Journalof ContemporaryChina (2001), 10(27),189– 217

China’s Monetary Reform:the counterrevolution from the countryside CARSTENA. HOLZ*

Untilthe late 1990s, the rapid development of rural cooperative funds as semi-formal Žnancialinstitutions in the countryside attracted little attention. In many provinces, these fundstook over large swathes of rural Ž nance,before the State Council in March 1999 issueda secretdecree requesting that they be immediately dissolved. This paper explores thereasons for the rapid development of rural cooperative funds in many localities, examineswhy this has been an issueof contention,and explains why it hastaken the central governmentsuch a longtime to come up with a coherent—and, furthermore, drastic— re- sponse.Although rural cooperative funds are now being dissolved across the country, they mayalready have achieved their purpose of revolutionizing Ž nancialintermediation in the countryside.

Introduction China’s rural economyhas onlylimited access to formal Žnancial sector funding. Throughoutthe 1990s,the contributionof townshipand village enterprises (TVEs) to national outputexceed edtheir share offormal Žnancial sector loans bythree to fourtimes. Agricultureis nobetter off; its share ofgross domestic product throughoutthe 1990sexceed edits share ofloans four-fold. 1 Thed iscrepancyneed notnecessarily implya lack ofexternal funds, butit implies apotential scarcity of formal Žnancial sector fundingin the countryside. OnesigniŽ cant developmentin the 1990swas the rapidspread of variousforms

*Carsten A.Holzis an Assistant Professorin theSocial Science Divisionof theHong Kong University of Science andTechnology. At thetime thismanuscript was accepted forpublication he was aVisitingAssistant Professor in theDepartment ofEconomics at CornellUniversity. The author gratefully acknowledges Ž nancialsupport through aDirect AllocationGrant of theHong Kong University of Science andTechnology. He wouldalso like to thank ThomasP. Lyons,David Zweig, Anita Chan, Jen-Chi Cheng and the anonymous reviewers fortheir comments. 1.The formal Žnancialsector includesthe four state commercial banks(Industrialand Commercial Bankof China, AgriculturalBank of China, Construction Bank of China, and Bank of China)and all othernationwide and regional commercial banks,savings deposit agencies ofpostal ofŽ ces, housingsavings banks, urban and rural credit cooperatives,urban cooperative banks, Ž nancialtrust and investment agencies, andŽ nance companies.For data see ZhongguoNongcun Jinrong Tongji Nianjian 1996 [StatisticalYearbook of China’ s RuralFinance 1996 ] (Beijing: ZhongguoTongji Chubanshe, 1996), pp. 70, 614; ZhongguoTongji Nianjian 1999 [StatisticalYearbook of China 1999](Beijing:Zhongguo Tongji Chubanshe, 1999), pp. 55, 412, 624; ZhongguoTongji Nianjian 1996 [Statistical Yearbookof China 1996 ](Beijing:Zhongguo Tongji Chubanshe, 1996), p. 614; ZhongguoTongji Nianjian 1993 [StatisticalYearbook of China 1993 ](Beijing:Zhongguo Tongji Chubanshe, 1993), pp. 51, 664; ZhongguoXiangzhen Qiye Nianjian1993 [ChinaTownship and Village Enterprise Yearbook 1993 ](Beijing:Zhongguo Nongye Chubanshe, 1993),p. 147.

1067-0564print; 1469-9400 online/ 01/270189-29 Ó 2001Taylor & FrancisLtd DOI: 10.1080/10670560120045706 CARSTEN A. HOLZ ofsemi-formal ‘rural cooperativefund s’( nongcunhezuo jijinhui ,also translated as ‘rural cooperativefound ations’) in manylocalities across the country. 2 While rural cooperativefund s(RCFs) wereoriginally set upin the late 1980sto managethe Žnancial propertyof the disbandedcommunes and prod uctionbrigad es, bythe early 1990sthe RCFs, underthe protective shield ofthe Ministry ofAgriculture (MoA),had their eyes set onmuch grand er developmentschemes. Inmany provinces,RCFs tookover large swathes ofrural Žnance.In March1999 the State Council(SC) issued asecret decree to immediately dissolve the RCFs. By mid-April,the RCFs werereported to have been d issolved inSichuan Province, by mid-Septemberin Hebei Province. Other provinces were slow tofollow suit, and RCFmay yet survivein many localities forsome time to come. RCFs havereceived only limited attention. Discussion within Chinawas largely restricted to specialized journals beforeit disappearedwhen the SCin 1997began toquestion the continuedgrowth of RCFs. 3 Newspapercoverage of RCFs through- outthe mid-1990swas minimal andthen turned increasingly negative.For example,the failure ofthree RCFs in LanxiMunicipality, ZhejiangProvince, triggereda severe andmuch publicized criticism bythe State Council. 4 Few scholars outsideChinahave taken notice ofthe RCFs. Park et al. (1997)d ocument anegativeimpact ofRCFs onthe developmentand proŽ tability offormal Žnancial institutions in alocality. Tsai (1999)investigates the relationship betweenlocal governmentattitud es towardsthe private economyand the developmentof different informal Žnancial institutions. Cheng et al. (1998),in acase study,look at the governanceof RCFs andthe innovationsthat RCFs introduceto rural lending practices. Du(1998) and Chen et al. (1998)give general overviews over the rise of the RCFs.5

2.Other sources offunding in the countryside include loans between individuals( minjiandaikuan ),loansextended byprivate banks and government departments, bank loans lent on by state-owned enterprises, as well as off-balance sheet Žnancingfrom the formal Žnancialsector. For more detailssee, forexample, Zhu Delin and Hu Hai’ ou, Zhongguo De HuiheiseJinrong: Shichang Fengyun Yu Lixing Sikao [China’s Grey andBlack Finance: Fast-changing Market andReasons for its Evolution ](Shanghai:Lixin Kuaiji Chubanshe, 1997); Jiang Xuchao, ZhongguoMinjian Jinrong Yanjiu [InformalFinance in China ](Jinan:Shandong Renmin Chubanshe, 1996); Huang Weiting, Zhongguo De YinxingJingji [China’s InvisibleEconomy ](Beijing:Zhongguo Shangye Chubanshe, 1996), section 10.4; Xu Xiaobo andDeng Yingtao, ZhongguoNongcun Jinrong De BiangeYu Fazhan1978– 1990 [Transformationand Development ofChina’ s RuralFinance 1978– 1990 ](HongKong: Oxford University Press, 1994).Hu Biliang and Zhang Yuanhong, ‘ZhongguoNongcun Jinrong Bumen De Gaige YuFazhan’ [‘ Reform anddevelopment of China’ s ruralŽ nancial institutions’] (Academy ofSocial Sciences, Beijing,manuscript, 1998), describe therecent reforms inthe rural Žnancialsector. 3.See, forexample, the agricultural journals NongcunJingji [RuralEconomy ],NongcunJingji Yanjiu [Rural EconomicResearch ], and NongcunHezuo Jingji Jingying Guanli [RuralCooperative Economy Management and Administration ],ortheŽ nancialsector journals JinrongYanjiu Baogao [FinancialResearch Report ] and Jinrong Cankao [FinanceNews ].Manyof the reports in these journalsare surveyreports of individual localities, often individualtownships. Journals associated withthe agricultural departments adopt a positivetone, while those associated withthe formal Žnancialsector tendto be highly critical ofRCFs. 4. RenminRibao [People’s Daily ],(25November 1996). 5.Albert Park, Loren Brandt and John Giles, ‘Givingcredit where creditis due:the changing role of ruralŽ nancial institutionsin China’(Working Paper No. 71, The William Davidson Institute, March 1997); Kellee S.Tsai, Banking Behindthe State: Private Entrepreneurs and the Political Economy of InformalFinance in China, 1978– 1998 , (Ph.D. dissertation,Columbia University, 1999); Cheng Enjiang, Christopher Findlay and Andrew Watson, ‘ “We’re not Žnancialorganisations!” ’: Žnancialinnovation without regulation in China’s ruralcooperative funds’ , MOCT-MOST 8(3),(1998), pp. 41– 55; DuZhixiong, ‘ Thedynamics and impact ofthedevelopmentof ruralcooperative funds (RCFs) inChina’ (Working Paper No. 98/ 2,ChineseEconomies Research Centre,The University of Adelaide, March 1998);

