The Development of Rural Finance in China 9789814332071, 9789814332088

China's Three Rural Issues -rural areas, agriculture, and farmers - have been the core concerns of the Chinese gove

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The Development of Rural Finance in China
 9789814332071, 9789814332088

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187mm

The Development of Rural Finance in China China’s Three Rural Issues–rural areas, agriculture, and farmers–have been the core concerns of the Chinese government in the course of socioeconomic transformation and domestic economic development. Addressing the Three Rural Issues is a crucial task for those involved in development finance. Using theoretical and empirical methods, The Development of Rural Finance in China analyzes and summarizes the features of China’s rural households in the rural credit market and looks at the economic behavior of the supply and demand sides through the prisms of various frameworks: nation, society, system, and culture. • Firsthand data from field research on the economic behavior and financial demands of China’s rural households

260mm

• Systematic examination of the structure and policies of the rural financial system in China • Comprehensive analysis of the agricultural loan market in China, and the role of the government and financial institutions • Practical strategies and suggestions for the development and reform of rural finance in China

the development of Rural Finance in China

Decoding China’s Rural Finance

Authors

Mr. Ma Yong is a Ph.D. in Finance and a Research Fellow of the International Monetary Institute at the China Financial Policy Research Center of the Renmin University of China. His research includes: macroeconomics, financial stability, and finance in rural China. He has published various papers in Chinese academic journals such as Economic Research Journal, Financial Research Journal, and Financial Review, and he has been granted the second-class prize of The Award for Distinguished Scholarship in Philosophy and Social Sciences in Beijing, 2010.

Chinese Financial Studies

Chen Yulu and Ma Yong

Mr. Chen Yulu is the President of the Renmin University of China, a Member of the Monetary Policy Committee of the People’s Bank of China, Vice President of the China International Finance Society, Deputy Secretary-General and Standing Director of the China Society for Finance and Banking. He has also been a visiting scholar from the Eisenhower Exchange Fellowship Program and the Fulbright Program at Columbia University.

187mm

The Development of

Rural Finance in China Chen Yulu and Ma Yong

Published  by Enrich  Professional  Publishing  (S)  Private  Limited   16L,  Enterprise  Road,   Singapore  627660   Website:  www.enrichprofessional.com A  Member  of  Enrich  Culture  Group  Limited +RQJ.RQJ+HDG2I¿FH 2/F,  Rays  Industrial  Building,  71  Hung  To  Road,  Kwun  Tong,  Kowloon,  Hong  Kong,  China &KLQD2I¿FH Rm  1800,  Building  C,  Central  Valley,  16  Hai  Dian  Zhong  Jie,  Haidian  District,  Beijing,  China 8QLWHG6WDWHV2I¿FH PO  Box  30812,  Honolulu,  HI  96820,  USA English  edition  ©  2013  by  Enrich  Professional  Publishing  (S)  Private  Limited Chinese  original  edition  ©  2010  China  Financial  Publishing  House Translated  by  Vivien  Lee (GLWHGE\%DUEDUD&DRDQG*OHQQ*ULI¿WK All  rights  reserved.  This  book,  or  parts  thereof,  may  not  be  reproduced  in  any  form  or  by  any  means,   electronic  or  mechanical,  including  photocopying,  recording  or  any  information  storage  and  retrieval   system  now  known  or  to  be  invented,  without  written  permission  from  the  Publisher. ISBN  (Hardback)   978-­981-­4332-­08-­8   ISBN  (ebook)   978-­981-­4332-­07-­1  (pdf)   978-­981-­4332-­06-­4  (epub)     This  publication  is  designed  to  provide  accurate  and  authoritative  information  in  regard  to  the  subject   matter  covered.  It  is  sold  with  the  understanding  that  the  publisher  is  not  engaged  in  rendering  legal,   accounting,  or  other  professional  service.  If  legal  advice  or  other  expert  assistance  is  required,  the   services  of  a  competent  professional  person  should  be  sought. Enrich   Professional   Publishing   is   an   independent   globally-­minded   publisher   focusing   on   the   eco-­ QRPLFDQG¿QDQFLDOGHYHORSPHQWVWKDWKDYHUHYROXWLRQL]HGQHZ&KLQD:HDLPWRVHUYHWKHQHHGVRI advanced  degree  students,  researchers,  and  business  professionals  who  are  looking  for  authoritative,   accurate,  and  engaging  information  on  China. Printed  in  Hong  Kong  with  woodfree  paper  from  Japan  

Contents Foreword ................................................................................................................

vii

Preface .......................................................................................................................

xi

Acknowledgements ................................................................................................

xv

Chapter 1

The Adverse Situation of Rural Finance in China: ..................... Past and Present

1

Chapter 2

Rural Households’ Behavior in China’s Rural Finance .............

31

Chapter 3

The Agricultural Loan Market in China’s Rural Finance ..........

95

Chapter 4

The Government and Financial Institutions in ........................... China’s Rural Finance

143

Chapter 5

Understanding China’s Rural Finance: ........................................ The Transformation of Rural Households and the Financial Layout

231

Notes

.............................................................................................................

293

References

.............................................................................................................

309

Index

.............................................................................................................

331

Foreword New China has celebrated its 60th anniversary, and the reform and opening-up policy has been implemented for over 30 years. China’s economy has been surging and expanding. Although things change, the issues of rural areas, agriculture, and farmers—referred to as the “Three Rural Issues”—remain as the focus of economic development in China. From the start of the rural reform when the household responsibility system was implemented, to the sudden emergence of rural enterprises in the 1980s, the migration of tens of millions of rural laborers to the urban areas, and the urban-rural integration at the turn of the 21st century, There have been countless milestone events by which the soaring Chinese economy gained extra momentum and the Three Rural Issues are given special status and meaning in the course of socioeconomic reform and domestic economic development. After more than 30 years of development, China’s economic development has achieved many things that have attracted the world’s attention. However, as an agricultural nation, China has been lagging behind in the development of a rural economy. The rural areas were both the starting point and driving force of China’s reform, but under the ideology of “leading by industrialization and prioritizing urbanization,” resources in rural areas are relocated to urban areas, and the agricultural surplus is invested into industrial development. As a result, despite the fact that China has become the third biggest economy in the world, and its development path is regarded as an exemplar for emerging market countries, the problem of imbalanced urban-rural development is still severe. Admittedly, there are many merits in this developmental pathway, but it has undoubtedly posed a major obstacle in China’s further economic development. The history of global economic development tells us that if the development of the rural economy lags behind, it will slow down the pace of the entire domestic HFRQRP\7KHQHZFHQWXU\VLJQLÀHVDQHZSKDVH&KLQD·VUHIRUPLQUXUDODUHDVLVDW a new starting point in history, and reform and opening-up policy has entered into a critical period: substantial reform in the economic system, fundamental changes in the social structure, considerable adjustment of the state of affairs, and profound changes in the mind and values. At this time, facing the persistent problem of poor rural development, we need to search for an effective way and devise practical plans to break through the bottleneck and activate the rural market where there are vast lands and population. Not only can this way improve the lopsided urbanrural dual structure, but it can also establish a solid foundation for sustainable development of China’s economy.

vii

Foreword

Under the conditions of the modern market economy, to solve the Three 5XUDO ,VVXHV UHTXLUHV VXSSRUW IURP PRGHUQ ÀQDQFH 7KLV QRWLRQ VLQFH  KDV SURPSWHGWKH&KLQHVHJRYHUQPHQWWRFRQFHQWUDWHRQUXUDOÀQDQFHLQWKHDQQXDO ÀUVWRIÀFLDOGRFXPHQW 1R'RFXPHQW FRQFHUQLQJWKH7KUHH5XUDO,VVXHV7KHVH GRFXPHQWV KDYH UHSHDWHGO\ KDG LQGHSWK H[SODQDWLRQ DERXW UXUDO ÀQDQFH LQ WKH KRSHRISURPRWLQJÀQDQFLDOUHIRUPDQGGHYHORSPHQWLQUXUDODUHDVDQGUHVROYLQJ the Three Rural Issues. In the time of economic transformation, China’s reform and GHYHORSPHQWRIUXUDOÀQDQFHDUHSURYLGHGZLWKXQSUHFHGHQWHGRSSRUWXQLWLHV ,QUHFHQW\HDUVUHIRUPRIUXUDOÀQDQFHKDVEHFRPHDQDFWLYHUHVHDUFKDUHDIRU VFKRODUV7KHTXHVWLRQVWKH\KDYHUDLVHGDQGWKHGLIÀFXOWLHVWKH\KDYHHQFRXQWHUHG present daunting challenges to traditional thinking and even classic economic theories. Researchers in and outside China have conducted fruitful research in order WRVDOYDJH&KLQD·VUXUDOÀQDQFH%XWGXHWRWKHIDFHWKDWWKHSUREOHPVRI&KLQD·V social economy are special, complex, and long-term accumulated ones, a logical and complete theoretical framework which is accepted by both the economists and the industry has yet to be formed. Further research is required. :KLOH&KLQD·VUXUDOÀQDQFHFDQEHVWXGLHGIURPGLIIHUHQWDQJOHVDQGDVSHFWV a theoretical framework must include the following core aspects: First, the characteristics of the economic behavior of the farmers who are the basis of rural PLFURHFRQRPLFVDQGWKHLQÁXHQFHRIWKRVHFKDUDFWHULVWLFVRQWKHHIIHFWLYHÀQDQFLDO demand. Second, the characteristics of the agricultural credit market which connect the supply and demand sides, and the effect of these characteristics on rural HFRQRPLFUHVRXUFHVDOORFDWLRQRIWKRVHÀQDQFLDOUHVRXUFHV7KLUGWKHFKDUDFWHULVWLFV RIÀQDQFLDOLQVWLWXWLRQVZKLFKDFWDVÀQDQFLDOVHUYLFHVSURYLGHUVDQGWKHLULPSDFW RQWKHHIIHFWLYHÀQDQFLDOVXSSO\)RXUWK&KLQDDVDWUDGLWLRQDOFRXQWU\ZLWKDQ economy directed by the government, under the trend of marketization of rural ÀQDQFHDQGWKHZD\VLQZKLFKWKHJRYHUQPHQWVKRXOGH[HUWLWVLQÁXHQFH)LIWK UXUDO VRFLHW\ LV IDFLQJ FRQWLQXRXV WUDQVIRUPDWLRQ KRZ &KLQD·V ÀQDQFLDO V\VWHP should be developed in order to achieve bidirectional and sustainable development RIUXUDOHFRQRP\DQGUXUDOÀQDQFHLQWKHORQJUXQ6L[WKZLWKPDUNHWLQWHJUDWLRQ DVDEDFNJURXQGEHWZHHQWKHÀQDQFHUHODWHGWRWKH7KUHH5XUDO,VVXHVDQGKRZ that relates to the urban economy, how to form a system in which the two can cooperate and interact to achieve a win-win situation. After identifying the core questions, suitable research methods are necessary WR VXSSRUW WKH DUJXPHQW 'UDZLQJ RQ P\ H[SHULHQFH GLIIHUHQW IURP WKRVH RI PDQ\ RWKHU GLVFLSOLQHV UXUDO ÀQDQFLDO WKHRULHV UHO\ PRUH RQ WKH FRQFOXVLRQ RI DFWXDOH[SHULHQFH,WLVWKHFDVHHYHU\ZKHUHLQWKHZRUOG7KHUHIRUHUXUDOÀQDQFLDO WKHRULHVDUHERWKWKHRUHWLFDODQGSUDFWLFDO7KHVLJQLÀFDQFHLVWKDWZKLOHOLWHUDWXUH

