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Rural Finance in China

Published online by Cambridge University Press:  17 February 2009

On-Kit Tarn
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Extract

There is a common policy bias against creating an appropriate economic environment for rural growth in many less developed countries as governments attempt to strive for rapid industrialization through various interventions in both the urban and rural sectors. As a result, signals for resource flows are distorted and incentive to raise agricultural productivity is destroyed. Such structural distortions and the low level of income mean that investment in agricultural production is often unattractive and therefore funds for that purpose are scarce. Many developing countries have, over the past 40 years, attempted to alleviate this perceived inadequacy of credits, which was seen as the only inhibiting factor to rural development, by the provision of highly subsidized and controlled finance through the creation of specialized credit institutions. However, there is an increasing recognition that this conventional approach has failed to achieve its aim and its premises are seriously challenged.

Type
Research Article
Information
The China Quarterly , Volume 113 , March 1988 , pp. 60 - 76
Copyright
Copyright © The China Quarterly 1988

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References

1. See, e.g., von Pischke, et al. , (eds), Rural Financial Markets in Developing Countries (Baltimore: Johns Hopkins University Press, 1983)Google Scholar; Lipton, Michael, “Agricultural finance and rural credit in poor countries,” in Streeten, Paul and Jolly, Richard (eds.), Recent Issues in World Development: A Collection of Survey Articles (Oxford: Pergamon Press, 1981)Google Scholar; and Braverman, Avishay and Guasch, J. Luis, “Rural credit markets and institutions in developing countries,” World Development, Vol. 14, No. 10/11 (1986).CrossRefGoogle Scholar

2. In spite of the recognition of its vital role particularly after the failure of the Great Leap Forward movement in 1958, agricultural growth had continued to suffer from unfavourable terms of trade, prices and output restrictions as well as from the adverse effects of an inappropriate system of production management.

3. The Chinese financial system prior to the current reform was based on a system of centralized supply of funds with minimal use of money and credits. The control of physical resource allocation achieved in the material balance planning were supposed to be similarly exercised in the flow of financial resources via the cash plan and credit plan. Therefore the role of money and financial institutions are highly restricted and insignificant. Under those conditions, there was no question of expanding the size of the financial sector and removing quantitative controls over interest rates and financial flows that are the necessary ingredients for financial development. See, Shaw, E. S., Financial Deepening in Economic Development (New York: Oxford University Press, 1973)Google Scholar; McKinnon, R. I., Money and Capital in Economic Development (Washington, D.C.: Brookings Institution, 1973)Google Scholar; and Goldsmith, Raymond W., Financial Structure and Development (New Haven and London: Yale University Press, 1969).Google Scholar For analysis of the reform of this system, see Huang Hsiao, Katherine H.Y., “Money and banking in the People's Republic of China,” The China Quarterly, No. 91 (09 1982)Google Scholar; Tarn, On-Kit, “Chinese financial reform: international dimensions and the role of Japan,” Pacific Economic PapersGoogle Scholar (forthcoming); and Wulf, Luc De and Goldsbrough, David, “The evolving role of monetary policy in China,” IMF Staff Papers, Vol. 33, No. 2 (06 1986).Google Scholar

4. The most notable change was the abandonment of the commune system and restoration of the farm household as the basic economic unit under a system which gives a much higher degree of autonomy to the producers. Although the central authorities still regulate the prices of grain and other major agricultural and industrial commodities, the role of market exchange in resource allocation has expanded significantly in the rural sector. For analysis of the success and problem of the new rural production and marketing system, see, e.g., Walker, Kenneth R., “Chinese agriculture during the period of readjustment, 1978–83,” CQ, No. 100 (12 1984).CrossRefGoogle Scholar

5. As the shares of marketed surplus and of non-agricultural output in the rural sector rise, and as the importance of non-state ownership (private individual and collective) increases, the channels and institutions through which savings and investment are made have become more diversified. Monetization can be defined as the enlargement of the sphere of the monetary economy. It involves the extension through time and space of the use of money in all its functions to the non-monetized (subsistence and barter) sector. For discussion of this definition and analysis of monetization in developing economies, see Chandavarkar, Anand G., “Monetization of developing economies,” IMF Staff Papers, 11 1977.Google Scholar

6. See, e.g., Lipton, , “Agricultural finance,”Google Scholarvon Pischke, et al. , (eds.), Rural Financial MarketsGoogle Scholar;, Adams, D. W. and Vogel, R. C., “Rural financial markets in low income countries,” World Development, Vol. 14, No. 4 (1986)CrossRefGoogle Scholar; and Braverman, and Guasch, , “Rural credit markets.”Google Scholar Lipton linked the distribution of rural credit to the power structure in the country. Braverman and Guasch noted that only 5% of farms in Africa and about 15% in Asia and Latin America had had access to formal credit, and that because of low interest rate credit programme, 5% of borrowers had received 80% of credit so that income had been made more inequitable. On the other hand, the question of demand for credits and their utilization seem to have received much less attention.