190 CHINA’S MONETARY REFORM

This paperexplores the reasons forthe rise ofthe RCFs in the early 1990sand thentheir fall in 1999.In the early 1990s,formal Žnancial sector lendingin the countrysidebecame increasingly scarce andŽ scal fundssaw arelative decline. Consequently,local governmentand Party departments usurpedand expand edthe existing communalRCFs in anattempt to Žll the gapin rural Žnancial intermedi- ation.While RCFs are locally established institutions with little nationwide co-ordination throughthe MoA,all share some commoncharacteristics, andto some degreethey all impact onthe rural economyand the nationwideŽnancial system. RCFs preventthe outow of funds from rural areas forlending to urban, primarily state-ownedind ustrial enterprises, andthey serve manyof those rural enterprises andhousehold sthat the formal Žnancial sector neglects. But the growthof the RCFs also implies stagnating if notfalling deposits at formal Žnancial institutions in the countrysideandthus areductionin their proŽtability; whenbad loans at formal Žnancial institutions cannotbe recoveredto meet householddeposit withdrawals, formal Žnancial institutions face bankruns. Poorlymanaged RCFs themselves mayexperience liqui dity problemswith ensuing bankruns on RCFs. ThePeople’ s Bankof China (PBC) as central bankby 1997 was nolonger willing to idly standby. Moreover, it hadbeen assigned the task of reorganizingthe approximately50,000 county- and township-based rural credit cooperatives(RCCs) that until 1996were little morethan branches of the Agricultural Bankof China(ABC), but then became ind ependent.Resuscitating the RCCs proveda major challengenot least dueto the Žerce competition fromthe unregulatedRCFs. Since March1999 the PBC,with supportfrom the SC,is mergingthe largest RCFs with the RCCs, andthus openingthe doorto potentially far-reachingchanges in formal Žnancial intermediation in the countryside. This paperd raws onnationwid eas well as provincialand sub-provincial tier evidence.Central andprovincial documents are available froma numberof law collections andbulletins. Chinese journals providenumerouscase studies. Inter- views werecond uctedthroughout 1997 and 1998 in several counties ofShaanxi Province(western region),Hebei and Henan Province (central region),Jiangsu Province(coastal region)as well as in Beijing. Localgovernment d ocumentswere frequentlyon display in the RCFs in anattempt to create animage ofrespectability, at times in competition with otherlocal RCFs. Muchof the detailed data are from ShaanxiProvince. While noclaim is madethat Shaanxiis representative ofthe wholecountry, the secondaryliterature onRCFs suggests that Shaanxiis at least as gooda locality to studyas anyother. Shaanxi has awiderangeof d ifferent RCFs, andthe authorwas able to secure arich collection ofd ocuments. 6 This paperis organizedas follows.The next section documentsthe scarcity of fundsin the countrysidein the early 1990sas the prime explanationfor the rise of the RCFs. Thethird throughto the Žfth sections examinethe characteristics and extent ofRCFs, explorehow far RCFs meet the needsof the locality, andexamine

Footnote 5continued ChenZhen and Liu Shucheng, ‘ MingqueZhuguan Bumen Zhize, Gaohao Hezuo Jijinhui Guanli’ [‘ Clarifythe responsibilitiesof thesuperordinate departments in order to manage theRCFs well’ ], NongcunHezuo Jingji Jingying Guanli 4,(April 1997), p. 22. 6.Five detailed interview case studiesare availableon request.

191 CARSTEN A. HOLZ whytheir growthgave rise to central governmentconcern. The sixth section traces the indecision at the center throughoutthe 1990son how to cope with the RCFs. Thelast section concludes.

The decrease in formalŽ nancial sector lendingin the countryside Thedegree of financial intermediation in China’s countrysidehas always beenlow dueto systemic reasons-deŽciency in Žnancial intermediation. Until the mid-1990s, all banksexcept the ABCservedexclusively the urban,mainly state-owned economy.Up to 1998, lend ingby the formal Žnancial sector was ruledby an imperative credit planthat left little quotafor lend ingother than to the state sector. With animplicit governmentguarantee on loan repayment it was safe tolend to the state sector. Nosuch implicit repaymentguarantee existed forlending to customers otherthan state-owned enterprises, suchas TVEs,or rural households. Theformal Žnancial sector controlledand mostly ownedby the central governmentthus had anin-built bias towardslendingto the,all to some degreecentrally controlled, state-ownedenterprises. Thetask ofprovi dingŽ nancial intermediation in the villages andtownships fell primarily tothe RCCs, yet in the Cultural Revolutionthe RCCs turnedinto mere branchesof the ABCandremained part ofthe distant formal Žnancial sector until theywere split offfrom the ABCin 1996. 7 While the credit planningsystem allowedRCCs some leewayin who to lend to, until 1996they had to deposit up tohalf oftheir fundsat the ABC.Theirlend ingin the countrysidethus remained relatively small, andmuch of it was drivenby central governmentpolicies. The outcomewas apotentially under-fundedrural economy.Neither townshipnor village governmentor ind ividuals wereable toestablish Žnancial institutions as the central governmentretained tight controlover the Žnancial system. Lending becameparticular scarce after 1992when the economybegan to overheatand the central governmenttook a host ofcontractionary measures, includinga recentral- ization ofthe formal Žnancial sector. Within eachformal Žnancial sector institution, the recentralization led to alack ofd ecision-makingauthority, a lack oflend ingallowance (quota), and a lack of fundsat the lowest-level bankbranches. Decision-making authority on lend ing movedup from the lowest-level branchesto the municipal tier branchand above. Alarger share ofthe credit quotawas retained byhigher-level branches for their ownlending. Lower-level tier bankbranches then were starved offundsto lendas eachbank branch was requiredto deposit a‘second-tier minimum reserve’at the next-higherlevel branchto fundthe higher-levelbranches’ lend ing.In add ition, since 1994,all reŽnancing of Ž nancial institutions bythe PBCoccurson central tier, furtherstarving local bankbranches of funds. Thed ata in Table1 documentthe increasing relative scarcity offormal Žnancial sector lendingin the countryside.Lending by the ABCandRCCs to agriculture (includingstate- andcollective-owned farming as well as agricultural households)

7.For details on thedevelopment of the RCCs inrecent years see AndrewWatson, ‘ Conict ofinterest:reform ofthe rural credit cooperative in China’, MOCT-MOST 8(3),(1998), pp. 23– 40.