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Foreword

review, deduction, and establishing arguments are essential in the study of China’s UXUDOÀQDQFHRXUSULPDU\MRELVWRVWHSLQWRWKHDFWXDOUXUDODUHDV:HQHHGVXUYH\V on the situations of China’s rural areas, agriculture, and farmers; analyses of the effect of industrialization and urbanization on the three aspects; investigation into WKHHYHUFKDQJLQJGHPDQGRIWKH7KUHH5XUDO,VVXHVIRUÀQDQFLDOVHUYLFHVDQGD VFLHQWLÀFFRQFOXVLRQRIWKHUXUDOÀQDQFLDODFWLYLW\2QO\RQWKLVKROLVWLFEDVLVFDQ we determine the direction of future development and propose effective policies. The special meaning of this book lies here. Based on a series of actual data FROOHFWHGRQVLWHLWREVHUYHVDQGH[SODLQV&KLQD·VUXUDOÀQDQFHIURPWKHDQJOHRI dynamic development. The author analyzes and summarizes the characteristics of China’s rural households being an entity in the market economy, and looks at economic behaviors of the entity relating to the demand for, and supply of, capital in the framework of nation, society, system, and culture. Therefore, the author’s conclusions and proposals are closely tied to the Three Rural Issues. 3URIHVVRU&KHQLVWKHPRVWSURPLQHQWÀJXUHLQWKHPLGGOHJHQHUDWLRQRI&KLQHVH economists. In recent years, his books and research have focused on various areas in HFRQRPLFVDQGÀQDQFHZLWKUHDOLQVLJKW1RZKHLVDERXWWRSXEOLVKQHZÀQGLQJV RI&KLQD·VUXUDOÀQDQFH,EHOLHYHWKLVERRNZLOOLQVSLUHUHDGHUVZKRDUHLQWHUHVWHG in that topic. Professor Chen Yulu invited me to write the preface for this forthcoming book. It is a great privilege for me and I also cherish this opportunity to learn. Li Yang Vice President, Academy Member, Chinese Academy of Social Sciences 'HSXW\3UHVLGHQW&KLQD6RFLHW\IRU)LQDQFHDQG%DQNLQJ

ix

Preface Nobel Prize laureate in economics Gunnar Myrdal has said that “it is in the agricultural sector that the battle for long-term economic development will be won or lost.” In the past, agricultural growth played an important role in economic development. The positive relationship between the two is supported by a great GHDO RI HPSLULFDO UHVHDUFK 'DWD IURP LQGXVWULDO FRXQWULHV DQG IDVWGHYHORSLQJ countries shows that agriculture can originate in non-agricultural growth and UDLVH HFRQRPLF EHQHÀWV RQ WKH ZKROH (FRQRPLF JURZWK GULYHQ E\ DJULFXOWXUDO GHYHORSPHQW LV HVSHFLDOO\ LQÁXHQWLDO LQ FRPEDWLQJ SRYHUW\ DQG IDPLQH WKH ULVH in the employment rate and the income of the agricultural sector stimulates the demand for non-agricultural products and services and non-agricultural income in rural areas. China is in the process of transforming to a middle-income country. As urbanization accelerates and the income gap widens, the Three Rural Issues are becoming a strategic problem in reform, and one of the core concerns of administration for the new government in recent years. According to the national policies, the solution to the Three Rural Issues should center on raising farmers’ LQFRPHQXUWXULQJDQGUHÀQLQJWKHIDFWRUPDUNHWSURPRWLQJWKHWUDQVIHURIUXUDO labor force, and maintaining the stable and sustainable development of agriculture. 2EYLRXVO\WKH7KUHH5XUDO,VVXHVDUHGHSHQGHQWRQWKHVXSSRUWDQGGHYHORSPHQW RIUXUDOÀQDQFHGLUHFWO\RULQGLUHFWO\+RZHYHUWKHFXUUHQWGHYHORSPHQWRIUXUDO ÀQDQFH LV LQ D GLIÀFXOW VLWXDWLRQ )RUPDO ÀQDQFH LV IDGLQJ RXW DQG WKH OHIWDORQH rural credit cooperatives are unable to offer enough support to satisfy the rural ÀQDQFLDOGHPDQG7KHDGYHUVHVLWXDWLRQRIUXUDOÀQDQFHDQGWKHVOXJJLVKLQFUHDVH in farmers’ income are acting on each other, which renders some farmers in distant UXUDODUHDVDV´IRUJRWWHQFRUQHUVµRIÀQDQFH Recently, as China pays more attention to the Three Rural Issues, the core SUREOHPRIUXUDOÀQDQFHKDVFRPHXQGHUWKHOLPHOLJKWRIDFDGHPLFVDQGPDQDJHULDO ERDUGV5XUDOÀQDQFLDOLVVXHVDUHQRWRQO\SDUWRIWKHUHIRUPRIWKHQDWLRQDOÀQDQFLDO V\VWHP LW DOVR UHODWHV WR WKH ÀQDQFLDO VXSSRUW IRU WKH GHYHORSPHQW RI WKH UXUDO areas, agriculture, and farmers. As such, research on, and reform of, China’s rural ÀQDQFHKDVEHFRPHPRUHXUJHQW $PRQJ WKH FXUUHQW UHVHDUFK RQ &KLQD·V UXUDO ÀQDQFH WKH PDMRULW\ IRFXVHV on qualitative studies. Quantitative studies are rare. There is much debate about WKHFUHGLWEHKDYLRURIUXUDOKRXVHKROGVDJULFXOWXUDOFUHGLWPDUNHWDQGÀQDQFLDO VXSSRUW DW WKH OHYHO RI ÀQDQFLDO V\VWHP ,Q WKHRUHWLFDO VWXGLHV ZKHQ UHVHDUFK WRXFKHVRQWKHÀQDQFLDOV\VWHPWKHIRFXVLVVWLOORQZKHWKHUIDUPHUV·FUHGLWEHKDYLRU

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FRQIRUPVWRWKHFODVVLFDOHFRQRPLFDVVXPSWLRQRIUDWLRQDOLW\ WRPD[LPL]HSURÀWV  Some scholars stress the rationality of small farmers, upholding the assumption, while others oppose this by incorporating elements of sociology and history into their analyses, proposing the “survival logic” of small farmers. This kind of debate not only directly touches on the explanation of rural economic behavior, but affects WKHDUUDQJHPHQWRIWKHV\VWHPV LQFOXGLQJWKHÀQDQFLDOV\VWHP LQERWKWKHSDVW and future. Through incorporating elements of sociology and history, the theory of “survival logic” of small farmers explains their credit behaviors under a relatively less advanced economic situation. It has to be pointed out that when these conclusions from long-term historical research are applied to the studies of China’s current UXUDOÀQDQFHDIHZFUXFLDOORJLFDODVSHFWVUHTXLUHGHHSHUFRQVLGHUDWLRQ)LUVWLIZH say famers still abide by the “survival logic,” is this phenomenon a result of culture and tradition as proposed by the studies? Second, much research distinguishes between “rational small farmers” and “surviving small farmers.” In a continuous long-term analysis, the clear-cut separation of the two throughout the diachronic analysis would cause problems because of the possibility of the transformation IURPVXUYLYLQJVPDOOIDUPHUVWRUDWLRQDOVPDOOIDUPHUV2QFHWKLVWUDQVIRUPDWLRQ proves to be real, the long-term conclusion would be different. Third, the studies rely on a lot of historical and cultural understandings to argue that small farmers’ “survival logic” has not changed. But, from the perspective of economic research, this kind of understanding lacks convincing empirical evidence. Moreover, we notice that there are several tendencies and problems in our domestic research which deserve attention: First, they put too much emphasis on the specialty of Chinese rural households and neglect the common economic characteristics of Chinese farmers acting as the economic entity of the market economy. Second, the period of study is too long. They do not offer a reasonable explanation on the logic of continuity. Third, they overstress the incompatibility EHWZHHQWKHIRUPDOÀQDQFLDOV\VWHPDQGUXUDOHFRQRP\ZKLFKSURPSWHGWKHPWR DGRSWDSHVVLPLVWLFSHUVSHFWLYHRQWKHHIIRUWRIUHIRUPLQJIRUPDOÀQDQFHWRERRVW farming. We believe that the aforementioned problems require a new objective interpretation on the credit behavior of rural households, agricultural credit PDUNHWDQGÀQDQFLDOVXSSRUWDWWKHOHYHORIÀQDQFLDOV\VWHP7KLVLQWHUSUHWDWLRQ must have a logical theoretical basis and could undergo empirical examination based on China’s practical condition. We must proceed from the actual situation in China’s rural areas, dissect the micro-economic mechanism in, and constraints on, farmers’ economic behavior, and interpret and evaluate objectively the problems RIWKHGHYHORSPHQWRIUXUDOÀQDQFH LQFOXGLQJERWKIRUPDODQGLQIRUPDOÀQDQFH 

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This would help us in conducting in-depth studies and devising accurate policies UHJDUGLQJUXUDOÀQDQFH 7KHDGYHUVHGHYHORSPHQWLQUXUDOÀQDQFHLVFORVHO\WLHGWRWKHFRPSOH[LW\RIWKH Three Rural Issues. Now, we are at the stage of understanding the problem, and FRQWLQXRXVGHWDLOHGUHVHDUFKLVQHHGHG,QWHUPVRIÀQDQFHRQO\ZKHQWKHUXUDO ÀQDQFLDOSUREOHPLVVROYHGFDQWKHGLVWRUWHGGXDOÀQDQFLDOVWUXFWXUHEHUHIRUPHG In terms of economy, only when the income gap narrows, which would be achieved by an increase in rural income, can the long-term, distorted dual economic structure EHUHFWLÀHG,QWHUPVRIWKHVWDWHRQO\ZKHQWKHGHYHORSPHQWRIXUEDQDQGUXUDO areas achieves a dynamic equilibrium, can our politics, economy, culture, and society all improve. 5HJDUGLQJ &KLQD·V LVVXHV LQ UXUDO DUHDV /LDQJ 4LFKDR D &KLQHVH LQWHOOHFWXDO DQG UHIRUPLVW LQ WKH WK DQG WK FHQWXULHV  RQFH VDLG WKDW ´1HZ &KLQD PXVW originate from rural areas, and the Chinese must reinvent rural areas before they can reinvent China.” When China’s economy again comes to the threshold of change, his words can still describe the importance of the Three Rural Issues in the midst of economic transformation. Without a doubt, in the process of breaking WKURXJKWKHGXDOHFRQRPLFVWUXFWXUHWRDFKLHYHDKLJKHUJURZWKUDWHUXUDOÀQDQFH is the lever to boost the entire economy. Chen Yulu

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Acknowledgements 7KLV UHVHDUFK LV WKH FROODERUDWLYH HIIRUW RI WKH ,QVWLWXWH IRU 5XUDO (FRQRP\ DQG )LQDQFH RI 5HQPLQ 8QLYHUVLW\ RI &KLQD DQG WKH 5HVHDUFK &HQWUH IRU (FRQRPLFV and Rural Finance of the Agricultural Bank of China on the topic “Rural Finance LQ&KLQD&RUH4XHVWLRQVDQG&KRLFHVRI'HYHORSPHQWµ:HH[WHQGRXUJUDWLWXGH to Broad Union Fund of China, the Soon Ching Ling Foundation, and the Renmin 8QLYHUVLW\RI&KLQD6RFLDO6FLHQFHV5HVHDUFK3URMHFWVIRUÀQDQFLQJWKHUHVHDUFK

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1

Chapter

The Adverse Situation of Rural Finance in China: Past and Present

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

We believe that the most basic and yet effective way to tackle unemployment in developing countries is to curb the bias toward the development of strategic cities. —Edgar O. Edwards

China’s Rural Areas in the Dual Economy: A Macroeconomic Background In developing countries, there usually exists a dual economic contrast between the traditional and modern sectors, represented by agriculture and industry, respectively (Lewis 1954, Fei and Ranis 1964, Bardhan and Udry 1999). The study of the contributions of, and relationship between, agriculture and industry in boosting national economic growth is one of the core studies in the modern development of economics. First proposed in the article “Economic Development with Unlimited Supplies of Labor” written by the American economist Arthur Lewis (1954), and subsequently developed by Dale W. Jorgenson, John C. H. Fei, and Gustav Ranis, the dual economy theory states that in areas with a vast agricultural population— South Asia, Southeast Asia, Africa, and Latin America—the co-existence of the traditional agricultural sector and the modern industrial sector is inevitable during economic development: In the traditional agricultural sector, productivity is low, technology is less advanced, and surplus labor exists which brings about zero or even negative marginal productivity. Labor is supplied at a minimum wage and there is an unlimited supply of labor. On the other hand, in the modern industrial sector, there is higher productivity and wages, which attracts the transfer of surplus labor from the traditional sector to the modern sector. This transfer promotes the expansion of the modern industrial sector and raises the marginal productivity in the agricultural sector. Over a period of time, the marginal productivity of the agricultural sector and the industrial sector will equalize, and the dual economic structure will disappear. How to achieve dynamic optimization in a dual economy and a stable transition from a traditional to a modern economy, and avoid the Malthusian Trap, are the core issues in the dual-sector model.1 As the largest developing country in the world, China shows an obvious feature of dual economy. As China’s economy develops, the adverse effect of the dual economy on long-term economic development is becoming more prominent. Since reform and opening up, China’s outstanding economic development has attracted DWWHQWLRQIURPDOORYHUWKHZRUOG+RZHYHUWKHFRQÁLFWVLQWKHGXDOVWUXFWXUHRI urban and rural areas are not yet resolved but accumulating. Because of the failure to shake off the long-lasting constraints of the dual economy, a lot of problems

2

The Adverse Situation of Rural Finance in China: Past and Present

are becoming “chronic diseases.” Not only does this restrict the transmission of structural reform, but it leaves less room for structural adjustment (Liu Yuanchun and Luo Yübo 2003). To a certain extent, the dual economy has become one of the reasons why China’s economic development has reached its bottleneck.2 Corresponding with the development of the dual economic structure, the income gap between urban and rural areas has been widening since the 1990s (see Fig. 1.1). In 2004, China’s income gap was the largest in the world (Li Shi and Yue Ximing 2004). Fig. 1.1.

