 informal credit 16, 17, 18, 32, 118, 130–9, 140–1; comparison of characteristics of borrowing behaviour in the three villages 121–3, 133; for education 84, 87–90, 96, 109, 110, 116, 133–6; from friends and relatives 67, 72, 83–7, 112, 118, 132; general status of households’ borrowing 63–4, 83, 84, 109–11, 118–20, 131–2; leasing of land 94–5, 96, 114, 116, 121, 132; for medical care 84, 90–4, 96, 133, 136–9; orange tree cultivation 111–14, 115–16; policy recommendations 143; Wulitang 83–95, 96; Xiaobu 109–14, 115–16; Yao 63–72, 73–4 informal financial institutions 4, 148 information: advantage of family and friends 85; asymmetry 126–7 injection of funds 38, 43 institution building 5 institutional analysis 14–15 interest rates 9–10, 143; informal credit 85–6, 87, 113; microcredit 99–100; and participation in formal credit market 60–1, 80, 81–3, 95–6, 108, 127 interlinked contracts 63, 69, 132, 141 intermediary businesses 41 internal control mechanisms 37 interviews 32–3, 47 irregularities 42 irrigation 114 Jian basin 20 Jiangsu Model 8 Jiangxi province 16, 19–24; evaluation of RCCs’ performance after the pilot program 128–30; general status of RCCs before the pilot program 34–8; pilot program of the RCCs 38–43, 43–4 junior high school 33 land: leasing 94–5, 96, 114, 116, 121, 132; ownership and collateral 126 liquidity 52, 54 literature gap 13–15 Liu zhi 39 living index 32, 49, 50, 77, 78, 101, 103, 145–6, 152 loan-application process 57, 62 loan charges 56 loan period 62

loan products design 108–9, 127 loan quota constraints 104, 105–6 local governments 38; healthcare provision 136–7; management of RCCs 7, 8–9, 38–9, 43 local students loans 135–6, 154 management of RCCs 34, 35, 41–2 Mao Zedong 15, 29 market economy 3 medical care 84, 90–4, 96, 133, 136–9 Mellor, J. 17, 122, 140 merchants/traders, loans from 132; Xiaobu 109, 112, 113–14, 116; Yao 61, 67–9 Meyer, R.L. 15, 149–50 microcredit 6, 14, 118, 141, 143, 150; access to 100–7; Xiaobu 97, 98, 99–100, 100–7, 115, 123, 128 micro-level analysis 14–15, 16 migrant workers 24, 26–7, 27, 28, 81 mineral resources 20, 23–4 miscellaneous school fees, exemption from 134–5 mountain land 114 Mushinski, D.M. 47 Nagarajan, G. 15, 149–50 Nanchang 21, 22 Nanghang county 21, 22 National Student Loans (NSLs) 135 natural villages 17, 24–30, 31; see also Wulitang, Xiaobu, Yao need for formal credit 60, 80, 81, 108 Nehman, G. 56 nepotism 37 network/contact with formal lenders 52, 54–6, 79–80, 106–7, 124, 126–7 non-compulsory education 89–90, 134, 135–6 non-performing loans (NPLs): ABC 4, 5; RCCs 6–7, 36 ‘one fee’ system 134–5 online services 42 operation of production 101 operation routines 129 operational inefficiency of RCCs 37 orange tree cultivation 97–8, 106–7, 108–9, 111–14, 115–16 Organization for Economic Cooperation and Development (OECD) 1 organizational structure of RCCs 8, 34 outpatient clinics 136 outpatient treatment 91, 92

Index 167 overcharging of interest 81–3 over-medication 93–4 ownership structure of RCCs 7, 8, 35, 130; restructuring in pilot program 38, 43 participation in formal credit markets 13–14, 32, 123–8, 149; Wulitang 80–3, 95–6, 125, 127–8; Xiaobu 107–9, 115, 128; Yao 57–63, 125, 127–8 patterns of credit 17, 122, 140 People’s Bank of China (PBOC) 2, 3, 6, 7, 141 per capita net income 32, 151–2; and participation in formal credit market 58, 59; Wulitang 77, 78; Xiaobu 101, 103; Yao 49, 51, 58, 59 personal loans: for education 84, 87–90, 96, 109, 110, 116, 133–6; for family events 109, 110, 116; house building 83–5, 86, 109, 110, 116; for medical care 84, 90–4, 96, 133, 136–9; Wulitang 87–94, 121, 123 personnel structure 34 Petrick, M. 47 pilot program of the RCCs 7–10, 141; Jiangxi province 38–43, 43–4 ‘Plan for Deepening the Reforms of RCCs in Jiangxi’ 39 policy banks 10, 148 policy objectives of RCCs 130, 142 possession scores: durable goods 32, 49, 51, 77, 78, 101, 103, 146, 147; living index 32, 49, 50, 77, 78, 101, 103, 145–6, 152 poverty, and informal credit 85 pre-spring festival 32 primary health care 136 private enterprises 26, 28, 30 product design problems (loans) 108–9, 127 production, loans for 118, 119, 140; Xiaobu 109–14, 121, 123; Yao 63–72, 73–4, 121, 122 production input dealers 111, 112, 113–14 production skills 48, 76–7, 124, 125 promissory notes 68, 71, 72 provincial rural credit cooperatives union (provincial RCCU) 38–42, 43 qualitative information collection 47 quota of loans 104, 105–6 reciprocity 85 regulations 129