192 CHINA’S MONETARY REFORM , , ; l e k 4 n n 2 6 4 a o 9 a a i m 1 9 i 6 i o r 9 j j a 4 . 9 5 e b 1 s n n t 7 p . 1 r a a a n 0 1 2 7 6 8 1 2 p e p 7 i a i i n , 5 0 9 5 4 9 5 2 , e 9 h N M N ...... t ) a a 7 9 Y i t 2 4 2 5 9 4 2 2 6 s j e g s 9 1 a e 2 2 1 1 9 c y n n a 9 i s i d 9 2 a t o i 1 w i s r 1 r Q d i , n n p e t N e n i r e r a a d e J i t e e a h j d t h y s S h o a n 1 8 i z n - s n l u a 0 2 g e a E i Q a g e 0 0 5 0 3 6 1 6 6 2 i n 6 u b g e N l h c 0 4 4 2 5 8 1 0 4 7 9 a n u ...... t i n g a n e 9 g h 1 6 7 5 8 1 1 4 2 4 o a f v X a h 1 l n i 2 3 1 1 1 h C l z ; n o o i ; i 2 2 2 e i Z g r ) u l j V ; n F e n g b g i 4 a c d e a g n i J 6 l s n n n i o i i X 4 o a a r o v T 1 0 8 . u v p h o p o 7 6 4 p i o g r a r u Z , 4 3 1 1 1 7 3 4 9 5 5 9 4 0 8 0 5 e u g h ) P g ; e t 8 9 4 5 8 0 8 2 8 4 1 9 6 6 5 6 9 s g n r 7 ...... g 9 n 9 n g a g o 3 7 5 1 7 2 0 9 8 4 1 0 1 1 2 2 9 n 3 E 1 n n h w 9 2 2 3 3 1 2 2 1 1 1 2 2 o a 2 t o o e Z o 1 , h a d , h g ; T 3 2 Z d g e a 7 Z 5 l a ; n h 8 l 4 : 1 s n 5 a i , i 9 g . n 4 u V 3 9 n h p 8 4 4 a 2 i . 4 1 G p 5 7 8 j d b C , 5 i . , [ 8 1 6 4 4 4 4 9 8 4 9 7 8 0 n 4 u o g e 5 2 p 3 8 2 5 0 1 7 7 2 0 1 9 5 8 1 a 9 h 8 n n 4 ...... p B 9 i 9 9 ( p 3 2 2 1 1 7 5 1 2 1 8 9 8 2 2 p C e , 9 i d 1 9 2 2 1 2 2 2 1 2 3 c ] , , 3 1 g u h ) 1 n l 6 9 9 n s i n 8 c 9 2 9 n o n s a 9 x r 9 1 1 a i w e i j 9 e n 1 . j ( c i n o 1 n p n J e n a T a , 3 2 i d p i c a i [ o e j i . e 1 6 v n , u N n h 4 9 d 5 6 4 1 8 3 5 8 5 8 9 2 o N 3 a 7 s g a r 8 9 e d 1 2 1 2 9 7 2 3 0 8 8 0 9 n 9 i e n ...... g i y a 9 3 P 9 9 y i a - 5 1 3 7 2 7 6 2 1 3 6 1 n N . 1 i F 1 g 1 e b 2 3 1 3 3 3 7 o i Q p l j o n Q u u h l n , a g n a o h r n 2 2 a Z i a 6 e n d l i e : u C v 9 i j h o g h g z i R 9 n Z n e T z j . n g 1 a s a i d g g g 8 i 0 7 g j n i ’ u i n n n n 1 2 6 n a a N . w e i a o o a G 6 8 6 0 7 7 2 8 1 1 2 8 o 2 n i 2 i n z i e B r X j T 3 7 5 2 8 1 2 6 0 1 8 2 i 9 e X ...... o ( h y s n n 9 i u i o d i i 3 1 2 2 6 2 3 5 1 0 6 2 ] o t o a C 1 u J u 7 i 2 2 2 2 1 4 3 3 1 H u a Q l u 4 f g 9 n i g 2 c n N g 9 o j g n 9 g x u f g 9 i g e n k 1 j n e c o n 1 n h o o , g o g a o z o h o a n n h n n h t g % i T i b Z o o 1 3 Z a Z n 2 r ; h s 3 0 u T d N : : a 3 a 9 n . i 8 4 4 6 4 2 5 0 1 2 8 0 C 1 t e g d w 6 o s a o 3 f i 6 5 8 1 8 9 1 8 0 4 0 9 9 X u e n Y ...... 3 u o u e o i a 9 p d l l j 0 3 2 3 7 9 1 7 1 3 6 3 d , g s t g o i k 1 d C e a i 2 2 2 2 2 2 2 9 g g u u e t k o a r c e 7 n 2 2 n - o g i u n o B t p y 1 e o o g a ( r b i b s r i . u h i h b n o r ] r l e t Q p t o Z a Z t t a 8 a o p n e e h t ; n ; t v 9 n , f 0 8 e o e Y S Z 0 0 9 e 4 [ 7 d c 9 6 h d l h 0 ; 1 9 s 9 e 7 n z 4 2 a i 2 6 9 5 n i a 9 , d g 0 3 a a e 9 , 2 1 . . c , u 1 9 d n h c n 9 4 1 6 n 2 r e i a 2 a n g n 1 - - 4 i a u , h , a n l a e e 1 l n 3 X i n 7 a a C i u j a . g 2 a ; 2 l h v f F i n b p 2 a a , 0 j [ t S s o a l p r v 9 5 n , i u l , n 7 e , k i 1 . 2 a p a 5 N e 9 h i t 1 p o . 1 v t s o 9 9 e u 9 l i , o N p e 1 9 r 1 y o 9 5 i b p h . i d 1 k s p j r 1 n 9 , s p r n n w n g Q a s a n 5 9 e p a i n a a , n I t e o j 1 9 n s , b a o r o : n . Y e / n 9 ) i - l t e g n e j T d e h s 8 l a 1 e p , a i i n e k z u i a e 9 i g s r n l n j a n d t g c N 9 h i h p u n a i a a n u e n s r r t 1 i s o s l g v s N - b j a a s e r c i n / s , n n t i i e e t n t n e x a e o d o ) c n g N u i X a i y a e r , w e h i r e t a n J i t ) p s s e l o % ) ) r n t d o o u s a l S N i n y n t t n n t u Q l i o u d [ % i ) ) C C u i J i t u c a n . a u g a t a v o j s s i r h c n e - o B B c b Q 8 s n o 1 o t g ( b - g l i e s e C C s e t d n u g u 9 2 e n ( n A A s n s i h e u e g l d n n 9 C C g 6 h ( ( g o l e o z s l o s a l n a g y n a g o 1 i . i h r a i h C R R t T g i a a a l a a r r i n ( ( - n p z i c l i g v N Z n d n n n i i p p e g u o c c p g i i n e , ; . . s s r a i a n r l v o t t n y ) d q i a h n n h h n 8 i e e e e e h b u j e n n t 5 o g a l n ) ) ) a n t a Z d 9 X v v s C C a i r n e e g i i n n 9 n : l Ž n 9 e n n t t n e d i k % % % g n a f f e l X 9 o o g ) a Ž e r 1 i i a a l Ž n n : n a o o n n w u 1 r r a n - ) J a n l o n n n N a u u r l i v N % o a n , e e n i i i o g h r r p a u u k k t a a ( ( ( o d n - - i m s m h a u i b s g p p r u o g t n i j n n r - e e t n u e f o m r h s s Z n o o i j e e e u m B i s a a g c r - r g o e e s c n - - ( : t g t g t o o t i o r : n f l g i C C f e n i n o g e e n e a a a a a g B o B o n s h s h o l a r f e l l g r r r r g o a o s t f y o c C c C i i s n f t l l n d o l l i l w Z o n l u i i o a i h e o t g b l T a e t a o a t a t f t l R R h h h N l l t o t s i o t ; i i r v v l a r r a t t t n l c Z t l o : o a m s N i a a a i r a v h l o 7 u d d u u e s a g ; o d d l l r r o h n w w w v d d t t n e e e s u c 0 Z y o t n n n 8 l l r e d u E l t a i r r m o n o n o N e C o l g 2 f b a a g u r o n h u u r r r h c : 5 d a r r a c c o a a w : a l t t V t g C r l r , a g a c c g n a i 2 g g g g n s s g o l l o t a i i i - - o n n C C . 4 a T c g w l - , r R n r r a i t l l l n n a a n a c i n h p p d i o F a n 8 n 4 o r r p 6 i t ( g a a i a i a e a g B g B j a J d - t j o o i d n r h a i n 0 1 o u u 5 t t h i . u h u h u h o l o l p i o s w e n h A r A A r A e t g l n Z l s s l 5 h o . 2 e i t g a l n n n 1 e s s s o a / - , . u p l l e n n Ž B – : n Z h u r n n n c y y y y y y A n B t n n k r ( P l a 4 a r p g p s a ( ; 4 P n e C t a a w w : a u B B B B B B n G A A A a w l 9 u g h , ] 5 ] , u n 6 s n D o o o o o h p a B D o 9 o n t e 8 5 8 2 4 2 S n b m w t T L L b A S G T T 1 r o S 9 A , T 9 . 9 9 G u n r a o o o h 9 5 9 p 9 9 o n A T O T N f i F 1 1 Z 1 p 1 1

193 CARSTEN A. HOLZ

Table 2. Ratioof countytier share in provincial expenditures to county tiershare in provincial revenues

Growthrates (%)

19931994 1996 94/ 93 96/94

Henan 1.121.00 0.94 2 11.12 2 5.46 Xinjiang1.49 2.15 1.80 44.05 2 16.24 Yunnan 1.551.41 1.00 2 8.73 2 29.25 Zhejiang0.56 1.17 1.82 108.21 55.46 Ningxia 1.261.50 1.07 18.99 2 28.67 Anhui 1.091.70 1.32 56.03 2 22.38 Sichuan 0.10 0.79 Shaanxi0.98 0.95 0.89 2 2.87 2 6.84 Jiangxi 0.731.35 0.78 83.96 2 42.35 Hebei 1.292.17 0.78 68.63 2 63.85 Tianjin 6.440.97 0.98 2 84.94 1.21

Sources:Calculated from individual provincial statistical yearbooks. For allexcluded provinces the data are not available in their statistical yearbooks. droppedsharply in 1993 and recovered only in 1995. Lend ingto TVEs began to slip in1994 and fell belowthe growthrate ofall lendingby formal Žnancial institutions in 1995;RCC lendingto TVEs,for which later data are also available, continuedto grow at arate belowthe nationwideaverageonly. 8 Thelow growth rate oflend ingin the countrysidecanalso bed ocumentedfor oneparticular groupof TVEs, the township-and village-run enterprises. 9 Accord- ingto their consolidated balancesheet, the annualgrowth rate oftheir borrowing fromany formal Žnancial sector institution fell belowthe nationwideformal Žnancial sector loangrowth rate in 1994and stayed at abelow-averagelevel ever after (Table1). Yet these enterprises expandedso rapidly that the share ofbank loans in their total liabilities andequity fell by14%in 1995and by another 2% in 1996.Viewed differently, the nationwideratio ofGDP to formal Žnancial sector lendingremained remarkably constant between1.01 and 1.16 in the periodfrom 1990to 1996,with a small rise from1.05 in 1993to 1.15in 1994and to 1.16in 1995.Township- and village-run enterprises, onthe otherhand ,notonly add twice as muchvalue per formal Žnancial sector lendingthan the nationwideaverage,but

8.In 1991 the volume of TVEloans was approximatelyequal to thevolume of agricultural loans; in 1995 the Ž rst was approximately50% larger thanthe second. ABC andRCC tend to lendthe same amountto agriculture, but RCCs lendabout twice as muchto TVEs thanthe ABC. See ZhongguoNongcun Jinrong Tongji Nianjian 1992 [Statistical Yearbookof China’ s RuralFinance 1992 ](Beijing:Zhongguo Tongji Chubanshe, 1992), pp. 7, 68; Zhongguo NongcunJinrong Tongji Nianjian 1996 , pp. 3, 51. 9.Township and village enterprises (TVEs) comprise thecollective-owned ‘ township-and village- run enterprises’ as well as jointenterprises (ownedjointly by several individuals)and individual-owned enterprises, all inthe countryside.Township- and village-run enterprises accountedfor 58% of totalvalue-added by TVEs in1996. See ZhongguoXiangzhen Qiye Nianjian1997 [ChinaTownship and Village Enterprise Yearbook 1997 ] (Beijing: ZhongguoNongye Chubanshe, 1997), p. 129.Balance sheet data forjoint enterprises andindividual-owned enterprises inthe countryside are notavailable; formal Žnancialsector lendingto these enterprises is likelyto be verysmall.