The income gap between urban and rural residents in China

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

3.5 3.3 3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5

Source: China Statistical Yearbook (1978–2005).

To give a quantitative description of the development of China’s dual economic structure, we employ some basic indexes used by the international economic academics: the difference in comparative labor productivity, dual contrast FRHIÀFLHQW DQG GXDO FRPSDUDWLYH FRHIÀFLHQW   7KH GLIIHUHQFH LQ FRPSDUDWLYH labor productivity is calculated by the non-agricultural labor productivity minus DJULFXOWXUDOODERUSURGXFWLYLW\ZKLFKVLJQLÀHVWKHGLIIHUHQFHLQODERUSURGXFWLYLW\ between the two sectors under a certain labor input. The larger the value LV WKH VWURQJHU WKH GXDOLW\ LV   'XDO FRQWUDVW FRHIÀFLHQW UHIHUV WR WKH UDWLR RI comparative labor productivity of agricultural sector to that of non-agricultural VHFWRU,WUHÁHFWVWKHGHJUHHRIGLIIHUHQFHEHWZHHQDJULFXOWXUDODQGQRQDJULFXOWXUDO comparative labor productivities. The smaller the ratio is, the larger the contrast between the two sectors and hence the more prominent the dual structure is. (3) 'XDOFRPSDUDWLYHFRHIÀFLHQWLVWKHDYHUDJHRIWKHDEVROXWHYDOXHRIWKHGLIIHUHQFH between production ratio (production value of either sector to that of the total) and labor force ratio (labor force of either sector to that of the total) of each sector. The

3

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

smaller the value is, the less prominent the dual structure is. Table 1.1 and Fig. 1.2 present statistic data of the abovementioned indexes. Table 1.1. Year

1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

4

The statistical measurement of the transformation of China’s dual economic structure

Primary industry’s comparative labor productivity 0.60 0.55 0.55 0.55 0.54 0.50 0.59 0.43 0.36 0.47 0.48 0.49 0.47 0.46 0.46 0.49 0.52 0.47 0.44 0.43 0.42 0.42 0.43 0.42 0.43 0.39 0.40 0.45 0.44 0.47 0.49 0.49 0.50 0.45 0.44 0.45 0.43 0.42 0.45 0.41 0.37 0.35 0.37 0.40 0.41 0.39 0.38 0.36

Second and third industries’ comparative labor productivity 3.00 3.20 3.21 3.02 2.93 3.18 1.58 1.94 2.23 2.80 3.39 3.41 3.46 3.38 3.37 3.26 3.16 3.37 3.38 3.25 3.18 3.13 3.03 2.96 2.78 2.77 2.44 2.28 2.23 2.14 2.09 2.04 1.89 1.91 1.86 1.83 1.83 1.88 1.83 1.88 1.89 1.84 1.74 1.66 1.60 1.61 1.62 1.64

Difference in comparative labor productivity 2.40 2.65 2.67 2.67 2.39 2.68 1.00 1.51 1.88 2.33 2.91 2.92 2.99 2.91 2.91 2.77 2.65 2.90 2.94 2.82 2.76 2.70 2.60 2.55 2.34 2.37 2.04 1.83 1.80 1.67 1.60 1.54 1.39 1.45 1.42 1.38 1.40 1.46 1.38 1.74 1.51 1.48 1.37 1.26 1.19 1.22 1.24 1.29

Dual contrast FRHIÀFLHQW 0.20 0.17 0..17 0.17 0.18 0.16 0.37 0.22 0.16 0.17 0.14 0.14 0.14 0.14 0.14 0.15 0.16 0.14 0.13 0.13 0.13 0.14 0.14 0.14 0.16 0.14 0.16 0.20 0.20 0.21 0.23 0.24 0.27 0.24 0.24 0.24 0.24 0.22 0.25 0.22 0.20 0.19 0.21 0.21 0.26 0.24 0.24 0.22

Dual comparative FRHIÀFLHQW (%) 33.0 37.2 37.5 37.1 37.4 40.9 24.1 35.5 42.3 41.0 42.7 42.2 43.8 43.7 43.9 41.4 39.6 43.6 45.6 45.6 46.0 45.3 44.3 44.8 43.0 45.1 42.4 39.6 38.6 36.3 34.8 34.1 32.0 34.0 33.8 33.2 33.7 35.1 33.1 35.3 36.7 36.5 34.0 31.3 29.8 30.5 30.9 32.1

The Adverse Situation of Rural Finance in China: Past and Present

(Cont’d) Year

2000 2001 2002 2003 2004 2005 2006 2007 2008

Primary industry’s comparative labor productivity 0.33 0.31 0.31 0.30 0.32 0.28 0.27 0.27 0.29

Second and third industries’ comparative labor productivity 1.67 1.69 1.69 1.68 1.60 1.58 1.87 1.81 1.47

Difference in comparative labor productivity 1.34 1.38 1.38 1.38 1.27 1.30 1.61 1.54 1.18

Dual contrast FRHIÀFLHQW 0.20 0.18 0.18 0.18 0.20 0.18 0.14 0.15 0.19

Dual comparative FRHIÀFLHQW (%) 33.4 34.5 34.6 34.5 31.7 32.2 36.3 34.7 28.3

Source: China Statistical Yearbook (2000–2009).

Fig. 1.2. 

The trend of the difference in comparative labor productivity, dual FRQWUDVWFRHIÀFLHQWDQGGXDOFRPSDUDWLYHFRHIÀFLHQW % 50

3.5

45

3

40

2.5

35

2

30 25

1.5

20

1

15 10

0.5 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

0

5 0

Difference in comparative labor productivities 'XDOFRQWUDVWFRHIÀFLHQW 'XDOFRPSDUDWLYHFRHIÀFLHQW

According to statistics, and combined with the historical background of China’s socioeconomic development, the transformation of China’s urban-rural dual economic structure can be divided into the following phases: (1) Before 1978: the urban-rural dual economic structure was formed and expanded rapidly; (2) 1979– 1984: duality of urban and rural areas diminished; (3) 1985–1996: urban-rural dual VWUXFWXUH ÁXFWXDWHG   ² XUEDQUXUDO GXDOLW\ ZDV UHLQIRUFHG   DIWHU

5

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

2003: urban-rural dual economic structure faced disintegration. See Table 1.2 for a more detailed description. Table 1.2.

The phases of the transformation of urban-rural dual economic structure in China

Time

Features

Description

Before 1978

The urban-rural

In the early stages of New China, China adopted the

dual economic

strategy of prioritizing heavy industry. It implemented

structure was

mandatory

formed and

administrative planning to organize and allocate

expanded

VRFLDOUHVRXUFHV5XUDOUHVRXUFHVÁRZHGWRXUEDQDUHDV

rapidly

by means of “price scissors” to support the urban

industrial

accumulation

through

industrialization. This forging ahead strategy based on the suppression of agricultural development caused the widening of the urban-rural gap, and the deterioration of the urban-rural dual economic structure: The difference in comparative labor productivity between the primary and the other two industries continued to LQFUHDVHDQGUHPDLQHGKLJKGXDOFRQWUDVWFRHIÀFLHQW stayed below 0.2, which was lower than that of the developing countries (0.31–0.45); dual comparative FRHIÀFLHQWUHPDLQHGKLJK DERYH  1979–1984

Duality of urban

At the beginning of the period of reform and opening

and rural areas

up, economic reform started from agriculture. In the

diminished

short run, rural economy became active. The core of the national economic growth followed the direction of agriculture and light industry, which, to a certain extent, changed the situation of over-emphasis on heavy industry. The success in rural reform resulted in the narrowing of the urban-rural income gap and the dual structure was also weakened: The difference in comparative labor productivity between the primary and the other two industries dropped from 1.83 to  GXDO FRQWUDVW FRHIÀFLHQW URVH IURP  WR  GXDOFRPSDUDWLYHFRHIÀFLHQWGHFUHDVHGIURPWR 32.0%

6

The Adverse Situation of Rural Finance in China: Past and Present

(Cont’d) Time

Features

Description

1985–1996

The urban-rural

Since 1984, the focus of reform in China has shifted

dual structure

from rural to urban areas, which triggered rapid

ÁXFWXDWHG

economic development in cities for successive years. Reform of the urban economic system was LPSOHPHQWHGRQWZROHYHOVWKHÀUVWOHYHOLVWRUHIRUP the state-owned enterprises, and the second is to promote the economic development of non-stateowned enterprises. The overheated economy caused VHYHUHLQÁDWLRQLQWKHHDUO\VZKLFKSURPSWHGWKH Chinese government to adopt “soft landing” economic policies from 1994 onwards. As a result, the expansion of the industrial sector halted, and measures designed to support agricultural development were adopted. The industrial output of the primary industry has weighed more than 20% again since 1994. Under such conditions, the enhancement of the duality of urban and rural areas was temporarily suppressed: Up to 1996, the difference in comparative labor productivity between the primary and the other two industries FRQWLQXHG WR GURS WR  GXDO FRQWUDVW FRHIÀFLHQW FOLPEHGEDFNWRDQGGXDOFRPSDUDWLYHFRHIÀFLHQW dropped to 29.8%

1997–2002

Urban-rural

In this phase, due to socioeconomic problems, such as

duality was

GHÁDWLRQDQGDVXUJLQJXQHPSOR\PHQWUDWHLQXUEDQ

reinforced

areas, the macroeconomic regulation and control unit provided more support to the urban economy, and the social security system was biased toward the urban sector in order to maintain social stability. Against such a backdrop, since the middle and later half of the 1990s, duality of urban and rural areas grew strong again: The difference in comparative labor productivity between the primary and the other two LQGXVWULHVDQGGXDOFRPSDUDWLYHFRHIÀFLHQWLQFUHDVHG to 1.38 and 34.6%, respectively, in 2002, and dual FRQWUDVWFRHIÀFLHQWFRQWLQXHGWRGHFUHDVHWR

7

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

(Cont’d) Time

Features

Description

After 2003

The urban-rural

The 16th National Congress and the 3rd Plenary Session

dual economic

of the 16th Central Committee of the Communist Party

structure faced

of China (CPC) put the resolving of the Three Rural

disintegration

Issues as the top priority. In order to coordinate the socioeconomic development of urban and rural areas, effort was made to ensure that industry supports agriculture, urban areas support rural areas, and rural areas were took less and were given more with loosened control. The government drafted four No.1 Documents from 2004 to 2007 concerning the Three Rural Issues with distinct themes, namely “Increase Rural Income,” “Raise the Overall Agricultural Production Capability,” “Promote Socialistic New Rural Constructions,” and “Actively Develop Modern Agriculture.” The joint research group of the China Rural Labor Association under the Development Research Center of the State Council, planned three stages for China to eliminate the dual economic structure. First stage (2004–2010): gradually and partly suppress the expansion of dual economic structure to achieve overall preliminary structural improvement. Second VWDJH ²  VLJQLÀFDQWO\ DPHOLRUDWH WKH GXDO structure. Third (2021–2050): basically disintegrate the dual structure.

Zeng Yinchu (2006) categorized China’s industrialization into four periods (19491978, 1979–1992, 1993–1996, and after 1997) based on the features of the strategies of industrialization and the changes in background environment. He believed that the effect on the transformation of the dual structure was more prominent during the period of reform and opening up than during the period of the planned economy. If reform and opening up was further divided into three periods, the structural transformation was fastest during 1979–1992, the improvement of the

8

The Adverse Situation of Rural Finance in China: Past and Present

dual structure was fastest during 1993–1996, and industrialization became less effective on the transformation of the dual structure after 1996. Table 1.3.

Period

The comparison of the rate of change of economic structure during different periods Year

Average annual

Average annual

Annual contraction

growth rate of

contraction in

in agricultural

per capita GDP

the percentage of

employment

(%)

agricultural GDP to

percentage (%)

total GDP (%) 1st 2nd 3rd 4th Note:

1952–1978 1979–1992 1993–1996 1997–2004

3.79 7.99 9.69 7.43

0.83 0.72 –0.16* 0.56

0.48 0.87 1.97 0.43

* There was an increase of 0.16% during 1993–1996.

Source: Zeng Yinchu, Renmin University of China’s Report on China’s Economic Development (Beijing: Renmin University of China Press, 2006).

The above analysis demonstrates that China has a typical dual economic structure. Moreover, it shows differences in different periods. Chronologically, DV SUHYLRXVO\ GHPRQVWUDWHG LWV WUDQVIRUPDWLRQ ÁXFWXDWHG DQG ZDV UHSHWLWLYH Regionally, the transformation process was the fastest in the east, followed by the central region, and the west came last. Using the cross-sectional data of China’s 31 provinces, municipalities, and autonomous regions as an example, the huge GLIIHUHQFHH[LVWVLQGXDOFRQWUDVWFRHIÀFLHQWDPRQJGLIIHUHQWSODFHV7KHFRHIÀFLHQW was largest in Yuannan and the smallest in Hainan, with an over fourfold difference (see Fig. 1.3). The above facts show that, from east to west, the degree of transformation of the dual economic structure is diminishing, and the degree of contrast is increasing.

