China looks under the mattress for rural funds

Beijing, Francesco Lao Xi Sisci, Asia Times, 31st October 1996

Senior Chinese economists are considering ways to tap a potentially huge treasure trove for developing the country's interior - savings amounting to billions or even trillions of renminbi which are held outside official banks.

Mistrust of banks among China's peasants is an age-old phenomenon. And as their wealth increased in recent years, the amount of cash flowing outside the official banking system grew proportionately.

Even in recent years, banks have sometimes refused to let peasants withdraw their money on the grounds of insufficient cash. Officials buying grain from farmers still sometimes pay them with IOUs, even though this practice has sparked riots in the past.

"It is extremely difficult to estimate how much money flows in the countryside outside official credit institutions but it is certainly a huge number," said the Ford Foundation's Steve McGurk, who heads a program on agricultural finance.

Ma Delun, director of the governor's office of the People's Bank of China, the central bank, also had no estimates. But he said there was a long history in the countryside of loans between individuals and it was difficult to get credit institutions to set up in each small village.

China's overall savings rate is 42 percent and is even higher in rural areas. According to the official Economic Daily, more than five trillion renminbi (US$602 billion) is in private hands, of which only about Rmb3 trillion is held by banks.

Up to now, farmers have been virtually forced to put their money into official rural credit cooperatives, which offer interest rates below the rate of inflation. Now authorities are thinking of ways to entice rather than force rural people to save with official banks.

As a first step, the government in September announced the reorganization of the rural credit cooperatives into independent bodies no longer under the Bank of Agriculture. They will no longer rely on official pressure to steer savings their way but will have to attract them.

"The rural credit cooperatives will be transformed into credit organizations run directly by the farmers and in some relatively richer areas they will become rural cooperative banks with farmers as customers," Ma said at the time.

While it will take time to regain the trust of peasants, the scale of business is potentially huge.

"Farmers use from Rmb3,000 to Rmb8,000 in cash to build a house. They also borrow, in order, for health, education, funerals and weddings," McGurk said. "Ninety percent of them just borrow from family and friends for these purposes." About Rmb100 billion is borrowed each year just for weddings, building houses, funerals and health care.

Meanwhile, township enterprises, one of the driving forces behind China's dramatic growth, are short of funds.

The official Financial News reported this month that official investment in rural township enterprises accounted for only a third of the funds needed. The rest had to be collected from other sources.

The newspaper, outlining another problem with rural credit, said farmers had to obtain guarantees for all loans from official institutions above Rmb500 - so they borrowed from semiofficial and unofficial organizations instead.

Ma admitted that the growth of rural financial institutions had not kept pace with the growth of the economy, driven by the township enterprises.

Semiofficial "investment funds" help fill the gap. They are not allowed to take deposits but get around this by selling "shares" and paying annual "dividends" instead of interest.

The funds were originally organizations of enterprises and private farmers set up to finance specific projects but have spread throughout the country.

Present national figures are unavailable but general trends up to 1990 and partial figures until 1995 show a huge increase in saving, lending and borrowing outside official institutions.

In 1984, total borrowing and lending by farmers among each other and outside the official banking system amounted to Rmb25.62 billion, according to research by Oxford University. In 1990, the figure was Rmb65.97 billion.

In 1980, a peasant's average cash income was Rmb113.12. In 1990, it was Rmb676.67 and at the end of August 1996 stood at Rmb1,350.

Economists with the Chinese Academy of Social Sciences in Beijing calculated that in the province of Sichuan alone there had been a huge growth in lending and deposits outside the banking system since 1988. In June of that year, non-official and semiofficial organizations collected Rmb74 million, according to the academy's research. In June 1995, the figure reached Rmb8 billion.

By 1992, the percentage of individuals owning shares in investment funds overtook the percentage owned by collective enterprises. In June 1995, collective enterprises owned 25 percent, while private farmers owned 40 percent.

Foreign economists believe one way to bring order to the sector would be to transform the investment funds into cooperative banks, in which peasants could be shareholders with control over operations.

At a conference in Sichuan last November, many Chinese economists implicitly suggested that investment funds should be given a higher status and be officially allowed to collect deposits.

But others called for them to be shut down, saying they hampered the overall control of the money supply.

McGurk said the reform of agricultural credit was crucial to alleviating poverty. China has set a target of lifting 65 million people out of extreme poverty by the year 2000.

"Trickle-down credit is not effective because the money goes to the ones who have power," McGurk said. "To solve the problems of its poor people China must create a program of micro-finance, finance directly to poor farmers."

Making the investment funds official would be a step in this direction, he said.

Anthony Saich, the Ford Foundation's chief representative in China, added a note of caution. "The reform of rural finance is a very technical thing and has problems of long-term sustainability in the growth of deposits. One key aspect is training the personnel to make the program working," he said.

According to official data, about half of rural credit was not used for the purpose for which it was extended, he said.

Hari Srinivas -
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