194 CHINA’S MONETARY REFORM

furthermoreshow a muchstronger rise in the ratio ofoutput to their formal Žnancial sector borrowing—by 39%— in 1994, continuing into 1995. 10 While the bias ofthe formal Žnancial sector is starving local enterprises and farmers ofd evelopmentfund s, rural economicd evelopmentcontinues to beof major concernto local governmentsand Party committees. Theunusually sluggish growthof TVEs in manyprovinces in recent years has contributedto a sense of urgency,but localities increasingly lack governmentfund sto promoteeconomic development.The 1994 tax reformmassively raised the share oftotal revenues collected bythe center (from22.02% in 1993to 55.70%in 1994),which then redistributed the fundstoprovinces to an extent that the local share ofexpenditures fell onlytwo percentage points (from 71.74% in 1993 to 69.71%in 1994). 11 Yet the countytier was hardhit bythe changesin revenueallocation. AsTable 2shows,in six outof ten provincesfor which county tier data are available, the ratio ofthe countytier share intotal provincialexpend itures to the countytier share in total provincialrevenues increased signiŽcantly in 1994over 1993, while in three otherprovinces the ratio decreased,butonly slightly. Thelast provincial-level entity, Tianjin,appears to havecond ucteda major redistribution ofrevenuesto the countytier. 12 Thegeneral increase in the county-tiershare ofexpenditures relative to revenueswas primarily dueto adisproportionated ecrease in revenuesrather thana disproportionateincrease in expenditures (Table3). Budgets on county tier andbelow tend to bevery tight; 13 this suggests that the countytier facedvery strongpressure in 1994to Žndnew ways to Žnancelocal economicd evelopment. It was onlyby 1996 that the pressure eased. Insearch ofnew sources offund sin 1994,government and Party leaders in manylocalities didnothave to lookfar. By the early 1990s,approximately one third ofall townshipshad established aRCF.The purpose of these early RCFs, the Žrst ofwhichwere established in SichuanProvince as early as December1986, was toprevent the dissipation offormerly collective-owned assets. Theirprimary task was tocollect assets dueto the formercommune. These RCFs oftenconsisted of nomore than a set ofaccounts, all business was conductedthrough the formal bankingsystem. 14 At atime ofscarce bankas well as Žscal fundsbutrenewed

10.The 1994 vs. 1993 comparison is basedon gross output value data as value-addeddata are notavailable; the relative changesin the gross output value ratio and the value-added ratio in 1995 over 1994, when both time series are available,are almost equal(a 21.6%rise vs.a 22.3%rise, oran18.6% rise ifthe lacking Shanghai data in1994 were approximatedas outlinedin the notes to Table 1). This suggests that relative changesin theratio of grossoutput valueto formal sector lendingprior to 1995are likelyto be agoodapproximation to the relative changesin a ratio basedon value-added. 11. ZhongguoTongji Nianjian 1998 [StatisticalYearbook of China1998 ](Beijing:Zhongguo Tongji Chubanshe, 1998),p. 281. 12.The mean ratioof 1994 is statisticallysigniŽ cantly different from the mean ratioof 1993 at the5% signiŽ cance level(two-tailed test, excluding Tianjin); i.e. on average there has beena signiŽcant increase inthecounty tier share ofprovincial expenditures relative torevenues. 13.These budgetsare frequentlydescribed as ‘dailynecessities’ ( chifan)budgets,barely sufŽ cient to cover administrativecosts, with little or no discretionaryspending. 14.See, forexample, Renminribao ,(29May 1992). On the Ž rst RCFsee Jinrongshibao [FinancialTimes ], (9 July1999). Shaanxi Province claims tohave founded its Ž rst RCFevenearlier, inNovember 1985. See FanLianshe andWang Mingshun, ‘ JijiYindao, Guifan Guanli, Cujin Nongcun Hezuo Jijinhui Wenjian Yunxing’ [‘ Provideactive guidance,standardize administration, and promote the steady operation of therural cooperative funds’ ], JinrongYanjiu Yu Fenxi 6,(1997),pp. 1– 3. Bythe end of 1988Shaanxi Province had approximately 370 such cooperative funds

195 CARSTEN A. HOLZ buoyancyin the aftermath ofDengXiaoping’ s tourthrough South China in spring 1992,local governmentand Party leaders approvedthe expansionof the RCFs into quasi-Žnancial institutions. 15

Characteristics andextent of rural cooperativefunds AlthoughRCFs are far fromuniform institutions, theyshare anumberof basic characteristics. 16 RCFs donotregard themselves as Žnancial institutions ( jinrong jigou)—whichrequire approval by the central bank—but mutual aidorganizations (huzhuzu)withoutproŽ t objective.In order to distinguish themselves fromŽ nancial institutions, theysell shares ( rugu)rather thanattract deposits, payuser fees (zhanyongfei )onthese shares rather thaninterest ( lilu)ond eposits, andoffer ‘borrowing’( jiekuan )totheir members (shareholders) rather thanloans ( daikuan) tothe public.In practice, these differences are semantic; shares canbe sold back tothe RCFat anytime (equivalentto adeposit withdrawal),user fees canbe Žxed (equivalentto interest rates), andpotential borrowerscan easily becomemembers beforethey ‘ borrow’. 17 RCFs are runand regulated by a foundinggovernment or Party department on townshipor county tier, occasionally evenon the municipal tier. Most RCFs are registered withthe agricultural departments inthe county,sometimes the municipal tier. Somecooperative fund smaynot bother with registration, orregister with (receive approvalfrom) superord inate departments in their ownbureaucracy; these cooperativefund sfrequentlyalso call themselves ‘rural’cooperative fund s, even thoughthey are notregistered with the agricultural department.In the following, the term ‘RCF’is usedas agenericterm tocover cooperative funds with the characteristics outlinedin this section, independent ofregistration. Examplesof RCFs are RCFs runby the TVEbureau,by the ‘Žnancial guidancestation’ ( caiwu zhidao zhan)ofthe rural workd epartment ( nongcungongzuo bu )ofthe Party,by the Žscal departments, bythe supplyand marketing cooperatives, or by the local civil affairs administration. Inthe rapidgrowth phase of the RCFs in the mid-1990s,the organizing institution if notthe local governmentand Party committee helpedattract start-up fundsbyorganizing public meetings to promotethe RCFandby assigning depositingtasks to subordinate departments. RCFs are formally ownedby their members (shareholders). Members rangefrom government d epartments tocollec-

Footnote 14 continued withtotal liabilities of 40myuan, compared to total deposits at state banksand rural credit cooperatives of 21,033m yuan. See Shaanxiribao [ShaanxiDaily ],(13May 1989), and ShaanxiTongji Nianjian 1990 [StatisticalYearbook ofShaanxi Province 1990 ](Beijing:Zhongguo Tongji Chubanshe, 1990), pp. 407,409. 15.The replacement ofbudgetary funds through bank lending is nota noveltyfor China. It has beenextensively documentedfor higher-level tiers byKaja Sehrt, Banksvs. Budgets:Credit Allocation in thePeople’ s Republicof China,1984– 1997 (Ph.D.dissertation, University of Michigan,1999). 16.This section is primarily based on interviews. Survey reports in Chinesejournals support this evidence. 17.In some RCFsmembership is limitedto speciŽcally deŽ ned institutions or individuals.Party-run RCFs are oftennot open to the public and then go bya name suchas ‘internalfund circulation work’ ( neibu zijin rongtong yewu).Furtherexamples are RCFsrun by the administration of economic development zones. An altogether different categoryis the traditional neighborhood funds ( hehui)withtheir various accumulation and distribution principles. See, forexample, Jiang, ZhongguoMinjian Jinrong Yanjiu ,chapter2, or Tsai, BankingBehind the State .

196 CHINA’S MONETARY REFORM l i h j a t g c i w n t o o s 2 4 8 5 6 2 5 3 2 1 r i . t T 4 7 9 9 7 8 5 9 0 8 g v ...... a e t 5 1 8 0 0 6 0 3 5 0 o o s l 9 1 9 5 1 6 6 5 5 5 u R w e r 1 1 2 g t i v g e e e l h n h t o T y n h t . i n Z e % u l 7 5 4 1 8 4 0 3 1 9 : o 9 b 1 3 6 2 5 8 2 2 1 5 g ...... 9 a n C . l 0 7 5 5 8 7 4 6 3 1 i p i j 9 6 7 6 3 3 0 3 4 1 5 i x a 1 4 1 2 e v E 9 s 2 a B e 9 ( t u 1 o ] n . n 8 e s e 9 v v r 9 e a r 1 6 a l 0 9 0 3 3 2 6 3 6 0 0 9 t a a 6 7 5 3 1 2 0 7 0 0 6 9 . a t ...... n 1 v o d i 3 8 9 9 3 7 5 8 3 7 7 l t e h 7 4 6 3 1 7 5 5 1 5 e e , R h 2 C v 3 t 2 2 e 9 f l s 9 o e l 1 c a k i r n o i c e o v n v i b o o v r r a o p . 1 9 2 5 6 0 7 2 7 8 3 % r e p 5 7 7 6 3 6 1 4 2 1 5 d 8 P ...... Y x e 7 0 8 2 9 2 1 4 2 3 4 6 . l d E 5 4 3 3 5 9 4 4 4 5 4 u a l 2 c c i t d x s e i e t s l a l a t a e r S 2 6 5 5 5 9 7 1 0 8 r [ c 5 2 5 3 0 2 8 2 9 7 o ) ...... n 8 i F 5 1 5 4 8 8 1 6 9 8 v % . 9 2 2 5 4 1 3 2 3 2 e 4 s 9 3 l 2 9 n R k 1 i e 2 2 2 2 2 2 2 9 ( o v 1 n o e s l a b n e i r i j u y a a n t n e n a n e y i i u v l h N e o a r C . 4 2 9 5 1 1 4 8 7 c i C 1 i j p f 3 4 0 8 3 5 8 9 1 t d ...... 3 . g x o s . . n i 3 3 0 2 4 4 0 2 6 n 3 l 2 t E a l 1 1 1 1 2 1 1 3 9 o % a a t s 9 T 7 s e 1 n 9 r l i . o . a u 1 u s s i t i 4 e g c v r d g n d u i 4 n n t 4 4 7 5 2 7 3 9 2 0 0 n v e 9 i o a 9 9 5 6 5 8 9 2 0 0 1 o p 9 . d h ...... r x n 1 v 2 2 2 5 4 8 0 2 5 2 3 Z p l e e e % 3 1 6 2 3 4 5 3 3 1 3 l e p 3 l R a m v x a 0 u e 2 2 2 2 2 . o e c l r d 7 s l i f l 3 a Ž v a i c e i l e r s d c r a a Ž n n e c i i l 6 2 7 5 7 a o w 2 4 5 8 1 3 v t a l 2 4 3 0 0 . t m a o 8 9 5 3 1 5 ...... ) f ...... 1 r o o 3 3 2 3 1 d p 4 t o 4 2 1 2 0 9 r 8 P 1 1 1 1 4 x , f 9 1 1 2 2 e 2 s n 9 E . d 2 d e i o 1 t e p s t a i w r , a r r ) e l n a 8 v u o h p i t c 9 o t l ( 9 a w m a 1 o o 6 N C r c , 9 : . e r G 9 s s h o 1 e . k s g g i c F 3 a n o n i n n r n i n x n : a a i i o a n a x i i a u e x n s i j i u l n u b a e b g j o j g a e s r n h n h t b n b u e n a e n n S a a c t e i u i n e o a a h h i i h e i a T H X Y Z N A S S J H T N r y C