9

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

)LJ

7KHGXDOFRQWUDVWFRHIÀFLHQWRI&KLQD·VSURYLQFHV municipalities, and autonomous regions

12 10 8 6 4

0

Beijing Tianjin Hebei Shanxi Inner Mongolia Liaoning Jilin Heilonggang Shanghai Jiangsu Zhejiang Anhui Fujian Jiangxi Shandong Henan Hebei Hunan Guangdong Guangxi Hainan Chongqing Sichuan Guizhou Yunnan Xizhuang Shaanxi Gansu Qinghai Ningxia Xinjiang

2

Source: Gao Fan, “Transformation of china’s dual economic structure: Track, characteristics, and effect,” Study and Exploration 6 (2007).

As a whole, the transformation of China’s dual economic structure is rather slow. The long-term accumulated problems in the system have brought more problems to the current adjustment of economic structure. Dual economy has indisputably caused many structural complications which has in turn brought negative consequences to the social economy: (1) In terms of resources allocation, the dual economic structure has caused segmentation of the factor markets. The labor force of the traditional sector cannot work well with the capital of the modern sector, resulting in a double surplus of labor and capital (Wang Jiangui 2002). (2) In terms of the economic growth mode, the dual economic structure has caused a concentration of capital in the modern sector. Growth in industry was motivated by investments rather than technological advancement. The FRQWLQXDOLQFUHDVHLQWKHFDSLWDORXWSXWUDWLRMXVWLÀHGSHRSOH·VGRXEWVDERXW the sustainability of this type of growth (Hayami 2003). (3) In terms of regional development, the dual economic structure does not help the regions to be mutually supplementary and dependent. The allocation of capital, labor, technology, and etc., are hardly at best. These two factors lead

10

The Adverse Situation of Rural Finance in China: Past and Present

to an inter-regional backwash effect instead of diffusion effect, as witnessed VLQFH  ZKHQ WKH UHJLRQDO JDS ÀUVW FORVHG XS EHIRUH ZLGHQLQJ DJDLQ showing a U-shaped trend (Lin Yifu and Liu Peilin 2003). (4) In terms of income distribution, the dual economic structure does not allow the market competition mechanism and the wage equalization mechanism WRIXOO\IXQFWLRQ7KHPRGHUQVHFWRUFDQQRWEHQHÀWWKHWUDGLWLRQDOVHFWRUE\ trickle-down effect. The urban-rural income gap does not quickly close up but expand (Cai Fang 2002). Moreover, the dual economic structure is self-repetitive and derivative: If the duality of industries is the core of the entire economic structure, it will further ´FORQHµDQGJHQHUDWHE\SURGXFWVRIUHJLRQDOÀQDQFLDODQGWHFKQRORJLFDOGXDOLW\ These by-products interact and reinforce one another, which causes duality to become strengthened and seep into every aspect of the economy. Dual economy is transforming from an issue into a problem.

Urban-Rural Resources Allocation Under the Dual Economy: The Repressed Rural Finance Capital, as we have learnt in the previous sections, plays an important role in the transformation of the dual economy. It follows that the successful transformation of the dual economy is energized by the capital mechanism. Under the HarrodDomar model, capital is the crucial factor in economic growth, assuming technology remains unchanged. In fact, Schultz’s traditional agricultural model states that reforming traditional agriculture can be through an increase in capital, technology, and institutions, etc., so as to expand the source of agricultural income. Chinese scholar Wen Tiejun also holds that agriculture revived under the Dabaogan, the individual peasant small-holding responsibility system, can be regarded as traditional agriculture. What Schlitz believes is prevalent in traditional agriculture—a lack of capital and technology, and institutions—still holds true in &KLQD:KDWKLQGHUVWKHGHYHORSPHQWRI&KLQD·VUXUDOÀQDQFHLVDVHULRXVVKRUWDJH RI FDSLWDO 2QO\ ZKHQ WKH FDSLWDO VKRUWDJH LV VROYHG FDQ &KLQD·V UXUDO ÀQDQFH improve. 0DQ\VWXGLHVKDYHVKRZQWKDWÀQDQFLDOLQWHUPHGLDULHVDUHDWWKHFRUHRIFDSLWDO formation and allocation (e.g. King and Levine, 1993). In the dual structure, the UXUDOFDSLWDOVKRUWDJHLPSOLHVDPLVDOORFDWLRQRIÀQDQFLDOUHVRXUFHV,QWKHWKHRU\ RI ÀQDQFLDO UHSUHVVLRQ 0F.LQQRQ   REVHUYHV KRZ LQ RUGHU WR SURPRWH LQGXVWULDOL]DWLRQ VRPH GHYHORSLQJ FRXQWULHV VXSSUHVV WKH ÀQDQFLDO VHFWRU E\ KHDYLO\UHJXODWLQJLQWHUHVWUDWHVDQGLQÁXHQFLQJFUHGLWDOORFDWLRQE\DGPLQLVWUDWLYH

11

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

means. These measures have kept many small and medium–sized enterprises, LQGLYLGXDOPHUFKDQWVDQGUXUDOKRXVHKROGVIURPWKHÀQDQFLDOPDUNHW2QO\WKRVH modern businesses controlled or favored by the government, large- and mediumsized enterprises and a few of those privileged ones, could obtain capital support. This financial repression directly led to a further imbalance of the dual economic structure. There is abundant literature about the established fact of the imbalanced credit allocation toward urban areas under the dual economic structure. Some of the representative works include Yang and Zhou (1999), Li Yifu (2002), Zhang Qi (2003), and many others.3 The World Bank pointed out in its summary of the global H[SHULHQFHRIGHYHORSLQJUXUDOÀQDQFH´,QPDQ\GHYHORSLQJFRXQWULHVWKHPDLQ reason why rural development lags behind is that they favor industry but neglect agriculture; their policies focus on the urban sector but neglect the rural sector. 7KHVH SROLFLHV UHGXFH WKH SURÀWDELOLW\ RI DJULFXOWXUDO DQG UXUDO QRQDJULFXOWXUDO HQWHUSULVHVDQGGHVWUR\HGWKHUXUDOÀQDQFLDOPDUNHW0DQ\SROLFLHVDUHEHQHÀFLDO to the owners of large farms but not to the owners of small farms or the poor farmers. This worsens the income allocation to the agricultural and rural sector. Countries which discriminate most against agriculture are countries who have the lowest economic growth rate.” $QG VLQFH ÀQDQFLDO PDUNHW FRPSHWLWLRQ LV GLUHFWHG E\ WKH SULFH VLJQDOV WKH ÀQDQFLDOPDUNHWDQGWKHFRPPRGLW\PDUNHWDUHFORVHO\UHODWHG&RQIXVLQJSULFH signals in the commodity market would cause a misallocation of resources in the ÀQDQFLDOPDUNHW)RUPDQ\\HDUVGHYHORSLQJFRXQWULHVKDYHLPSRVHGKLJKWD[HV on the agricultural sector through a series of direct or indirect policies. Those SROLFLHVW\SLFDOO\ IDYRULQJ WKH XUEDQ VHFWRU VHYHUHO\ DIIHFWHG WKH SURÀWDELOLW\ RI agricultural enterprises and non-agricultural rural enterprises.4 Based on the 1960– 1984 data from 18 countries, Schiff and Valdes (1992) estimated that direct and indirect governmental interference caused the domestic agricultural trade to drop 30%, and revenue transfer from agriculture accounted for 46% of the agricultural GDP. This “seizure from agriculture” is very short-sighted because countries with discriminatory policies against agriculture have a very low economic growth rate. It should be noted that China’s dual economic structure has been also shaped by a raft of socio-political, economic, and historical factors. No doubt, the economic SHUVSHFWLYH WKH UHSUHVVLRQ RI UXUDO ÀQDQFH DQG WKH UHVXOWLQJ RXWÁRZ RI UXUDO ÀQDQFLDOUHVRXUFHVKDYHREYLRXVO\EHHQVWUHQJWKHQLQJWKHGXDOHFRQRPLFVWUXFWXUH First, in order to prioritize the development of heavy industry—as part of its Forging Ahead strategy—the central government for the longest time has suppressed the interest rate to ensure that capital which was in shortage was DOORFDWHGWRWKHXUEDQLQGXVWULDOVHFWRUÀUVW /LQC>A1, and A1’s would be B1>C1>A.

71

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

Obviously, credibility founded on kinship is a kind of relation credibility, but not contact credibility. The latter is generally regarded as the basis for regulating HFRQRPLF EHKDYLRU UHGXFLQJ WUDQVDFWLRQ FRVW DQG H[SDQGLQJ WKH URRP IRU transaction in market economy. Then, what role does relationship credit play in HFRQRPLFDFWLYLWLHVDQGKRZGRHVLWLQÁXHQFHUXUDOKRXVHKROGV·HFRQRPLFEHKDYLRU" Unlike the urban social structure, the rural area system is a typical “acquaintance society.” As villagers live in the same geographic community, everyone can accumulate perfect information of one another. Therefore, information asymmetry JHQHUDOO\ GRHV QRW H[LVW DPRQJ UXUDO KRXVHKROGV ,Q DGGLWLRQ WKHLU EHOLHI RI WKH timely return of a loan, which makes it easier to borrow a second time, and the commonly acknowledged moral factors such as face, gratitude, relationships, etc., strongly guide and constrain rural households’ behavior.22 &KLQD·VUXUDOKRXVHKROGVKDYHVSHFLDOWUXVWLQÁXHQFHGE\WUDGLWLRQDOFXOWXUH ZKLFKUHLQIRUFHVWKHEXLOGXSRISHUVRQDOFUHGLWWKH\DUHQRORQJHUMXVWLQGLYLGXDO economic men, but social men in the midst of human relationships and moral evaluation. Genetic and emotional closeness and psychological identity, resulting from relationship credit, resemble the physical property of kinship, which are encoded in the genes of rural households. Once rural households appear as a social man in economic activities, their economic behavior would be regarded as part of their ethics and personality, which would in the end be internalized as social evaluation of individual value. From the perspective of economics, to China’s rural households, personal ethical credibility is the basic requirement in a transaction, and they also bear the high cost of betraying ethics: Any dishonest behavior which LQFXUVDEUHDFKRISURPLVHLVWUHDWHGDVDQH[HPSOLÀFDWLRQRIWKHIDLOXUHRIHWKLFV One will be punished economically as well as being socially degraded. At the same time, in an acquaintance society, dishonest behavior is easy to discover. This further increases the risk probability of betraying trust. Thus, it can be said that the personal credit of China’s rural households is an ethical social capital,23 which has not only the properties of capital for production, development, and accumulation, but also the ethical properties of guiding and restraining human behavior. The combined effects of the two imply that rural households have to highly preserve their personal credit and also spontaneously take up the responsibility of debts. Without a doubt, the acquaintance community keeps community members in a FRQÀQHGJHRJUDSKLFFRPPXQLW\7KHLPPRELOLW\RIVRFLHW\³DVWKH\OLYHWKHUHWKHLU whole lives—places them in the repetitive gaming, and, together with the concept of “son paying father’s debt,” makes the economic activities of rural households not only repetitive gaming but eternal gaming. In such a situation, a participant in DUHODWLRQVKLSFDQQRWH[WULFDWHKLPRUKHUVHOIIURPDQ´HPEHGGHGµUHODWLRQVKLS ZKLFK JLYHV ULVH WR PXWXDO WUXVW DQG KRQHVW\ 4LX -LDQ[LQ DQG 7RQJ ;LQJ  

72

Rural Households’ Behavior in China’s Rural Finance

This credit mechanism which is deeply rooted in acquaintance society can also ZRUN EHWZHHQ UXUDO KRXVHKROGV DQG ÀQDQFLDO LQVWLWXWLRQV 7KH SURFHVV RI UXUDO KRXVHKROGV· REWDLQLQJ ORDQV IURP ÀQDQFLDO LQVWLWXWLRQV LV D ORQJWHUP UHSHWLWLYH JDPLQJ7KHWUDQVDFWLRQLVQRWRQHRIIEXWUHSHWLWLYH7KHSURFHVVZLOOHYHQWXDOO\ ÀQG DQ HTXLOLEULXP VROXWLRQ ZKLFK HQDEOHV ERWK SDUWLHV WR REWDLQ PD[LPXP EHQHÀWV³WR ORQJWHUP SDUWQHUV IXOÀOOLQJ FRPPLWPHQWV LV D EHWWHU VWUDWHJ\ WKDQ EHWUD\DO2QO\ZKHQFRPPLWPHQWVDUHIXOÀOOHGFDQWKHUHEHFRRSHUDWLYHVXUSOXV Breaching promise can lose the opportunity to borrow. One would have to bear heavy psychological pressure and be regarded as having little credibility, and even WKHQH[WIHZJHQHUDWLRQVPD\VXIIHU .XDQJ R1 0DUJLQDOUHWXUQVGLPLQLVKDWDKLJKHUOHYHO as capital increases. Fig. 5.1.

