Rural Finance in Poverty-Stricken Areas in the People's Republic of China. Xuechun Zhang
viability of postal savings.
After 1 August 2003, the PBC changed the interest on deposits from postal savings. According to the new method, the interest rate on new deposits with the PBC was the same as that on financial institutions’ reserves (1.89% per year), while the previous interest rate (4.13% per year) remains applicable to deposits before August 2003. At the same time, postal savings offices were allowed to utilize new savings at their own discretion.
Under such circumstances, postal savings maintained rapid growth. As of the end of 2002, postal savings outstanding stood at CNY736.9 billion. Two-thirds of these deposits were from rural areas and all were deposited with the central bank. As of August 2006, postal savings outstanding was more than CNY1.5 trillion, an amount exceeded only by the four state-owned commercial banks. The Postal Savings Bank of China (PSBC) also boasts the largest financial network in the nation, connecting urban and rural areas through more than 37,000 outlets, two-thirds of which are in rural areas.
An important part of the central government’s postal system reform was to reform the postal savings management system and standardize the operations of financial services provided by postal savings offices. The general reform plan called for a gradual shift from the previous operational model, in which all savings were deposited with the PBC, to independent utilization of savings under the supervision of the PBC and the China Banking Regulatory Commission. Savings deposited before the cutoff date of 1 August 2003 would continue to follow previous policies until 1 August 2005, whereas new savings were utilized at the discretion of postal savings offices. After 1 August 2005, postal savings offices’ deposits with the PBC would be transferred out over 5 consecutive years. As of 21 March 2006, three such transfers—totaling CNY62.2 billion—were made without affecting the operation of the postal savings offices.
The second element of reform was the gradual diversification of the use of postal savings funds. With previous savings gradually transferred out of the PBC, the ability of postal savings offices to utilize funds independently has been improving. They have adapted to rural financial reform and have piloted pledged microcredit to reinforce support for agricultural industry, rural areas, and farmers (sannong). In December 2005, the China Banking Regulatory Commission approved microcredit lending to rural residents, using time deposit certificates as pledges, in Fujian, Hubei, and Shaanxi provinces.
As of August 2006, independent fund use outstanding exceeded CNY800 billion, most of which was in bonds or was deposited with banks. The China Development Bank was selected as China Post’s partner in the lending business. In June 2006, the two parties signed a comprehensive agreement to cooperate in a variety of areas, such as asset management, fund use, consulting services, human resources, and settlement.
On 31 December 2006, the China Banking Regulatory Commission approved the incorporation of the Postal Savings Bank of China, permitted China Post to become the sole investor in the PSBC, and approved the creation of the fifth-largest commercial bank in the PRC. According to the articles of association, the PSBC operates through the China Post network, must establish an internal control and risk management system in accordance with corporate governance and other requirements for commercial banks, and must operate in line with market principles. Similar to other banks, the institutional arrangement, operations, and senior management are subject to banking supervision focused on the bank’s capital adequacy ratio. The PSBC is well positioned to rely on its current network of outlets to improve financial services with retail and intermediary businesses in both urban and rural areas.
After its transformation from China Post, the biggest problem now facing the PSBC is inadequate lending capacity. It was not until August 2003 that postal savings deposits were gradually transferred out of the central bank and new savings were available for utilization at the discretion of the PSBC, which mainly purchased bonds and deposits under negotiated terms. Since 2006, the China Banking Regulatory Commission has allowed China Post to launch pilot programs of microcredit pledged with deposit certificates, interbank deposits, and investment in syndicated loans and bonds issued by international development agencies. As of August 2006, the balance of independently utilized funds exceeded CNY800 billion, but most of the funds were still invested in bonds or deposited with banks.
Market Liberalization and Rural Financial Development
Liberalization of the PRC’s rural financial market entered a new stage in 2005, and the most notable reforms are the pilots of microfinance companies and new types of financial institutions. Since the second half of 2005, the PBC has piloted microfinance companies in five provinces and regions, and in May 2008, the pilot was expanded nationwide (including Guizhou, Inner Mongolia Autonomous Region, Shaanxi, Shanxi, and Sichuan). Presently, nearly 500 microfinance companies have been established. In addition, the China Banking Regulatory Commission relaxed market entry requirements for rural financial institutions and, at the end of 2006, piloted the liberalization of rural financial markets in Gansu, Hubei, Inner Mongolia Autonomous Region, Jilin, Qinghai, and Sichuan. In addition to microcredit institutions that provide lending without taking deposits, other new types of financial institutions include village banks, loan companies, and mutual financial organizations (also called mutual fund associations).
The PSBC is well positioned to rely on its current network of outlets to improve financial services with retail and intermediary businesses in both urban and rural areas
Market opening also has provided a base for the legalization of informal credit
A great number of farmers have gained control over their agricultural production, supply, and sales through the family contract responsibility system, and the liberalization of the rural financial market allows farmers to legally obtain credit. Production, supply, sales, and credit can work together to help farmers gain a competitive edge in the growing market economy.
Market opening also has provided a base for the legalization of informal credit. Some qualified informal creditors could become legal rural financial institutions through registration. Such institutions, as well as loan companies with a 100% capital adequacy ratio, RCCs with relatively low capital adequacy ratios, and other commercial banks, including the ABC, will present a complete spectrum of rural financial institutions, and such diversity of institutions can better meet diverse financial demands. In addition, private capital (including foreign capital) is now, for the first time, allowed to purchase a stake in and control newly established financial institutions. Pilot provinces have experienced an increase in mutual financial organizations self-managed by farmers, private microfinance companies, and village banks representing partnerships between financial institutions and private investors.
Main Issues of the Rural Financial System in the People’s Republic of China
The main challenges to the PRC’s current rural financial reform stem from the old financial administrative system, which was designed to support agricultural production with cheap money from the ABC (in the form of poverty reduction loans) and RCCs (in the form of small credit loans). Such an institutional design requires a highly centralized financial system, simplified financial institutions, and administrative management similar to that of government agencies.
The PRC’s traditional rural financial system is characterized by lack of competition, diverse demand, capital outflows, difficult access to credit, the need for government credit inputs, insider control, and a lack of an enabling operating environment. Monotypic institutions reduce competition in rural financial markets, and demand for diversified financial services cannot be met. Furthermore, government credit supplies cannot reverse the large outflows of funds from rural areas or relieve farmers’ difficult access to credit. At the same time, the “reform” of rural financial institutions under senior management that makes decisions without consulting shareholders has separated loan decision making from the interests of rural households.
Lack of Competition
Rural financial reform since 1996 has failed to promote competition in the rural credit market. Instead, the reform caused the ABC to gradually remove its lending business from the rural credit market and close down rural cooperative foundations and