197 CARSTEN A. HOLZ tive-ownedenterprises andindividuals. The particular ownershipconŽ guration varies fromprovince to province(Table 4) but ind ividuals tendto holdbetween a quarterand three quarters ofall shares. Althoughlong-term sharehold ers suppos- edly havethe authorityto, at anannual sharehol der meeting,d etermine the leadership ofthe RCF,the RCFis rund irectly outof the governmentor Party departmentto whichit is attached.Managers are frequentlyformer, if notcurrent, governmentor Party employees,while the Boardof Directors andthe Supervisory Committee (if existent) comprise concurrentgovernment and Party staff. 18 RCFs offera choiceof at least twotypes ofshares; onthe onehand a share whichis equalto d eposits in all butname and freely redeemable,and on the other handa ‘basic’(long-term) share. The d istinction carries implications forvoting rights at the shareholdermeeting andfor the returnon the share; the deposit-type share carries novoting right andonly pays interest (and/ora Žxed‘ dividend’), while the basic share comes withvoting rights andpays interest anda proŽt-d epen- dentd ividend. 19 Thereturn on all types ofshares is determined bythe superordinate departmentand in the early years tendedto be on average twice as highas ona bankdeposit ofcorrespond ingmaturity. After aŽrst periodof consoli dation in 1997,in many RCFs in ShaanxiProvince the interest rate onquasi-deposits was set 10%above the correspondingbank interest rate (i.e. multiply the bankinterest rate bya factor of1.1). The spread between loan and deposit interest rates is usually lowat 1–2%, but higher penalty interest rates comeinto effect oncea loanturns overdue. Loansextend edby RCFs are primarily short-term workingcapital loans of3– 6 monthsd uration.Across provinces,approximately half ofall lendingtypically goes tothe agricultural sector andanother third totownship- and village-run enterprises. Farmers receive alarge share ofthe agricultural loans as well as ofthe residual loans,and across different provincesaccount for between 40 and 96% of all lending (Table 4). SomeRCFs haveextensive branchnetworks covering several townshipsand villages wherebranches are set upaccord ingto their economicviability. Branches havevirtually nodecision-makingauthority on loans. This authorityrests with the headofŽ ce inthe townshipor county seat andthus often,given the personnel overlap,with the superordinated epartment.In localities whereseveral RCFs coexist, Žnal authorityon interest rates andon generalpolicies, suchas institutional expansion,tend sto beconcentratedin onegovernment department. This is usually the agricultural department,by local governmentdecree, even if some cooperative fundsare notregistered with it.

18.In 1995, 51% of the8236 employees of RCFs in Henan Province concurrently held other positions. See ‘Dui NongcunHezuo Jijinhui Ying Geiyu Chongxin Dingxing: Henan Sheng Nongcun Hezuo Jijinhui De Diaocha’[‘ The character oftheRCF should be newlydetermined: a surveyof RCFsin Henan Province’ ], JinrongYanjiu Baogao 12,(11 April 1996), p. 2. 19.The 33 RCFsin Dali County,Shaanxi Province, distinguish between three typesof shares: basic shares which carry risk,pay dividends and are usuallynot to be sold(they accounted for 2.5% of all externalfunds at theend of 1996);‘ Žxedshares’ which carry risk,pay usage fees (interest)and dividends, and can beredeemed after oneyear (37.3%);and non-Ž xed shares whichare depositsin all butname (20.1%).See Dali CountyRCF administrativeofŽ ce andjoint RCF, ‘ JianchiBuxie De ZhuahaoGuifanhua Guanli’ [‘ Persevere inimplementing standardization’ ], Nongcun HezuoJingji Jingying guanli 7,(July 1997), pp. 24f, 21; no informationis providedabout the residual.

198 CHINA’S MONETARY REFORM e n c o i n e t e d c i d 5 3 n i . . i 1 w t v 0 7 5 9 n s e 0 3 4 i 9 o i 9 d 1 y t 9 n s a i 9 a . h N ) d T 2 f e . i 9 9 ) r . 9 6 r 6 ) c a 1 1 t 1 9 5 7 3 7 6 c e ...... , 3 y s , 9 4 0 8 8 0 0 5 5 6 9 a s k 0 5 2 0 8 7 9 9 e ( o 3 4 9 M 1 s o i 1 g r 9 b , n r p 2 r a a ( i e e j , t ] y 0 n n i y 6 r e l 7 2 6 ) i 1 X u 5 6 3 1 4 8 8 n a o ...... , 6 u f 6 6 5 8 4 3 6 5 7 r D 9 - 3 2 6 7 7 9 9 e 9 ( s e 9 2 8 9 h 1 ’ t g 1 e a f l l l o p i o e v e n 9 d P o 7 [ n 9 2 n 1 a 3 6 6 3 5 9 t o ...... , 3 - a a 4 9 9 2 8 9 0 4 9 p h b i 1 5 1 1 4 9 t 9 i h 4 4 9 r 1 s s 1 e n n n i i l a w p m n o t n n m 8 i , e u 3 s s R 5 ) r Y 1 i e 0 3 4 3 4 0 5 3 6 h ...... , 6 t m 3 5 8 3 3 8 1 1 3 9 3 3 7 m 9 o r e 9 3 4 1 5 5 3 3 3 3 9 r 9 l a ( f 0 0 9 9 f 1 b ( 3 2 4 1 a e t r r e a e h w a t t o 1 a r n 2 r i 9 ) d i 1 o 5 7 7 6 x d e . . . . , b 5 n e 0 3 1 0 4 6 3 6 d 9 a i o d 7 2 3 5 5 2 9 t 9 a ( u 4 9 0 9 w l 1 h g n 1 2 1 c S n o n i i i t d t r a o o 6 N c n 7 . c s 0 ) ) 1 a i ) 2 0 8 2 4 n e ...... , r l 5 e a 7 2 3 7 2 8 7 5 6 o b 9 c . n m 5 2 6 0 8 4 3 9 a 9 ) s n e u ( t . i 2 8 3 9 e 1 c c v H s 2 3 1 ( e t i o e r h r t , p p r s n e e a i t 3 c f i n 9 y I 3 ) v e r u 2 . r t 4 0 8 7 8 4 o ...... , 6 e 7 n n h 0 1 4 0 0 0 0 8 0 7 s 9 e 9 u z , r 5 4 2 0 8 4 4 3 9 i 9 9 ( - n y 2 3 2 9 1 u 1 e r a 1 t – g G s t 4 a u l n 9 l a d i 9 r n v r 1 4 i a 2 , s d 8 r 1 e w n 3 r a n . , a 6 e a u o 0 0 0 7 t t 9 - y n l 0 0 6 9 9 p u u e e 4 6 9 i 1 c s h H 7 0 1 h i r t r s 1 a f g n p o a s w ( s o 1 r o t k 8 o o o i t 9 c t 1 y o c x l 0 5 9 6 . . . . , e 6 e b g n r 4 8 2 0 6 1 1 7 s r 9 n o e a 7 4 7 4 3 2 9 a 9 c t e i 7 8 0 9 w u 1 o y e 1 2 1 m a G n r c t o i , u a n s t . d m o e e c . o s 0 c e v s i c b u e i n , 1 r h e t 5 1 b b r o t 1 p n c o a t 9 4 8 2 c r t l r a . . . . , 6 e s e e u u u r 9 4 3 5 2 1 7 t g 9 l o e h 9 6 8 5 3 9 n n 9 m g a s i c h 5 4 1 9 i e 1 u i n d c 1 5 1 e c w i r S e n 2 h o i g t d n n c a v i a n l j s c o l h s n a r e i t l o a v p i r r d c e e ) ) d T d d . z a h n n n i ) t f y n a a . r a a d o a y u o r . s e t m p y g n k n i t ( a n k e i o i m t o h t e i o a ( a s s m F o t a t o ( d n a n c b p n o C b i r g e u s r w e p a d a R r c n a - b o F e n i e x t r e m e e y d e C n e d y - l g l l n a r y p R a l e l a a e c a l s t i s a l F h l t s e r i t i r c t n g F a s l i y c o e e v e n C l n s t a i C r h n e i s : : u v a t e c i o t v u u d i R v d r s o R q i u ’ t e v i p s o % % n ) l a s e n n c e t s s d r w r . f e o a e i r s u e o c v ( n e r n o n r d a P a e r 4 v c g n e p i a i - L t p t i i e l s e . : a e h m o e r a l e r a t . a s r h : s d c e e h F p c e e l t d o g g d d r e o r a e : e n s l n b , c i r ‘ a u a f t o t C s i l a a c c r e r e r r r b e o v a h h R m a e m t h h a t u u s s n a o e e u v o u o T r o T o n y s T P Y T N A C S ( N i b c S o