Indivisible investments and the fractured curve of return on capital

MR R3

G Advanced producers

R2

3RYHUW\WUDS 6HOIVXIÀFLHQW area ECDF R2R1CE   E F

MR2 Marginal return on capital rises at the critical point

MR1 R1 O

C

D

A

B

Capital owned

With the knowledge of the segmented marginal return on capital curve, we can analyze how the poverty trap is formed, persists, and can be broken through from. We assume R2 to be the lowest average rate of return on capital in the regular commercial credit market. Any investment project with a rate of return on capital lower than R2 would not be able to obtain regular commercial credit in the market. In Fig. 5.1, the entire MR1 is below R2. Rural households who have capital smaller than OB (lying in area OR2FB FDQQRWREWDLQH[WHUQDODQGUHJXODU FRPPHUFLDOÀQDQFLQJ)RUWKRVHZKRKDYHFDSLWDOVPDOOHUWKDQOA, i.e. when MR1 is diminishing, as a small increase in capital deposit can only bring repeated simple production but not marginal returns, R2R1CE UHSUHVHQWV WKH SRYHUW\ WUDS $V FDSLWDOGHSRVLWDQGWKHLQFUHPHQWVRIREWDLQDEOHFDSLWDODUHYHU\LQVXIÀFLHQWUXUDO KRXVHKROGVDUHFRQÀQHGWRVLPSOHDQGUHSHWLWLYHSURGXFWLRQ)DFLQJGLPLQLVKLQJ marginal returns, even if they obtain some production surplus, they would invest LWLQLQHIÀFLHQWDQGUHSHWLWLYHVLPSOHSURGXFWLRQ5DWKHUWKH\ZRXOGVSHQWLWRQ

236

The Transformation of Rural Households and the Financial Layout

QRQSURGXFWLRQVXFKDVFRQVXPSWLRQRUNHHSLWDVVDYLQJV$VORQJDVREWDLQDEOH capital increment is smaller than OA WKLV W\SH RI LQHIÀFLHQW HTXLOLEULXP ZRXOG persist. The situation was different in the part where marginal returns increase. The LQFUHDVHLQFDSLWDOGHSRVLWPDNHVUDLVLQJSURGXFWLRQHIÀFLHQF\E\HPSOR\LQJQHZ technology a possibility. Facing a rising marginal return curve, rural households who have a certain amount of capital deposits can invest in I2 production by borrowing loans and utilizing the surplus they have accumulated, gradually extricating themselves from the poverty trap. However, even though the simultaneous increase in capital deposit and return is possible in area ECDF, the marginal return is still lower than R2. Rural households remain unable to obtain ÀQDQFLQJIURPWKHUHJXODUFRPPHUFLDOFUHGLWPDUNHW7KHLUÀQDQFLQJFKDQQHOVDUH mainly accumulated surplus, private lending (loans from family and friends, and XVXU\ DQGQRQFRPPHUFLDOORDQV HJSROLF\ORDQV 7KHUHIRUHWKLVDUHDLVWHUPHG ´VHOIVXIÀFLHQWDUHDµ:KHQFDSLWDOGHSRVLWLVODUJHUWKDQOA, increasing marginal returns encourage rural households to break through from the poverty trap to UHDOL]HVHOIVXVWDLQDELOLW\ VHOIGHYHORSPHQW 7KURXJKFDSLWDODFFXPXODWLRQVRPH may break through at BDQGGHYHORSLQWRDGYDQFHGSURGXFHUV7KHLUSURGXFWLRQ, DELGHVE\WKHODZRIUHWXUQRQFDSLWDO,QDGGLWLRQRQFHWKH\EHFRPH,SURGXFHUV the marginal and average return would always be higher than R2. In other words, in the area where MR2 lies, rural households would be able to obtain regular FRPPHUFLDOFUHGLW 7KHUH LVQRORZOHYHOHTXLOLEULXP DQGUXUDO KRXVHKROGVKDYH extricated themselves from the poverty trap.

Borrowing behavior in the self-sufficient area: The logic of usury As mentioned in the previous section that rural households who have capital deposit larger than OAZRXOGSRVVHVVWKHDELOLW\WREHVHOIVXVWDLQDEOHDQGZRXOG obtain various types of loans to compensate for the capital shortage in order to achieve higher marginal and average returns. A logical deduction is that rural households with capital deposit between ABZRXOGIUHTXHQWO\ERUURZORDQV$V the amount of capital deposit approaching B, the demand for loans is stimulated E\WKHH[SHFWHGSURÀWDVPDUJLQDOUHWXUQLQFUHDVHV,WLVORJLFDOIRUXVXU\WRHPHUJH as the marginal and average returns R3RILQYHVWPHQWLQ,DUHPXFKODUJHUWKDQ the interest paid for usury, especially when a small amount of usury would make WKH RULJLQDOO\ LPSRVVLEOH LQYHVWPHQW LQ , SRVVLEOH :LWK PRUH FDSLWDO GHSRVLW investments are no longer limited to projects with a level of return between R1 to R2. With reference to the face value of usury, the interest rate may be extremely high. However, considering the driving effects of it which brings very high marginal

237

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

utility (bringing the drastic increase of the rate of return on capital from R2 to R3  the weighted average interest rate of usury with respect to the total capital input may be much lower than R2. To explain the above logic, we employ the following mathematical deduction. Assume rural households carry out I2 production, which has an average rate of return R2, and the total capital deposit is C1. Now, the households face an investment RSSRUWXQLW\WRWUDQVIRUPWKHLUSURGXFWLRQLQWR,SURGXFWLRQZKLFKSXVKHVXSWKH rate of return on investment from R2 to R3, but an indivisible initial capital input C (C > C1 LVUHTXLUHG7KHKRXVHKROGVFRQVLGHUERUURZLQJORDQVDWDQLQWHUHVWUDWHR. 7KHDPRXQWRIFDSLWDOQHHGVWREHERUURZHGL = C – C1 ,QWHUHVWSDLGRQPDWXULW\I = LR = (C – C1 R 7KHWRWDOLQFRPHE\LQYHVWLQJLQ,T = CR3 T–I CR3  – (C–C1 R C C 7KHÀQDOUDWHRIUHWXUQRQLQYHVWPHQW = = R3  – R+R C1     C1   C C             1           1 7KHFRQGLWLRQIRUUDWLRQDOERUURZLQJ

C C R3  – R+R •R2 C1              C1

C R 3– R 2 = m (as C > C 1 , m! WKHFRQGLWLRQIRUERUURZLQJLVR ”R 3 + . C1     m–1                         Obviously, when is R3 increases and m  decreases, the loan rate which the households can bear would increase. In other words, they may be able to tolerate usury. Also, a small m implies a large C1. When C1 approaches the capital deposit needed for LQYHVWPHQWLQ,DVPDOOFDSLWDOLQFUHPHQW L = C – C1 ZRXOGEHDEOHWRVDWLVI\WKH indivisible initial capital input C. Usury is economically rational. From the above deduction, it can be further deduced that, due to the fact that investment is indivisible and the sudden rise in the marginal return on capital, as capital deposit approaches the critical point of investment B, the occurrence of XVXU\LVPRUHIUHTXHQW If

The government and the agricultural loan market: Corner solution or interior solution? 7KH FRH[LVWHQFH RI IRUPDO DQG LQIRUPDO ÀQDQFLDO LQVWLWXWLRQV LV FRPPRQ LQ GHYHORSLQJFRXQWULHV7KHWKHRULHVRIÀQDQFLDOUHSUHVVLRQUHSUHVHQWHGE\0F.LQQRQ  FODLPWRRPXFKJRYHUQPHQWLQWHUYHQWLRQFDXVHVLQHIÀFLHQF\DQGÀQDQFLDO UHSUHVVLRQ ZKLFK JLYHV ULVH WR WKH GXDO ÀQDQFLDO VWUXFWXUH 1HZ VWUXFWXUDOLVP 238

The Transformation of Rural Households and the Financial Layout

UHSUHVHQWHG E\ 6WLJOLW] DQG :HLVV   VWUHVVHV WKDW WKH GXDO VWUXFWXUH FDQ EH explained by information asymmetry, the difference in selection, supervision, and FRQWUDFWFRVWV)XUWKHUUHVHDUFKKDVIRXQGWKDWLQIRUPDOÀQDQFHLVVWLOOFRPPRQLQ FRXQWULHV RU UHJLRQV ZKHUH WKHUH LV ÀQDQFLDO OLEHUDWLRQ /LQ Li UXUDOKRXVHKROGVIDFHÀQDQFLQJFRQVWUDLQWV)LQDQFLDO institutions implement credit rationing. When Li*   < Li  WKH RSWLPDO TXDQWLW\ GHPDQGHG IRU ÀQDQFLQJ OLHV LQVLGH WKH FUHGLW UDQJH )LQDQFLQJ FRQVWUDLQWV DUH removed. Rural households can determine the actual line of credit they prefer. )LJ  DQG )LJ  VKRZ WKH VLWXDWLRQ ZLWK DQG ZLWKRXW ÀQDQFLQJ FRQVWUDLQWV respectively.

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$VVKRZQLQ)LJWKHFUHGLWOLPLWRIUXUDOKRXVHKROGVLVGHWHUPLQHGE\WKH 1+r intersection of Fi (L DQG a L, of which those of type I and type II rural households are L1 and L2 , respectively. The demands L1 DQGL2 IRUFUHGLWRIW\SH,DQG,,UXUDO

258

The Transformation of Rural Households and the Financial Layout

KRXVHKROGVHTXDOWRWKHVORSHRIWKHWDQJHQWSRLQWRIWKHLURZQUHWXUQRISURGXFW functions (1 + r $VERWKL1 DQGL2 DUHODUJHUWKDQWKHLUFRUUHVSRQGLQJFUHGLWOLPLW L1 and L2  ERWKW\SHVRIUXUDOKRXVHKROGVIDFHFUHGLWFRQVWUDLQWV7KHÀQDQFLQJJDS for type I rural households is L1 ²L1 and for type II is L2 ²L2  . Of course, changes in the parameters of the model would change the positions of the curves and the VORSHV2QFHWKHRSWLPDOTXDQWLW\GHPDQGHGIRUFUHGLWIDOOVEHORZWKHFUHGLWOLPLW ÀQDQFLQJFRQVWUDLQWVZRXOGEHUHPRYHG VHH)LJ 

Model extension: Information asymmetry and credit differentiation ,IWKHUHLVQRLQIRUPDWLRQDV\PPHWU\LQWKHUXUDOÀQDQFLDOPDUNHWLQIRUPDWLRQRI W\SH,DQG,,UXUDOKRXVHKROGVDUHSXEOLF$Q\ÀQDQFLDOLQVWLWXWLRQVLQWKHPDUNHW can obtain that information. They would be able to determine the line of credit IRUHDFKKRXVHKROG:KHQWKHW\SHRIKRXVHKROGFDQEHGLVWLQJXLVKHGÀQDQFLDO institutions would offer L1 and L2 as the upper limit of credit ranges. Credit demand which does not fall in the ranges would lead to credit rationing. In other words, ZKHQWKHUHLVVXIÀFLHQWDQGV\PPHWULFDOLQIRUPDWLRQDQ\ÀQDQFLDOLQVWLWXWLRQVFDQ employ credit differentiation, i.e. offering more credit support to rural households who have more assets and a higher return. Credit differentiation is similar to the microeconomic concept of price discrimination. Under perfect information, ÀQDQFLDOLQVWLWXWLRQVFDQGHYLVHWKHVWUDWHJ\WRLVVXHGLIIHUHQWDPRXQWRIFUHGLWWR different parties so as to achieve optimization of the credit structure and return maximization. 8QGHU LQIRUPDWLRQ DV\PPHWU\ ZKDW FUHGLW DOORFDWLRQ VWUDWHJ\ GR ÀQDQFLDO LQVWLWXWLRQVDGRSW"$FFRUGLQJWRJHQHUDOJDPHWKHRU\ZKHQÀQDQFLDOLQVWLWXWLRQV cannot distinguish between two types of rural households, they estimate the GLVWULEXWLRQSUREDELOLW\RIWKHWZRW\SHVRIKRXVHKROGVIURPH[SHULHQFHDQGÀUVW WKRXJKWV7KH\HPSOR\WKHVWUDWHJ\RIPL[HGHTXLOLEULXPLQFUHGLWLVVXDQFH%DVHG on our model, the cost of breach of contract for type I rural households is C1(L DQG that for type II is C2  (L 7KHSURSRUWLRQVIRUW\SH,DQGW\SH,,UXUDOKRXVHKROGVDUH _and 1–_, respectively. Therefore, the cost of breach of contract of rural households H[SHFWHGE\ÀQDQFLDOLQVWLWXWLRQVLVEC (L  _C1  (L  ²_ C2  (L For rural households to repay their debts, the condition that EC (L • r L PXVWEHVDWLVÀHG$VDUHVXOWWKHLQFHQWLYHFRPSDWLELOLW\FRQVWUDLQWLVUHSUHVHQWHG as 1+r F (L  _F1  (L  ²_ F2  (L • a L The marginal rate of output of the type I households is larger than that of type II, i.e. F1’ (L !F2’ (L 7KHUHIRUH

259

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

F1’ (L !F’ (L !F2’ (L 7KHPL[HGHTXLOLEULXPOLHVEHWZHHQF1  (L DQGF2  (L 7KHFRUUHVSRQGLQJFUHGLW limit L lies between L1 and L2, i.e. L2 < L < L1 VHH)LJ  Fig. 5.5.