rejected loan applicants 101–5 relatives and friends, loans between 67, 72, 83–7, 112, 118, 132 rent 94–5 repayment rates 99–100, 105–6, 111 research objectives 15–18 Reserve Bank of India Rural Credit Surveys 14 risk management system 42 rules 129 rural commercial banks 10 rural cooperative banks 10 rural cooperative foundations (RCFs) 4, 7 rural cooperative medical system 136, 137–9 rural credit cooperative unions (RCCUs) 4, 6, 8, 135–6 rural credit cooperatives (RCCs) 10–12, 15, 16, 17, 118, 141; accumulated aggregate losses 36; business operations 34–5; determinants of credit rationing 48–9, 50–1, 73, 76–7, 78, 100–1, 102–3, 124, 125; establishment of 2–3; evaluation of performance in Jiangxi after the pilot program 128–30; fundamental problems before the pilot program 35–8; general status in Jiangxi before the pilot program 34–8; injection of funds 38, 43; management 34, 35, 41–2; negative experiences with 62–3; need for an efficient mechanism to manage and operate 142; negative experiences of 62–3; non-performing loans 6–7, 36; operational inefficiency 37; organizational structure 8, 34; outstanding loans 34–5; ownership structure 7, 8, 35, 38, 43, 130; personnel structure 34; pilot program 7–10, 141; pilot program in Jiangxi 38–43, 43–4; policy objectives 130, 142; provincial government role in managing 7, 8–9, 38–9, 43; quality of staff 37–8; reforms in the 1980s 3–4; reforms in the 1990s 5–7; sustainability of 130 rural finance paradigms 149–50 rural financial system 1–12; 1949–78 2–3; 1979–2002 3–7; after 2003 7–10; chronology of events 11; factors inhibiting the development of 142; policy recommendations 142–3 rural reform and development policy document 143–4 San gang 39

168

Index

selected students 90, 135, 153 semi-structured interviews 32–3 senior high school 89–90, 135 service methods innovation 42, 43 small dealers of production inputs 111, 112, 113–14 specialized banks 3, 5 staff, quality of 37–8 standardization management 129 State Council Documents: Document 15 (Pilot Scheme to Deepen Reform of Rural Credit Cooperatives) 7–9, 39, 130; Document 33 (Resolution on Rural Financial System Reform) 5 status of households’ borrowing 32, 117–23; comparison of the three villages 121–3, 133; formal credit 45–7, 75–6, 97–100, 117–18, 119; informal credit 63–4, 83, 84, 109–11, 118–20, 131–2; Wulitang 75–6, 83, 84, 118, 131–2; Xiaobu 97–100, 109–11, 118, 131–2; Yao 45–7, 63–4, 118, 131–2 Stiglitz, J. 85 student loans 135–6, 154 subsidies 137–8 supply-side determinants of credit rationing 124, 125; Wulitang 76–7, 78; Xiaobu 100–1, 102–3; Yao 48–9, 50–1, 73 sustainability of RCCs 130 taxation 9 third-party guarantees 52–3, 56–7, 118, 119 time costs 57 township and village enterprises (TVEs) 3 traders see merchants/traders, loans from transaction costs 52, 56–7, 79 travel, costs of 57 tuition fees 89, 90; exemption from 134–5 two-track fees 90 undiversified ranges of products 129 unregulated charges 88–9, 90, 134 urban credit cooperatives 36 usurious finance 81, 82, 131, 153 viability of production 101 village committees 104 village head 104–5, 106 villages, natural 17, 24–30, 31; see also Wulitang, Xiaobu, Yao

Wanfu economic and technological development zone 23 Wen Jiabao 143 wholly state-owned commercial banks (WSCBs) 5 World Bank 137 World Health Organization 136 World Trade Organization (WTO) 1 Wulitang 17, 27–8, 31, 32–3, 43, 75–96; access to formal credit 76–80, 95, 124–7; characteristics of borrowing behaviour 119, 121, 122–3, 133; formal credit 75–83, 95–6; general status of households’ borrowing 75–6, 83, 84, 118, 131–2; informal credit 83–95, 96; land leasing 94–5, 96; loans between friends and relatives 83–7; loans for education 84, 87–90, 96; loans for medical care 84, 90–4, 96; participation in the formal credit market 80–3, 95–6, 125, 127–8 Wuning county 21, 22–3 Xiaobu 17, 29–30, 31, 33, 43, 97–116; access to formal credit 100–7, 128; characteristics of borrowing behaviour 119, 121, 123, 133; citrus tree cultivation 29–30, 97–8, 106–7, 108–9, 111–14, 115–16; formal credit 97–109, 115, 128; general status of households’ borrowing 97–100, 109–11, 118, 131–2; informal credit 109–14, 115–16; land leasing 114, 116; participation in the formal credit market 107–9, 115, 128 Xie, P. 39, 99, 100, 142, 143 Xunwu county 21, 23–4 Yan, Z. 13 Yang Ch’ing-k’un 15 Yao 17, 24–7, 31, 32, 43, 45–74; access to formal credit 47–57, 124–7; characteristics of borrowing behaviour 119, 121, 122, 133; duck-breeding 25, 63, 65–72; formal credit 45–63, 73; general status of households’ borrowing 45–7, 63–4, 118, 131–2; informal credit 63–72, 73–4; participation in the formal credit market 57–63, 125, 127–8 Zeller, M. 105, 149 Zhu, J. 13