199 CARSTEN A. HOLZ

By1998 some municipal agricultural departments hadset upcoord inating RCF ofŽces, butprovincial-level coordination is rare.In the case ofthe 32township and village enterprise (TVE)RCFs inShaanxi Province the provincialTVE bureauonly promotestheir cause andcirculates developmentgui delines butd oes notissue instructions onhow to runa RCF; nord oes it exercise anysupervision. No nationwideuniformregulatory framework for RCFs exists. 20 Atthe endof 1994more than one third of all townshipsand slightly belowone Žfth ofall villages nationwidehada RCF(ora RCFbranch). 21 While the spread ofRCFs is notuniform across the country,no particular explanatorypattern ofwhy theyexist inone locality butnot in another is evident.RCFs thrive incoastal as well as interior regions,in poverty-counties ( pinkun xian)as well as in rich counties,and in pred ominantlyagricultural as well as inpredominantly ind ustrial areas.22 Theonly common explanation appears to be local governmentand Party dissatisfaction withthe degreeof formal Žnancial intermediation inthe particular locality. Data onthe extent ofRCFs is available forthe early years,when provincial yearbooksand occasionally newspapersreported on their spread,althoughnation- wideŽgureswere no more than rough estimates. When,in 1997,the SCrequested adetailed reporton the state ofthe RCFs fromthe MoAand it becameapparent that their survival was in danger,public reporting on the extent ofRCFs ceased. Data onlybecame available againin late 1999once RCFs in Sichuanand Hebei Provincewere being d issolved.As Table5 shows,RCFs beganto take offin several provincesin 1994,but RCFs neverbecame a signiŽcant rival to the formal Žnancial system in total. Evenin the provincein whichRCFs weremost widespread,Sichuan Province, d eposits at RCFs neverexceed edan amount equal to10% of deposits in the formal Žnancial system. Nationwide,this ratio was at best 3%(second to last columnin Table 5). 23

20.The MoA handles RCF matters withinits Rural Cooperative Economy Guidance OfŽ ce ( nongcunhezuo jingji zhidaosi)whichhas establisheda RuralEconomic Administration Station ( nongcunjingji guanli zongzhan ) as a semi-independentadministrative facility ( shiye danwei ).ThePBC coversRCFs in its Rural Cooperative Finance AdministrativeBureau ( nongcunhezuo jinrong guanli ju ). 21. See NongcunHezuo Jingji Jingying Guanli 10,(October 1995), p. 13. 22.Some data ontheirspread are thefollowing. By the end of 1995, 65% of all municipalitiesand 56% of all countiesin Sichuan Province had established ‘ joint’cooperative funds ( hezuojijinhui lianhehui ),each coordinating several RCFs.By the end of 1996,712 townships in ShaanxiProvince, accounting for 32% of all townships,had establishedRCFs. In Henan Province, 63% of all counties,32% of all townships,and 65% of all villageshad establishedone ormore RCFbySeptember 1995. In Xinjiang Province, 44% of all townshipsand 45% of all villages hadsome formof RCFby the end of 1996. On Sichuan Province, see GuoXiaoming and Yang Gang, ‘ NongcunHezuo JijinhuiFazhan Zhong De WentiYu Duice’ [‘ Problemsof RCFdevelopment and counter-policies’ ], NongcunJingji 5,(May 1997), pp. 1– 4; onShaanxiProvince Shaanxi Province Government (21 July 1997, Shaanzhengfa #31/ 1997), ‘ShaanxiSheng Renmin Zhengfu Pizhuan Zhongguo Renmin Yinhang Shaanxi Sheng Fenhang, Shaanxi Sheng NongyetingGuanyu Qingli Zhengdun Nongcun Hezuo Jijinhui De YijianDe Tongzhi’[‘ ShaanxiGovernment circular approvingthe suggestions of the People’ s Bankof China Shaanxi Province branch and the Shaanxi Province AgriculturalBureau on cleaningup andrectifying rural cooperative funds’ ], ShaanxiZhengbao 15,(15 August 1997), pp.18– 20; on Henan Province see ‘DuiNongcun Hezuo Jijinhui Ying Geiyu Chongxin Dingxing’ ; onXinjiang Province Xinjiangnianjian 1997 [Yearbookof XinjiangProvince 1997 ](Wulumuqi:Xinjiang Renmin Chubanshe, 1997),p. 160. 23.The range from 0.73 to 2.92% of totaldeposits at all Žnancialinstitutions in Chinain mid-1997 re ects the unofŽcial estimates ofeconomists in thecentral bank(the lower estimate) andof economistsin the MoA (the upper estimate).

200 CHINA’S MONETARY REFORM

But these data ignorethat RCFs onlyexisted inapproximately 1/ 3ofall townships,and that their deposit share in individual townshipsthus couldbe quite large.In one municipality inShaanxi Province, Weinan Municipality, deposits in RCFs by1997 were equivalent to almost 27%of deposits inthe formal Žnancial system.24 Comparedto the deposits at their main competitors, the RCCs, RCFs are likely to havebeen d ominantplayers in rural Sichuanand possibly also across parts ofrural Hebei,Hunan, Yunnan, Xinjiang and Shaanxi Province (last column in Table 5).25 RCFsmeet the needsofthe rural economy RCFs meet several needsofthe rural economy.They prevent the outow of funds fromrural areas andlend to borrowersneglected by the formal Žnancial sector. RCFs also present aneffective bufferagainst usury. RCFs increase the degreeof Žnancial intermediation in alocality becauseRCFs offera larger amountof loans to the locality perlocal deposits thanformal Žnancial institutions. Thevolume of RCF loans is equalto 60–90% of d eposits, with the remainderbeingheld as reserves either in cash orwith the formal Žnancial sector. Onehund redpercent of this lendingoccurs within the locality. Theformal Žnancial sector, onthe otherhand ,retains muchfewer fund sinthe locality. Table6 illustrates the degreeof leakagein the formal Žnancial sector outof rural into urban areas byfocusing on the twoformal Žnancial institutions in the countryside,the ABCandRCCs. Rural credit cooperativesin 1995extend edloans equivalentto 72%of deposits, butonly a small share ofthese loans wereguaranteed to remain in the locality; these are the ‘TVEloans’which in 1996were equivalent to 45%of total deposits only.Most ofthe ‘agricultural loans’(equivalent to 17%of total deposits) are likely to serve agricultural procurement,i.e. are usedfor the transfer ofagricultural resources to urbanhousehold sandstate-owned ind ustry.‘ Otherloans’ may in part goto ind ividuals butalso includeloans tostate-owned enterprises. Overall,of total deposits collected almost exclusively in the countryside,RCCs re-lendperhaps no morethan 50% in the countryside.The overall as well as individualshares have beenon a steadydecline since 1993that continuedinto 1997,suggesting an increasing transfer offund sthroughthe RCCs outof the countryside. 26 TheAgricultural Bankof China in 1995had a loan-to-deposit ratio of0.95.

24.Data onthe 1997 increase indeposits in the formal Žnancialsystem vs.the RCFs conŽ rm thesize oftheRCF sector inWeinan Municipality. See PBCWeinanMunicipality, ‘ DuiWeinan Shi 1997 Nian Chuxu Zengzhang QingkuangDe Diaocha’[‘ Aninvestigation of theincrease inhousehold deposits in WeinanMunicipality in 1997’ ], ShaanxiJinrong [ShaanxiFinance ]3,(March 1998), p. 28f;Wu Xiju, ‘ DuiWeinan Jinrong Zhixu De JidianKanfa’ [‘Someviews onthe Ž nancialorder of Weinan’], ShaanxiJinrong 9,(September 1997), pp. 6– 7. 25.The comparison in Table 5 neglectsthat RCFs do notexist in all townships,while RCCs mostlikely do; the data thusunderestimate the share ofRCFs in ruralŽ nance inthose townships where theyexist. The other formal Žnancialsector institutionin thecountryside, the ABC, on average attracts slightlyfewer deposits(in both urban and ruralareas) thanRCCs (inrural areas); province-speciŽc data are notavailable, so the comparison is conducted between RCFsand RCCs only.RCC branches also tend to be more numerouson townshiptier thanABC branches. 26.The ratio of agricultural household loans to agricultural household deposits at RCCs fell from41% in 1984 tojust 19% in 1998, even though RCCs are ‘owned’by thefarmers andsupposed to primarily lend to them. See Zhongguoxiangzhen qiyebao [ChinaTVE Daily ],(30March 1999). On the out ow offundsfrom RCCs tourban areas alsosee WooWing Thye, ‘ Someobservations on theownership and regional aspects inŽ nancingthe growth ofChina’ s ruralenterprises’ (Working Paper, University of California at Davis,1999).