7. Braverman, and Guasch, , “Rural credit markets,” pp. 1253, 1263.Google Scholar

8. The gross value of production in the rural sector included non-agricultural production, plus agricultural output which is defined to include planting, forestry, animal husbandry, fishery and side-line production.

9. Wen, Lu, “New development in urban-rural relations in the country,” Zhongguo nongcun jingji (Chinese Rural Economy), No. 11 (1986), p. 29.Google Scholar

10. Skinner, G. William, “Rural marketing in China: repression and revival,” CQ, No. 103 (09 1985), p. 408.Google Scholar These free markets were the traditional form for market exchanges in the rural and urban sectors. Skinner found that, while their number might be expanding, a growing proportion of them are no longer traditional or periodic.

11. While the magnitude of net intersectoral flow of resources between the urban and rural sector before the economic reform cannot be estimated due to lack of relevant information, it was clear that investment funds in the rural sector mainly came from within. In this context, despite the structural reform in recent years, that financial mode has not changed. See, e.g., Ishikawa, Shigeru, National Income and Capital Formation in Mainland China (Tokyo: Institute of Asian Economic Affairs, 1965)Google Scholar; Paine, Suzanne, “Some reflections on the presence of ‘rural’ or ‘urban bias’ in China's development policies 1949–1976,” World Development, Vol. 6, No. 4 (1978)CrossRefGoogle Scholar; Lardy, Nicholas R., Agriculture in China's Modern Economic Development (Cambridge: Cambridge University Press, 1983)CrossRefGoogle Scholar; and Tarn, On-Kit, China's Agricultural Modernization (London: Croom Helm, 1985).Google Scholar

12. While the author of this article was able to obtain a copy of the 1984 balance sheet of the ABC during a visit to its head office in 1986, there is no doubt that accounts for other years have by now been compiled, but may not yet be made available to the public.

13. Kato, Yuzuru, “Mechanisms for the outflow of funds from agriculture into industry in Japan,” Rural Economic Problems, Vol. 3, No. 2 (12 1966)Google Scholar, in von Pischke, et al. , (eds), Rural Financial Markets, pp. 38–41.Google Scholar

14. Nongcun jinrong yanjiu (Rural Financial Research), No. 1, Supplement (1987), p. 23.Google Scholar While there is certainly a real need to finance the purchase of such stock, the question remains as to whether the ABC should concentrate its resources in this area, and indeed if other financial institutions can perform the task as or more efficiently.

15. Jinrong yanjiu (Finance Research), No. 3 (1986), p. 26Google Scholar; Table 4 of this article.

16. The general problems of China's banking system are discussed in Tam, On-Kit, “Reform of China's banking system,” The World Economy, Vol. 9. No. 4 (12 1986).CrossRefGoogle Scholar

17. Nongcun jinrong yanjiu, No. 1, supplement (1987), p. 24.Google Scholar

18. Ibid. p. 23.

19. Nongcun jinrong yanjiu, No. 10 (1986), p. 3.Google Scholar

20. Chinese Rural Economy, No. 7 (1986), p. 27.Google Scholar

21. Nongcun jinrong yanjiu, No. 10 (1986), p. 3.Google Scholar

22. Jinrong yanjiu, No. 3 (1986), p. 26.Google Scholar

23. Chinese Rural Economy, No. 7 (1986), p. 27.Google Scholar

24. Ibid.

25. The figure of 1,400 yuan per co-operative is obtained by dividing 80 million by the number of RCC (57,156). See the Figure, p. 64.

26. Statistical Yearbook of China 1986, pp. 23, 147, 215.Google Scholar

27. Some aspects of this development have been discussed in an earlier paper by the author, “Capital markets in China” (Paper for the Sixth National Conference of the Asian Studies Association of Australia, University of Sydney, May 1986).

28. Chinese Rural Economy, No. 7 (1986), p. 29.Google Scholar

29. Tarn, On-Kit, “Capital markets in China.”Google Scholar

30. Jingji yanjiu, No. 11 (1985), p. 10Google Scholar; Nongcun jinrong (Rural Finance), No. 7 (1986), pp. 4–12Google Scholar and No. 3 (1986), pp. 25–27; Problems of Agricultural Economics, No. 11 (1985), pp. 52–53.Google Scholar

31. Ibid.

32. Jinrong yanjiu, No. 3 (1986), p. 25.Google Scholar

33. For reported cases, see, e.g., Economic Weekly, 9 09 1985, p. 2Google Scholar; Chinese Finance, No. (1985), p. 24Google Scholar and No. 5 (1985), pp. 34–35; Nongcun jinrong, No. 3 (1986) and No. 6(1986), pp. 20–21.Google Scholar

34. Interview notes, Mr Fu Zhangwei, deputy head of Credits Department, Agricultural Bank of China, Lin County branch, 18 January 1986.