Information asymmetry, credit differentiation, and mixed equilibrium

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7KHDERYHDQDO\VLVLOOXVWUDWHVWKDWWRÀQDQFLDOLQVWLWXWLRQVFUHGLWGLIIHUHQWLDWLRQ XQGHU V\PPHWULF LQIRUPDWLRQ LV SUHIHUUHG WR PL[HG HTXLOLEULXP VWUDWHJ\ XQGHU DV\PPHWULFLQIRUPDWLRQ7KHUHDVRQLVWKDWZLWKPL[HGHTXLOLEULXPVWUDWHJ\W\SH,, rural households which incur higher risk and a lower rate of return on investment WDNHXSSDUWRIWKHOLQHRIFUHGLWRIW\SH,UXUDOKRXVHKROGV,WHTXDOVWRVXEVWLWXWLQJ ORZULVN KLJKUHWXUQ LQYHVWPHQW IRU KLJKULVN ORZUHWXUQ LQYHVWPHQW 0RUHRYHU type I rural households incur lower risk and a higher rate of return on investment. +RZHYHU XQGHU LQIRUPDWLRQ DV\PPHWU\ DQG ZLWK PL[HG HTXLOLEULXP VWUDWHJ\ the line of credit type I rural households diminishes because of standardization. 7KH\QRZIDFHWLJKWHUÀQDQFLQJFRQVWUDLQWVZKLFKLVQRWIDYRUDEOHIRUGHYHORSLQJ agricultural production or investment as type I rural households have better conditions to transform or provide demonstration.12 2EYLRXVO\LQIRUPDWLRQDV\PPHWU\LQWKHUXUDOÀQDQFLDOPDUNHWKDVHFRQRPLF VLJQLÀFDQFHWRERWKUXUDOKRXVHKROGVDQGÀQDQFLDOLQVWLWXWLRQV7RUXUDOKRXVHKROGV WKRVHZKRKDYHKLJKHUSURGXFWLRQDQGLQYHVWPHQWDELOLW\ W\SH, IDFHDZLGHQHG FUHGLWJDSEXWWKRVHZKRKDYHORZHUDELOLW\ W\SH,, IDFHDUHGXFHGRQH(IÀFLHQF\

260

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LVVDFULÀFHGLQWKLVW\SHRIFUHGLWDOORFDWLRQXVLQJORZPDUJLQDOSURGXFWLRQDELOLW\ to substitute low marginal production ability, which is favorable to agricultural development.137RÀQDQFLDOLQVWLWXWLRQVWKH\FDQQRWHPSOR\FUHGLWGLIIHUHQWLDWLRQ to offer a reasonable line of credit to different types of rural households. Credit DOORFDWLRQ XVLQJ WKH PL[HG HTXLOLEULXP VWUDWHJ\ LV ELDVHG WRZDUG W\SH ,, UXUDO KRXVHKROGVZKRKDYHORZHIÀFLHQF\)LQDQFLDOLQVWLWXWLRQVIDFHKLJKHUULVNDQGD lower rate of return on portfolio. When the expected rate of return is smaller than their total cost, they have no choice but to exit the market. ,QIHUHQFH  8QGHU LQIRUPDWLRQ DV\PPHWU\ ÀQDQFLDO LQVWLWXWLRQV FDQ RQO\ HVWLPDWHWKHGLVWULEXWLRQRIULVNDQGUHWXUQLQWKHPDUNHWIURPH[SHULHQFHDQGÀUVW WKRXJKWV7KH\HPSOR\WKHVWUDWHJ\RIPL[HGHTXLOLEULXPLQFUHGLWLVVXDQFH8QGHU such strategy, rural households who have higher production and investment DELOLW\ W\SH ,  IDFH D ZLGHQHG FUHGLW JDS (IÀFLHQF\ LV VDFULÀFHG LQ WKLV W\SH RI credit allocation using low marginal production ability to substitute low marginal SURGXFWLRQDELOLW\DQGÀQDQFLDOLQVWLWXWLRQVIDFHKLJKHUULVN

Inferences from comparative static analysis The effect of the loan rate on demand and supply In our model, when the loan rate r decreases, the slope of tangent point 1 + r and 1+r the constraint line l = LPRYHWRWKHULJKWFDXVLQJWKHHTXLOLEULXPTXDQWLW\ a demanded for credit Li DQGWKHFUHGLWOLPLWLi to move rightward. When r increases, 1+r the slope of tangent point 1 + r and the constraint line l = L move to the a OHIWFDXVLQJWKHHTXLOLEULXPTXDQWLW\GHPDQGHGIRUFUHGLWLi DQGWKHFUHGLWOLPLW Li to move leftward. This is to say that when the loan rate drops, rural households’ FUHGLW GHPDQG LQFUHDVHV DQG ÀQDQFLDO LQVWLWXWLRQV RIIHU D KLJKHU FUHGLW OLPLW WR rural households; vice versa. Although the change in the loan rate causes changes in the same direction in the tangent point and the credit limit, the extent of the change is different. Due to the parameter a(0 < a WKHGLVFRXQWIDFWRURIH[SHFWHGLQFRPH WKHFKDQJHLQr H[HUWVDQHIIHFWRQWKHRSWLPDOTXDQWLW\GHPDQGHGIRUFUHGLWDQGWKHFUHGLWOLPLW to different extents. When r drops by one unit, the slope of the tangent point 1+r 1 1 + r drops by one unit, but the slope of the constraint l = L line drops by a  a times of one unit. In other words, the constraint line moves rightward faster than the tangent point does. When the loan rate falls continuously, credit constraints follow suit. Take type I rural households as an example, as seen in Fig. 5.6, when r 261

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

drops to r’, the tangent point moves from A to B and the constraint line from 1+r 1 + r’ l= L to L&RUUHVSRQGLQJO\ZKHQWKHHTXLOLEULXPTXDQWLW\GHPDQGHG a a for credit increases from Li WRLi

WKHFUHGLWOLPLWPRYHVIURPLi to L’1 . As the credit OLPLWULVHVIDVWHUWKDQWKHTXDQWLW\GHPDQGHGIRUFUHGLWWKHFUHGLWJDSGLPLQLVKHV ,QWKHÀJXUHWKHQHZFUHGLWOLPLWL’1LVODUJHUWKDQWKHQHZTXDQWLW\GHPDQGHGIRU credit Li

, which means that there is no more credit gap. It is worth mentioning WKDW XQGHU LQIRUPDWLRQ DV\PPHWU\ HYHQ ZKHQ ÀQDQFLDO LQVWLWXWLRQV RIIHU DQ XQGLIIHUHQWLDWHG OLQH RI FUHGLW WR UXUDO KRXVHKROGV XVLQJ WKH PL[HG HTXLOLEULXP VWUDWHJ\ WKHFUHGLWZRXOGLQFUHDVHDVWKHORDQUDWHIDOOV Fig. 5.6.

The effect of the loan rate variation on rural households’ credit demand

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Based on the comparative static analysis, when the loan rate falls, credit constrains loosen; vice versa. This is to say that the continuous rise in the loan rate implies the continuous tightening of credit constraints. This is because when UXUDOKRXVHKROGVIDFHDQLQFUHDVLQJO\KLJKORDQUDWHWKHSURÀWPDUJLQVRIUHWXUQRQ LQYHVWPHQWZRXOGGLPLQLVK6PDOOHUSURÀWDELOLW\LPSOLHVKLJKHUFUHGLWULVNZKLFK VXSSUHVVHVWKHFUHGLWLVVXDQFHRIÀQDQFLDOLQVWLWXWLRQV,QH[WUHPHVLWXDWLRQVHYHQ if the loan rate rises higher than the rate of return on agricultural investment, the SURÀWDELOLW\RIUXUDOKRXVHKROGVLVQHJDWLYH)LQDQFLDOLQVWLWXWLRQVZRXOGQRWLVVXH loans to rural households and the credit demand is entirely suppressed.

262

The Transformation of Rural Households and the Financial Layout

,QIHUHQFH  :KHQ WKH ORDQ UDWH IDOOV UXUDO KRXVHKROGV· GHPDQG IRU FUHGLW LQFUHDVHV DQG ÀQDQFLDO LQVWLWXWLRQV LVVXH PRUH FUHGLW :KHQ WKH ORDQ UDWH ULVHV WKHSURÀWPDUJLQVRIWKHUDWHRIUHWXUQRQLQYHVWPHQWGLPLQLVK5XUDOKRXVHKROGV· GHPDQGIRUFUHGLWGURSVDQGÀQDQFLDOLQVWLWXWLRQVLVVXHOHVVFUHGLW:KHQWKHORDQ UDWHULVHVKLJKHUWKDQWKHUDWHRIUHWXUQRQDJULFXOWXUDOLQYHVWPHQWWKHSURÀWDELOLW\ of rural households is negative. Financial institutions would not issue loans to rural households and the credit demand is entirely suppressed.

Credit expansion in the development of regional economy under information asymmetry In the extensive model, we obtained the incentive compatibility constraint and 1+r L. KHQFHGHWHUPLQHGWKHPL[HGHTXLOLEULXPDVF (L  _F1  (L  ²_ F2  (L • a As F1’ (L  ! F’ (L  ! F2’ (L  WKH PL[HG HTXLOLEULXP OLHV EHWZHHQ F1   (L  DQG F2   (L  curves, and the corresponding credit limit L lies between L1 and L2 ,Q )LJ  the shaded area between F1  (L DQGF2  (L GHÀQHVWKHSRVLWLRQVRIF (L FXUYHVZLWK all possible values of _. Assume the initial position of F (L LVDWl1 and that for the credit limit is at L corresponding to A. As _ increases, F (L PRYHVXSWRl2. The new credit limit is at L’ corresponding to B. Given that L’ > L, as _ increases, credit issuance increases. We assumed in our model that type I rural households account for a proportion _and type II for 1–_ of total households, and type I have a better capital foundation and marginal productivity. Therefore, the higher _ is, the larger the proportion type I rural households takes up, which implies a better foundation and potential for market development. From the above analysis, it can be seen that the value of _UHÁHFWVWKHGHYHORSPHQWDOOHYHORIDUHJLRQ$KLJKHUYDOXHRI_ implies a higher developmental level of the region, and vice versa. The economic implication of the change in _ is clear. Under information asymmetry, the more developed the regional economy is, the greater the credit issuance is with the strategy of mixed HTXLOLEULXPDQGUXUDOKRXVHKROGVIDFHVPDOOHUÀQDQFLQJFRQVWUDLQWV

263

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

Fig. 5.7.

Credit expansion in the development of regional economy under information asymmetry

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The multiple driving effect of the rise in the rate of return on agriculture ,QRXUPRGHOWKHOLQHRIFUHGLWÀQDQFLDOLQVWLWXWLRQVRIIHUWRUXUDOKRXVHKROGVLV 1+r determined by L and Fi (L :KHQFi (L UHPDLQVXQFKDQJHGWKHFUHGLWOLPLW a Li is mainly determined by the loan rate r and the discount factor a. In Fig. 5.8, when the discount factor increases from a to a ’, the curve 1+r 1+r l= L moves rightward to l’ = L ; ceteris paribus. There is a new credit a    a’ boundary. The credit limits of type I and type II rural households increase from L1     and L2 to L’1 and L’2 respectively. The credit limit per household also increases

from L to L’. It is obvious that the rise in the discount factor a brings systematic LPSURYHPHQWWRWKHÀQDQFLQJFRQVWUDLQWV

264

The Transformation of Rural Households and the Financial Layout

Fig. 5.8.