201 CARSTEN A. HOLZ

Table 5. Extentof rural cooperative funds Deposits(m yuan) at a/RCC Locality Date RCFs (#)RCFs [ a] Banks [b] a/b deposits

Nationwide 1990 8–10,000 1,401,260 0.57– 0.71 3.73– 4.66 1991 99901,807,900 0.55 3.69 early 1990s 1994 17,800 1995 80,0005,386,220 1.49 11.15 1995 , 72,7005,386,220 1.35 10.14 mid-1997 200,0006,857,120 2.92 . 18.95 mid-1997 50–70,000 6,857,120 0.73– 1.02 . 4.74–6.63 mid-1999 160,00010,276,164 1.56 , 13 Provinces Hebei mid-1999 2139 20,900 , 7 , 20 Tianjin 1993 181 240 58,612 0.41 3.70 Zhejiang 1998 . 4900 , 1 , 5 Guangdong1996 2300 64001,301,242 0.49 4.29 Sichuan 1994 4966 6000 183,800 3.26 19.76 1995 5349 14,526 250,400 5.80 35.57 1996 21,599 298,659 7.23 41.05 1998 4435 25,690 , 8 , 50 Henan 1993 426 476 114,366 0.42 2.50 1994 548 569 160,295 0.35 2.07 9/95 74 1828 213,169 0.86 . 4.88 1995 807 2257 270,765 0.83 6.03 Hunan 1993 676.77 72,151 0.94 4.17 1994 1968 98,453 2.00 8.20 1995 2750 4000 124,436 3.21 12.55 Guangxi 1993 588 260 66,534 0.39 2.35 1996 848 1774 136,117 1.30 9.10 Guizhou 1995 70 70 47,821 0.15 1.80 1996 300 250 58,626 0.43 5.38 Yunnan 1993 449 414.39 59,356 0.70 5.84 1994 1160 1280 84,115 1.52 13.54 1995 1792 2000 118,724 1.68 15.92 1996 2136 3093 153,959 2.01 18.46 Xinjiang 1993 408 128.72 44,068 0.29 5.31 1994 1034 442.31 63,444 0.70 12.16 1995 190 808.34 83,842 0.96 16.95 1996 274 936.57 101,247 0.93 21.46 Anhui 1996 510 510 142,070 0.36 2.20 Gansu mid-1999 935 319 , 0.3 , 3 Shaanxi 1988 370 40 21,034 0.19 1.13 1993 323 92,382 0.35 3.34 1994 764 120,682 0.63 5.89 1995 923 1470 156,909 0.94 8.71 1996 900 2000 205,399 0.97 9.33 32TVE mid-1997 32 250 205,399 0.12 . 0.92 RCFs Municipalitieswithin ShaanxiProvince Xi’an mid-1997 , 100 61,998 0.16 n.a. Weinan 1996 214 1091 8530 12.79 n.a. Weinan 1997 450 2300 8530 26.96 n.a.

Sources:For a detailedlist please contact the author.

202 CHINA’S MONETARY REFORM . , . o d r e 3 e u 0 7 2 1 4 4 o h t 8 7 g 9 4 9 5 6 4 f h s 5 i t 9 g 8 7 4 6 6 5 n . h u 9 n a 6 1 3 1 8 1 s p a ...... 1 o b , 0 0 0 0 0 0 s h u e 8 a h Z h 9 t ; w C 3 8 6 6 7 6 9 t 3 6 5 3 5 0 0 3 ) i 1 c j 6 9 1 9 2 0 4 0 g a n g 5 9 t 7 1 4 2 9 6 n ...... a i n . 1 n i 0 0 0 0 0 0 c o p j o n , n c T ) a a 6 9 6 8 4 3 3 6 2 3 0 7 3 6 1 3 7 7 i e n o 5 s 1 5 8 0 5 6 9 1 8 5 6 2 8 8 0 5 5 9 u Ž N 9 a 2 7 4 1 4 0 5 6 1 7 2 8 0 7 8 1 5 9 e g e 9 r g 7 1 4 2 9 5 1 1 1 2 4 5 6 2 7 2 4 1 l g ...... 1 n , p n 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 C e o o r s h B t h s n i 6 4 5 1 4 2 0 0 1 2 2 1 6 3 4 2 5 i P Z s n 4 J 3 7 3 4 5 5 1 9 0 6 7 2 9 8 1 1 6 a o : 9 h 3 6 7 2 6 6 8 6 5 9 6 2 1 2 7 4 0 t b g p o 9 i 7 1 4 2 0 5 1 1 1 2 4 6 6 2 7 2 5 e u n u ...... 1 i w d h g 0 0 0 0 1 0 0 0 0 0 0 0 0 1 0 0 0 j i g r C e d n e l g 2 9 1 3 4 5 6 2 2 4 0 2 0 6 6 6 6 B o h o 3 ( t n 0 3 9 0 8 2 1 3 1 4 0 6 3 0 0 7 8 h h 9 e o 6 8 9 3 0 6 0 2 2 1 2 0 5 2 5 5 7 ] e Z r 9 g 7 1 4 2 7 0 2 2 2 3 5 7 6 2 7 2 5 s 6 ...... ; n 1 o 9 u i t 0 0 0 0 0 1 1 0 0 0 0 0 0 0 1 0 0 0 J ( o 9 3 h 1 o 5 g 6 5 4 9 5 0 6 9 0 7 0 5 0 1 5 8 9 l u . e n 2 a 5 2 1 1 2 9 5 9 8 3 8 4 4 8 1 6 2 i c g p r 9 0 4 5 6 4 2 8 6 5 8 3 1 7 9 3 3 1 d g n , u 9 7 3 4 0 7 2 1 2 0 2 3 6 6 1 7 2 5 n n a 7 r ...... 1 e n o 9 l 0 0 0 0 1 1 0 0 0 0 0 0 0 1 0 0 0 f i h 9 o F y 1 Z c l 6 9 0 8 4 9 2 5 8 9 5 5 6 2 4 0 1 e : i t n 1 l a 7 5 3 1 6 5 3 3 3 2 2 2 6 9 4 2 0 g a a 9 r o 6 4 9 4 6 3 0 8 4 7 1 0 8 2 5 2 9 i n u 9 i j p 6 3 3 0 8 3 2 2 0 2 3 6 6 2 7 2 4 m j ...... i n 1 i R t t 0 0 0 0 1 1 0 0 0 0 0 0 0 1 0 0 0 e a s s s i e o ’ B N ( a 8 2 5 6 7 8 7 0 2 0 5 4 9 7 0 6 7 e m ] 0 n g 8 4 0 2 4 7 5 3 8 9 6 5 0 9 1 0 8 h i 7 s 9 t n 5 5 8 3 6 9 2 9 4 7 1 1 9 0 5 3 0 h a 9 9 o 6 3 3 0 9 3 2 2 0 2 3 6 6 2 7 2 5 f ...... C 9 r 1 a o 0 0 0 0 1 1 0 0 0 0 0 0 0 1 0 0 0 t 1 n f i a o n a J d o n k i i o r t o h u e a o i g l v C b i r g f r r a n e o a e s o e d k d h l h Y o t e Z o i l o d h ; l h t a b d w l e 9 o c r i s n o 1 h e a . t s l u h e , t s e p O i i b s o e 6 e t Y i s . s u h t 1 d l a o 4 u a t o l . a p f 9 o p i h S a p s e o [ r 9 c h t l p m i d u 1 n a e 6 , s - r o t t C a 9 6 c o d C o a n i y C t 9 9 p i C y b m 1 9 e R m f l F i t R [ 1 d t o s n c t s n d l i 7 i a n d e e e n i a s / f 9 r a n j t a r s a i o a 9 a j n o e n p t h C 1 i a n / C p e s s i C s a t h C n t d B i i N n s B a s C R o f i a a N A i j o n / j A f o o i d s s n l p j g o l e n e e a d d g n t r s a l l t i a t d k n a o n n a o o N o n e l o T o h h t C ) 5 a i m a / g T e e t i t m s 9 s g B C t s s B t n ) t t s u o g s 9 n i i s t s t u u o B A n t i / s s e n 1 o e r o t o s s / a n C s r A o o . o t t v s s y n h h o e i ( i n d r i n p p 1 C l n n b s s i a l l C n i i J n e e 2 m a i J R o o a a o a s d d d l C 6 ( l p o r r J p n p d n : n a n i . l o u u 4 u e e R n i ) s r d a a s s l n r r u a s s p h l g 9 t a t c d d e e s s s t e t t o u c i i t t t m o d s i i g , l 9 v n h C , l i i l i o y y v c s s t g i t s s n o l t h a 1 n 8 i s s s t a a e b b r o o / r g f n a a o t o t o e s o n 9 o o o f a s e i r p p n o s o D p o p o s s o r h 9 p p p s c Ž n h t t o e e t t o d u e e t C t p r d e / / i i l N e e e f 1 a Z k i l d d n o s s s s e d d e e N o a p s B d d d ; o a t a n a r o l l h n n l o o n d o l l o t 0 a l l l m o a a a . A d u u a a C p p l a a a m o l a t t r p t 6 a a a i u t t c r n o o e e C g t B t t l u c j m a e e i o o , B d l l y g o o a o r t t r c g d d o o o u n o t l t h C d t 8 / / f b l t t t g l l A / / t s u i . c n g c / / / a a s s f f C 5 a i s a s a R n i c o a h s s s s o d d r n r R r n , r n o o c i . d l n n B o i e l h n n n n ( h r N a u a g u u d . p a a n o d d r h t a t a a t a e e a g Z l A s s o o l i n p 6 l l t t s c o o a n n h A l l t t g Z o o o o a r a l l a : a i a i : e , u u u l l l a a l t e r l n : e s s ) r r s s , s e c l c c l s c s l u a o i i i m m r e e e 6 o o h a a C C E u E C E E E E E r C u i i r r r t r b r t t t u h h t t 9 p p d o g t g t B o n B a u g C C o V o V V V V s s V V o e e y 9 i n o T R T A T O A T I T A O R T T T H E E A T T b N t S R 1 J A d d