The effect of the rise in the rate of return of agriculture on rural credit

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It is worth noting that the increase in a has a multiplier effect on the expansion of the credit boundary. Through increasing the multiplier factor of index 1+r , a small change in a can cause a large change in the feasible f([  [-­(1+r) = [ region of credit. We have pointed out that a FDQEHUHJDUGHGDVWKHUHTXLUHGUDWH of return on agricultural investment. The rise in the rate of return on agriculture would loosen credit constraints and attract more input of credit resources, which is the primary effect of the change in a . Furthermore, the rise in a implies the lowering of risk of the entire agricultural industry and the increase of returns. 7KHVH FHUWDLQO\ ZLOO DWWUDFW PRUH ÀQDQFLDO UHVRXUFHV$V FRPSHWLWLRQ LQ WKH UXUDO ÀQDQFLDOPDUNHWEHFRPHVNHHQHUWKHFRPSHWLWLRQEHWZHHQFUHGLWRUVZRXOGSXVK the loan rate r down. The effect of the lowering of r is multiplied by a , leading to the double–multiplier effect in which a and a interact. As it can be seen that a ULVHLQWKHUDWHRIUHWXUQRQDJULFXOWXUHFDQORRVHQÀQDQFLQJFRQVWUDLQWVRQUXUDO households, increase agricultural credit input, and enhance competition in the market through the multiplier effect. This effect can promote the simultaneous ORQJWHUPGHYHORSPHQWRIWKHDJULFXOWXUDOLQGXVWU\DQGUXUDOÀQDQFHOHDGLQJWRD YLUWXRXVF\FOHDQGDVHOIVXVWDLQDEOHPHFKDQLVP ,QIHUHQFH7KHULVHLQWKHUDWHRIUHWXUQRQDJULFXOWXUHFDQORRVHQWKHFUHGLW FRQVWUDLQWVRQUXUDOKRXVHKROGVDVZHOODVORZHUWKHÀQDQFLQJFRVWE\LQFUHDVLQJ

265

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FUHGLW LVVXDQFH DQG SURPRWLQJ UXUDO ÀQDQFLDO FRPSHWLWLRQ 7KH ORZHULQJ RI WKH ÀQDQFLQJ FRVW KDV D PXOWLSOLHU HIIHFW OHDGLQJ WR WKH IRUPDWLRQ RI WKH ORQJWHUP virtuous circle of mutual stimulation and development of agriculture and rural ÀQDQFH

Further analysis and evaluation We developed several inferences of information in the agricultural market, interest rate, regional development, and the level of return on agriculture from the extension of the model and comparative static analysis. The systematic analyses of FUHGLWFRQVWUDLQWVDQGWKHFUHGLWEHKDYLRURIÀQDQFLDOLQVWLWXWLRQVRIIHUVRPHSROLF\ implications.

,QIRUPDWLRQDV\PPHWU\LQWKHUXUDOÀQDQFLDOPDUNHW 2XUÀUVWLQIHUHQFHLVWKDWXQGHUV\PPHWULFLQIRUPDWLRQÀQDQFLDOLQVWLWXWLRQVFDQ apply credit differentiation to offer a different line of credit to different clients. 8QGHULQIRUPDWLRQDV\PPHWU\ÀQDQFLDOLQVWLWXWLRQVFDQRQO\HPSOR\WKHVWUDWHJ\ RI PL[HG HTXLOLEULXP LQ FUHGLW LVVXDQFH EDVHG RQ H[SHULHQFH DQG ÀUVW WKRXJKWV This strategy is not preferred even if the distribution of households in the market is DFFXUDWHO\HVWLPDWHG(IÀFLHQF\LVVDFULÀFHGLQWKLVW\SHRIFUHGLWDOORFDWLRQIDYRULQJ KRXVHKROGV ZLWK ORZ PDUJLQDO SURGXFWLRQ DELOLW\ DQG ÀQDQFLDO LQVWLWXWLRQV IDFH higher risk. 7KHNH\TXHVWLRQVDUH,VWKHUHLQIRUPDWLRQDV\PPHWU\LQWKHPDUNHW",I\HV how does it come into existence? 8QGRXEWHGO\ ÀQDQFLDO LQVWLWXWLRQV ZKLFK KDYH EHHQ VHUYLQJ UXUDO DUHDV for a long time or are established in rural areas have better information of rural areas and rural households (level of assets, production and investment ability, FUHGLW OHYHO  WKDQ EDQNHUV DW ODUJHVFDOH ÀQDQFLDO LQVWLWXWLRQV :KLOH EDQNHUV WU\ WRÀQGWKHYDOXHRI _WRGHWHUPLQHWKHOLQHRIFUHGLWIRUUXUDOKRXVHKROGVIURQW OLQHRIÀFHUVRIUXUDOÀQDQFLDOLQVWLWXWLRQV RUJDQL]DWLRQV NQRZFOHDUO\WKHGHWDLOV DQGVLWXDWLRQRIHDFKKRXVHKROG7KH´JUDVVURRWVµUXUDOÀQDQFLDOLQVWLWXWLRQVKDYH DQ LQIRUPDWLRQ DGYDQWDJH RYHU XUEDQEDVHG IRUPDO ÀQDQFLDO LQVWLWXWLRQV 7KHVH “grassroots” institutions can apply credit differentiation as they have close to perfect LQIRUPDWLRQ7KHDOORFDWLRQRIFUHGLWUHVRXUFHVIROORZVPRUHFORVHO\WKHULVNUHWXUQ WUDGHRIISULQFLSOH,QFRQWUDVWIRUPDOÀQDQFLDOLQVWLWXWLRQVQRWRQO\IDFHWKHFRVWRI VHWWLQJXSWKHÀQDQFLDOQHWZRUNLQUXUDODUHDVDQGREWDLQLQJPDUNHWLQIRUPDWLRQ but they are also at a disadvantaged position in terms of the method and channels

266

The Transformation of Rural Households and the Financial Layout

for information collection. Therefore, they have little economic motivation to enter WKHUXUDOÀQDQFLDOPDUNHWHVSHFLDOO\WKHPLFURFUHGLWPDUNHW It should be noted that although RCCs are seen as having a nature of formal ÀQDQFH WKH\ SRVVHVV DQ LQIRUPDWLRQ DGYDQWDJH RI WKH ZLGH FRYHUDJH RI WKHLU QHWZRUNDQGIURQWOLQHFUHGLWRIÀFHUV5HJDUGOHVVRIWKHQDWXUHRI5&&VWKH\DUH grassroots organizations in terms of their operating methods, which is the reason ZK\WKH\KDYHDQHGJHRYHUIRUPDOÀQDQFLDOLQVWLWXWLRQV

,QWHUHVWUDWHSROLF\LQWKHUXUDOÀQDQFLDOPDUNHW 2XU VHFRQG LQIHUHQFH LV WKDW ZKHQ WKH ORDQ UDWH ULVHV WKH TXDQWLW\ RI UXUDO KRXVHKROGV·GHPDQGIRUFUHGLWGHFUHDVHVWKHSURÀWPDUJLQVRIWKHUDWHRIUHWXUQ RQLQYHVWPHQWGLPLQLVKHVDQGÀQDQFLDOLQVWLWXWLRQVLVVXHPRUHFUHGLW:KHQWKH ORDQUDWHULVHVKLJKHUWKDQWKHUDWHRIUHWXUQRQDJULFXOWXUDOLQYHVWPHQWÀQDQFLDO institutions exit the market. Rural households’ credit demand is entirely suppressed. $QLPSOLFDWLRQLVFOHDU$ORDQUDWHZKLFKLVWRRKLJKLVXQIDYRUDEOHWRERWKUXUDO KRXVHKROGVDQGÀQDQFLDOLQVWLWXWLRQV ,Q UHFHQW \HDUV LQ RUGHU WR HQFRXUDJH ÀQDQFLDO LQVWLWXWLRQV WR LQFUHDVH FUHGLW input given the condition that the return can cover risk, the state has raised the upper limit on the interest rate to four times the benchmark. Not only does WKLV SROLF\ HQFRXUDJH ÀQDQFLDO LQVWLWXWLRQV VXFK DV 5&&V WR LVVXH PRUH ORDQV WR UXUDO KRXVHKROGV EXW LW DOVR SURPRWHV WKH HVWDEOLVKPHQW RI QHZVW\OH ÀQDQFLDO LQVWLWXWLRQV VXFK DV YLOODJH DQG WRZQVKLS EDQNV 97%V  DQG FUHGLW FRPSDQLHV ZKLFKRIWHQDGRSWDKLJKHUORDQUDWH$FFRUGLQJWRRXUVHQWLQHOVXUYHLOODQFHRI QHZUXUDOÀQDQFLDOLQVWLWXWLRQV 97%VDQGWKUHHFUHGLWFRPSDQLHV LQ6LFKXDQ 3URYLQFHWKHKLJKHVWORDQUDWHRI97%V,VZLWKDQDYHUDJHRIWKDWRIFUHGLW FRPSDQLHVLVZLWKDQDYHUDJHRI7KHGDWDRI$SULOVKRZVWKDW there were seven VTBs and one credit company which suffered losses, accounting IRUDQGRIWKHLUUHVSHFWLYHFDWHJRU\,QWHUPVRIORDQDOORFDWLRQZHUH LVVXHG WR UXUDO VPDOO DQG PHGLXPVL]HG HQWHUSULVHV DQG OHVV WKDQ  WR UXUDO KRXVHKROGV :KHWKHU D KLJK ORDQ UDWH FDQ HQVXUH ÀQDQFLDO LQVWLWXWLRQV WR REWDLQ return high enough to cover their risk and rural households to receive more credit support is uncertain. In the situation in which the rate of return on agriculture is JHQHUDOO\ORZVLPSO\UDLVLQJWKHORDQUDWHWRFRYHUWKHFRVWRIÀQDQFLDOLQVWLWXWLRQV can hardly expand the loans issued to rural households. It would even discourage UXUDOKRXVHKROGVIURPREWDLQLQJORDQV$FFRUGLQJWRRXUVXUYH\RQWKHÀHOGVWDII HDFK PHPEHU ZDV UHVSRQVLEOH IRU  UXUDO KRXVHKROGV RQ DYHUDJH  RI VHYHQ 5&&VLQWZRSURYLQFHVLQ:HVWHUQ&KLQDLIWKHORDQUDWHULVHVWRKLJKHUWKDQ WKHUXUDOKRXVHKROGV·TXDQWLW\GHPDQGHGIRUFUHGLWGURSVVLJQLÀFDQWO\,IWKHORDQ

267

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

UDWHULVHVWRKLJKHUWKDQUXUDOKRXVHKROGVGDUHQRWREWDLQORDQV:HJDYHRXU TXHVWLRQQDLUHWRKRXVHKROGVLQIRXUWRZQVLQWKHWZRFRXQWLHV7KHDQVZHUWR WKHTXHVWLRQ´&DQ\RXEHDUDORDQUDWHRIIRUSURGXFWLRQRUFRQVXPSWLRQ"µ ZDVQHJDWLYH7KHVWXG\RIWKHUHVHDUFKJURXSRIThe Chinese Banker     JDYHDVLPLODUFRQFOXVLRQZKLOHUXUDOKRXVHKROGVFDQEHDUDZLGHUDQJHRILQWHUHVW UDWHVWKH\KDYHOLWWOHLQWHQWLRQWREHDUKLJKRQHV2IWKHTXDOLÀHGVDPSOHV KRXVHKROGV DQVZHUHG WKDW WKH\ FRXOG RQO\ EHDU D ORDQ UDWH ORZHU WKDQ  DQG RQO\FRXOGEHDUDORDQUDWHKLJKHUWKDQ VHH7DEOH  Table 5.5.

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Number of households

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6RXUFH 5HVHDUFKJURXSRI5HVHDUFK,QVWLWXWHRI7KH&KLQHVH%DQNHU´)LQDQFLDOGHPDQG in traditional rural areas and the distribution of institutions,” The Chinese Banker  

The long-term sustainable development of rural areas and the rural ÀQDQFLDOPDUNHW Our fourth inference is that an increase in the rate of return on agriculture can ORRVHQWKHFUHGLWFRQVWUDLQWVRQUXUDOKRXVHKROGVDVZHOODVORZHULQJWKHÀQDQFLQJ FRVW E\ LQFUHDVLQJ FUHGLW LVVXDQFH DQG SURPRWLQJ UXUDO ÀQDQFLDO FRPSHWLWLRQ OHDGLQJWRWKHIRUPDWLRQRIWKHORQJWHUPYLUWXRXVFLUFOHRIPXWXDOVWLPXODWLRQDQG GHYHORSPHQWRIDJULFXOWXUHDQGUXUDOÀQDQFH)LQDQFHLVDQLQWHUPHGLDU\LQGXVWU\ If the return on the input into the market cannot compensate for the risk or cannot UHDFK WKH UHTXLUHG OHYHO FRPPHUFLDO ÀQDQFLDO LQVWLWXWLRQV ODFN WKH LQFHQWLYH WR HQWHU WKH UXUDO ÀQDQFLDO PDUNHW 2Q WKH FRQWUDU\ LI WKH ULVNDGMXVWHG UDWH RI UHWXUQ RQ DJULFXOWXUDO ORDQV LV KLJKHU WKDQ WKH DYHUDJH SURÀWDELOLW\ RI ÀQDQFLDO LQVWLWXWLRQVWKHLUSURÀWPDNLQJPRWLYHVZRXOGOHDGWKHPLQWRHQWHULQJWKHPDUNHW and expanding their business in credit. Therefore, the rise in the rate of return on DJULFXOWXUHFDXVHVQRWRQO\DQLQFUHDVHLQWKHLQÁRZRIÀQDQFLDOUHVRXUFHVLWDOVR LPSURYHVWKHVXVWDLQDELOLW\RIH[LVWLQJÀQDQFLDOUHVRXUFHV2QO\DFRQWLQXRXVULVH

268

The Transformation of Rural Households and the Financial Layout

LQWKHUDWHRIUHWXUQFDQOHDGWRDZLQZLQVLWXDWLRQRIORQJWHUPGHYHORSPHQWRI DJULFXOWXUH DQG UXUDO DUHDV$ IXUWKHU LQIHUHQFH LV WKDW WKH DOORFDWLRQ RI ÀQDQFLDO resources should target an improvement in the rate of return on agriculture. Any ÀQDQFLDOVXSSO\ZKLFKFDQQRWGRVRLVLQHIIHFWLYH RUHYHQSUHGDWRU\ 7KHUHIRUH EHLQJHIÀFLHQF\RULHQWHGLVWKHEDVLVIRUWKHORQJWHUPGHYHORSPHQWRIDJULFXOWXUH DQGUXUDOÀQDQFH Other factors also play a role in loosening the credit constraints. In our framework, credit constraints on rural households are closely related to the rate of return on agriculture as well as the regional economy. Our third inference is that developing the entire regional economy is the fundamental way to loosen credit constraints caused by information asymmetry. In regions with a better economy, HYHQXQGHULQIRUPDWLRQDV\PPHWU\ÀQDQFLDOLQVWLWXWLRQVWHQGWRLVVXHPRUHFUHGLW WRUXUDOKRXVHKROGV:KHQÀQDQFLDOLQVWLWXWLRQVFDQQRWLGHQWLI\WKHW\SHVRIUXUDO households, they refer mainly to the developmental level of the regional economy to determine the line of credit. In other words, the developmental level of the UHJLRQDOHFRQRP\KDVDVLJQDOLQJHIIHFW,WVKRXOGEHQRWHGWKDWXUEDQEDVHGODUJH VFDOHFRPPHUFLDOEDQNVDUHWKHPDLQÀQDQFLDOLQVWLWXWLRQVWURXEOHGE\LQIRUPDWLRQ asymmetry. They are reluctant to enter the market as they face higher information FRVWV:KHQWKHUHJLRQDOHFRQRP\VHQGVRXWHQFRXUDJLQJVLJQDOVWKHVHÀQDQFLDO institutions can expand credit issuance as more type II rural households transform to type I. The implication is that promoting the development of the regional HFRQRP\LVDPDMRUFKDQQHOIRUDWWUDFWLQJH[WHUQDOÀQDQFLDOUHVRXUFHV$VWKHUXUDO HFRQRP\ GHYHORSV LW LV SRVVLEOH WKDW XUEDQEDVHG ÀQDQFLDO LQVWLWXWLRQV ZRXOG QDWXUDOO\UHHQWHUWKHUXUDOÀQDQFLDOPDUNHWRULQFUHDVHFUHGLWLVVXDQFH In conclusion, the rate of return on agriculture should be continuously stimulated and development of the rural economy should be promoted in order WRDWWUDFWWKHLQÁRZRIH[WHUQDOÀQDQFLDOUHVRXUFHVLQWRWKHUXUDOÀQDQFLDOPDUNHW EDVHGRQHIÀFLHQF\,QWKHHQGWKHPXWXDOGHYHORSPHQWRIDJULFXOWXUHDQGUXUDO ÀQDQFHZLOOEHDFKLHYHG

Modernization of China’s Rural Finance The present layout and future of China’s rural financial market 7KH OD\RXW RI &KLQD·V FXUUHQW UXUDO ÀQDQFLDO PDUNHW FDQ EH GLYLGHG LQWR WKUHH OD\HUV  7KHKLJKHQGPDUNHWZKLFKLVUHSUHVHQWHGE\FRPSHWLWLYHHQWHUSULVHV LQYROYHG LQ DJULFXOWXUDO LQGXVWULDOL]DWLRQ LV VHL]HG E\ ODUJHVFDOH FRPPHUFLDO banks, such as the Agricultural Development Bank. But only a few enterprises

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LQYROYHGLQDJULFXOWXUDOLQGXVWULDOL]DWLRQDUHTXDOLÀHGWRREWDLQORDQV7KHPDUNHW DZDLWV H[SDQVLRQ   7KH PLGGOHHQG PDUNHW LQ ZKLFK WKHUH DUH PDLQO\ VPDOO DQGPHGLXPVL]HGHQWHUSULVHVDQGPDUNHWL]HGUXUDOKRXVHKROGVLVGRPLQDWHGE\ 5&&V$WWKHVDPHWLPH5&&VDUHWU\LQJWRHQWHUWKHKLJKHQGPDUNHW1HZVW\OH ÀQDQFLDOLQVWLWXWLRQVVXFKDV97%VDQG PLFUR FUHGLWFRPSDQLHVDQGWKHUHIRUPHG 3RVWDO 6DYLQJV %DQN RI &KLQD DUH FRPSHWLQJ ZLWK 5&&V IRU WKH H[LVWLQJ TXDOLW\ FXVWRPHUV 7KHUH LV RYHUFRPSHWLWLRQ IRU TXDOLW\ FOLHQWV EXW WRR OLWWOH ÀQDQFLDO VXSSO\SURYLGHGIRUJHQHUDOUXUDOKRXVHKROGV  ,QWKHORZHQGPDUNHWWDNHQXS E\JHQHUDODQGLPSRYHULVKHGUXUDOKRXVHKROGVFRPPHUFLDOÀQDQFLDOLQVWLWXWLRQV are reluctant to enter this market except some mutual aid cooperatives. However, WKHÀQDQFLDOGHPDQGRIUXUDOKRXVHKROGJURXSVFDQQRWEHVDWLVÀHGE\WKHVPDOO QXPEHURIPXWXDODLGFRRSHUDWLYHV5HPRWHDUHDVZLWKRXWDQ\EUDQFKRIÀQDQFLDO LQVWLWXWLRQVDUH´IRUJRWWHQFRUQHUVRIÀQDQFHµ VHH)LJ 

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General rural households

Marketized households

Entrepreneurs Commercial banks

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3ROLF\EDVHG banks

RCCs Income level of clients

Based on the above layout, we predict that there are three basic pathways and GLUHFWLRQVIRUWKHGHYHORSPHQWRIWKHPDUNHW  $VDJULFXOWXUDOLQGXVWULDOL]DWLRQ SURJUHVVHV PRUH TXDOLW\ HQWHUSULVHV ZLOO HPHUJH LQ WKH KLJKHQG PDUNHW /DUJH VFDOHFRPPHUFLDOEDQNVZLOOFRPSHWHIRUSURYLGLQJÀQDQFLDOVXSSRUWWRWKHP$W WKHVDPHWLPHWKHEDQNVZLOOJRGRZQWKHFKDLQRILQGXVWU\WRH[SORUHWKHPLGGOH HQGPDUNHW  $VWKHUHIRUPRI5&&VGHHSHQVDQGQHZVW\OHÀQDQFLDOLQVWLWXWLRQV

270

The Transformation of Rural Households and the Financial Layout

GHYHORS WKH RYHUFRPSHWLWLRQ IRU TXDOLW\ FOLHQWV LQ WKH PLGGOHHQG PDUNHW ZLOO evolve into orderly competition and differentiated services will be offered. This WUDQVIRUPDWLRQZLOOJLYHSOD\WRQDWXUDOVHOHFWLRQLQWKHPDUNHW  $VWKHPDMRU SDUWLFLSDQWLQWKHORZHQGPDUNHWPXWXDODLGFRRSHUDWLYHVVKRXOGGHYHORSLQWR FRPSRVLWH DQG RSHQ SRYHUW\DLG RUJDQL]DWLRQV ZLWK WKH VXSSRUW RI WKH VWDWH$V FUHGLWWHFKQLTXHVPDWXUHQHZVW\OHÀQDQFLDOLQVWLWXWLRQVDUHH[SHFWHGWRH[SDQG WKHLUVHUYLFHVWRWKHORZHQGPDUNHW7KHDUURZVLQ)LJUHSUHVHQWWKHSRWHQWLDO H[SDQVLRQGLUHFWLRQVRIÀQDQFLDOLQVWLWXWLRQVLQWKHUXUDOÀQDQFLDOPDUNHW

The future system of rural financial services Judging from the current situation and the trends of development, China’s future UXUDOÀQDQFLDOVHUYLFHVZLOOEHFRRSHUDWLYHFRPPHUFLDODQGSROLF\EDVHG &RRSHUDWLYHÀQDQFHVWLPXODWHVHQGRJHQHLW\RIUXUDOÀQDQFH,WZLOOUHVROYHWKH FRQÁLFW EHWZHHQ VPDOOVFDOH SURGXFWLRQ DQG WKH KXJH PDUNHW DQG SURPRWH WKH development of social credit during the transformation of rural households. &RPPHUFLDO ÀQDQFH ZLOO H[SDQG WKH PDUNHW VSDFH XQGHU WKH LUUHYHUVLEOH marketization progress, as the transformation of rural households, agricultural LQGXVWULDOL]DWLRQ DQG XUEDQL]DWLRQ RI UXUDO DUHDV 7KH FUHGLW WHFKQLTXHV DQG VHUYLFHVRIWKHLQVWLWXWLRQVZLOOEHUHÀQHG 3ROLF\EDVHG ÀQDQFH ZLOO FRYHU WKH GLVDGYDQWDJHG UXUDO DUHDV QHJOHFWHG E\ FRPPHUFLDOÀQDQFH7KHVHDUHDVDUHSRVLWLYHH[WHUQDOLWLHV 7KHFRPELQDWLRQRIFRRSHUDWLYHFRPPHUFLDODQGSROLF\EDVHGÀQDQFHZLOOEH able to fully cover the market, giving rise to a mutual complementary market VWUXFWXUH$GYDQWDJHRXVUHVRXUFHVRIUXUDOKRXVHKROGVÀQDQFLDOLQVWLWXWLRQVDQG the state will be combined and rearranged so that the market will be in the optimal condition.

&RRSHUDWLYHÀQDQFH6LPXODWLRQRIHQGRJHQHLW\LQUXUDOÀQDQFH For a long time, the scattered business put rural households in a disadvantaged position in the market and, eventually, the economy. Therefore, to resolve the FRQÁLFWEHWZHHQVPDOOVFDOHSURGXFWLRQDQGWKHKXJHPDUNHWLWLVIXQGDPHQWDOWR HQKDQFHUXUDOKRXVHKROGV·FRRSHUDWLRQDELOLW\DQGWKHVHOIGHYHORSPHQWDODELOLW\RI RCCs in order to raise the income of rural households. Regarding the endogenous GHYHORSPHQW RI UXUDO ÀQDQFH FRRSHUDWLYH ÀQDQFH DVVXPHV D FOHDU FRPSDUDWLYH DGYDQWDJH7RGLVDGYDQWDJHGUXUDOKRXVHKROGVÀQDQFLDOFRRSHUDWLRQFDQLPSURYH WKHLUVHOIDQGH[WHUQDOÀQDQFLQJDELOLW\EDUJDLQLQJSRZHUDQGPDUNHWQHJRWLDWLRQ ability. Of course, at the moment, rural households have little intention and ability

271

THE DEVELOPMENT OF RURAL FINANCE IN CHINA

WR EH FRRSHUDWLYH DQG WKXV WKH SURPRWLRQ RI FRRSHUDWLYH ÀQDQFH VWLOO IDFHV WKH constraints of the initial conditions. It is impractical to expect the emergence of many FRRSHUDWLYHÀQDQFLDORUJDQL]DWLRQVLQWKHPDUNHWZLWKLQWKHVKRUWSHULRGRIWLPH It is more feasible to capitalize on the advantage of the government, community, HQWHUSULVHV DQG UXUDO KRXVHKROGV 7R HVWDEOLVK DQ HIIHFWLYH PXOWLFRRSHUDWLRQ mechanism in which the government provides guidance, the community offers support, enterprises interact with each other, and the rural households cooperate with the other parties is more suitable for traditional rural areas. Once the market EUHDNWKRXJKIURPWKHFRQVWUDLQWVRILQLWLDOFRQGLWLRQVRFFXUVFRRSHUDWLYHÀQDQFH may have unexpectedly ample room for economic development. For example, UHVHDUFKKDVIRXQGWKDWLQ-LDQJ6XDQG=KH-LDQJSURYLQFHVWKHVFDOHRIÀQDQFLQJ WKURXJKFRRSHUDWLYHÀQDQFHLVODUJHUWKDQWKDWWKURXJK5&&VDQGWKH$JULFXOWXUDO %DQNRI&KLQDDFFRXQWLQJIRU +X