203 CARSTEN A. HOLZ

DeŽnitely extendedin the countrysidewere again the TVEloans equivalentto 16% oftotal deposits, far downfrom a peakof 28% in 1992and 27% in 1993.The largest share ofABC loans goesto state-owned enterprises either toŽ nance industry andcommerce (primarily related to agricultural procurement)or to fund capital constructionand technological upd ating andinnovation. 27 ‘Agricultural loans’and ‘ otherloans’ may includ esome loans to individuals in the countryside, butthe ABCis unlikelyto botherwith small loans to households. 28 Even if all agricultural loans andall otherloans wereviewed as havingbeen extend edin the countryside,their share togetherwith TVEloans intotal deposits wouldstill not exceed43%, by far less thanthe share achievedby RCFs. Thesed ata conŽrm the large outow of fund sfromthe countrysideand furthermored ocumenta relative increase in this outow since 1993.One shortcom- ingof the data is the fact that evenin the early 1990ssome deposits at the ABC mayhave been urban rather thanrural, and the outow calculated herethus may beexaggerated .Analternative thenis to use (anestimate of)d eposits byrural householdswith anyformal Žnancial sector institution, eventhough such a measure doesnot includ edeposits byrural enterprises. 29 Lendingin the countrysidebyABC andRCC also falls far short ofthis newd eposit measure,reaching between perhaps 22and 46% in 1995.The increased leakageof fundsfromrural to urbanareas since 1993is againconŽ rmed . Lackingexact data onthe extent ofRCFs, it is notclear whetherthe positive effect ofRCFdevelopmenton local Žnancial intermediation outweighsthe increase informal Žnancial sector leakage.But anyd epositing withRCFs— which extend all their loans inthe locality—rather thanwith the formal Žnancial sector improvesthe degreeof local Žnancial intermediation. Besides retaining fundslocally, RCFdevelopmentalso implies achangein the compositionof the borrowerpool in the countryside.RCFs target notonly township-and village-run enterprises butas the data in Table4 attests also, and oftenprimarily, individual entrepreneursor farmers, aborrowergroup almost utterly neglectedby the formal Žnancial sector. Throughoutmost ofthe 1990s, farmers wereunlikely to obtaina loanfrom a RCCorABC branchas suchloans wered eemedtoo risky andthe costs ofextendingsmall loans toohigh. Yet farmers obtainapproximately half ofall RCFlending,with anotherone third goingto TVEs. RCFs canlend to whatmay be highrisk borrowersfor ABC andRCCs because oftheir frequentlysuperior risk assessment capabilities andlower operating costs.

27.This share droppedsigniŽ cantly in 1994 as muchlending related toagricultural procurement was shiftedto theAgricultural Development Bank of China (ADBC). Alongwith these loans,PBC reŽ nancing of the ABC (rather thandeposits at theABC) movedto the ADBC, causingthe sharp drop in the ratio of (now reduced) loans to (unchanged)deposits. The ratio of totalABC loansto total deposits at theABC isstill relatively high as RCCs up toand including 1996 deposited all minimumand excess reserves withthe ABC. These reserves are notincluded inthe ‘ totaldeposits’ at theABC. Since the separation of ABC andRCCs these reserves are heldwith the PBC; the data discussedhere are notaffected bythis re-organization. 28.According to JinrongShibao ,(11January 1999), 80% of all loansto agricultural households and 70% of all loansto TVEs are extendedby RCCs. 29.Such rural enterprise deposits should be small as inthe case ofthe ABC andRCC household deposits accounted for78% of all depositsin 1995 (Table 6).

204 CHINA’S MONETARY REFORM

Directors ofRCFs are likely to knowthe local enterprises well dueto their frequentlyconcurrent position in the governmentofŽ ce co-operatingwith if not supervisingthe borrower.In one RCF in ShaanxiProvince, enterprise personnelhas beenco-opted as RCFstaff, in whichcase the RCFresembles anenterprise-internal Žnanced epartment with direct access to householdfund s. Inanother RCF, governmentd epartment retirees onbehalf of the RCFpayalmost daily, informal visits to the borrowerto ensureproper use ofthe loan.Loan repayment can be enforcednot only through the courts butperhaps more easily throughthe adminis- trative governmentchannels. 30 Farmers are recommendedto the decision-makers in the RCFbythe RCFstaff at the village ortownship level. RCFoperatingcosts are extraordinarilylow. RCFs are routinelysubsid ized by the local governmentwhich may provid eofŽces forfree andpay for half the employees(who concurrently hold positions in the government).RCF remuneration ofnon-government employees is minimal andd oes notcarry any of the housingand social insurancebeneŽ ts that employeesin the formal Žnancial sector enjoy.RCFs also havetax advantages.While the state commercial bankspay a 55%income tax tothe state tax ofŽce ( guojiashuiwuju ),RCFs payincome taxes at alowerrate, andthey pay these taxes to the local (provincialand subprovincial) tax ofŽ ce (difangshuiwuju ).31 Localgovernments in supportof their RCFs frequentlyd onotcollect incometaxes fromRCFs, andallow them to retain all proŽ t.32 Byextendingsmall loans to individuals, RCFs havemad esigniŽcant inroadsinto traditional usurypractices inthe countryside.For many household s, the only alternatives to RCFloans are tomake d owithouta loanor to borrowfrom other rural householdsat potentially far higherinterest rates. 33 Theestablishment ofa RCFina locality is invariablyaccompanied by a sharpd ropin the interest rates

30.One TVERCF in Shaanxi Province with approximately 150 loans outstanding in mid-1998was takingone borrowerto court.This was theŽ rst case since theestablishment of theTVE RCF in 1994 that is has takena borrower to court. 31.State TaxOfŽ ce (10February 1995, Guoshui hanfa #58/ 1995),‘ GuanyuNongcun Hezuo Jijinhui Suodeshui ZhengguanWenti De Tongzhi’[‘ Circularon the income tax of ruralcooperative funds’ ], in Zhongguoshuishou zhidu [China’s TaxSystem ](Beijing:Qiye Guanli Chubanshe, 1996), p. 576f.The maximum incometax rate forRCFs as non-Žnancial institutions is 33%;since theoperation of onecooperative fund is relativelysmall, thereduced tax rate of27 or18% may apply.(The income tax rate is27%if thetaxable income is 100,000yuan or less, and18% if the taxableincome is 30,000yuan or less.) See State TaxOfŽ ce (18May 1995, Guoshuifa #23/ 1995),‘ GuanyuQiye SuodeshuiZhengshou He GuanliFanwei De Tongzhi’[‘ Circularon the collection and administration of enterprise incometaxes’ ], in Zhongguoshuishou zhidu ,p.578f.Wang Zheng and Yang Wenli, ShuijinJisuan Yu Kuaiji Hesuan [TaxComputation and Accounting ](Beijing:Zhongguo Jingji Chubanshe, 1997), the tax almanac usedby localtax authoritiesin at least Xi’an Municipality, includes 34 pages of taxexemptions (pp. 400– 434), including an exemption forRCCs inpoverty areas (RCCs otherwiseface anincome tax of 33%),but on cooperative funds only states that theMoA is responsiblefor determining the relevant policies and laws andregulations (p. 423). 32.RCFs likewise tendto escape thevarious local government levies onruralenterprises; thus the TVE bureau rarely collects theadministrative fee of0.7%of incomefrom TVE RCFs that it levies onTVEs. RCFs pay a business taxof 5%oninterestincome from lending activities to local governments as all otherŽ nancialinstitutions do. See Wangand Yang, ShuijinJisuan Yu KuaijiHesuan , p. 195. 33. See GuojiaJixie GongyejuJijingwang [StateMachinery and Industry Net ](anInternet source), (11 November 1999),reporting on the dissolution of the RCFs. The author sees thedissolution of the RCFs as thecause ofan upcomingreturn to usury practices andpoints out that just as reforms inthereal economybegan in the countryside in1978, thus reform oftheŽ nancialsector may haveto come fromthe countryside with the establishment of atrue market forfunds (like the RCF).

205 CARSTEN A. HOLZ householdsface.RCFs beneŽt rural householdstwice. First, theydirectly increase the supplyof loans at relatively lowinterest rates. RCFlendingrates maybe as highas twice the interest rates in the formal Žnancial sector, butthey are below those ofthe informal Žnancial sector, andRCF loans are readily available. Second, RCFs havepositive externalities in rural Žnancial intermediation forthose borrow- ers neglectedby the formal Žnancial sector. Theestablishment ofRCFs causes interest rates inthe informal Žnancial sector to fall andthus indirectly makes these loans moreafford able,too. 34

Centralgovernment concern about the rise ofthe RCFs Theimprovement in rural Žnancial intermediation broughtabout by the RCFs comes at aprice.RCFs carrynegative externalities forhigher-level governments andgovernment d epartments if these haveto be called in toprevent ‘ social instability’when a mis-managedRCF collapses. 35 RCFs also havea direct, negativeimpact onthe operationof the formal Žnancial sector. AlthoughRCF lendingsupposed lyrequires collateral orguarantees, in practice the quality ofthe RCFlendingportfolio varies widely betweenRCFs. Onaverage, the share ofnon-performing loans couldbe as highas 20%. 36 But evenif 20%of all loans wereunlikely to beeverrepaid ,the quality ofRCFloans is still superior to the quality ofthe loans extendedby the formal Žnancial sector, wherethe share ofbad loans is generallyviewed as rangingbetween 20 and 50%. 37 Yet there is asigniŽcant difference betweenRCFs andformal Žnancial institu- tions. Formal Žnancial institutions are supportedby the PBC; RCFs as non-

34.For example, according to Fan and Wang, ‘ JijiYindao, Guifan Guanli, Cujin Nongcun Hezuo Jijinhui Wenjian Yunxing’, theestablishment of RCFsin Weinan Municipality, Shaanxi Province, led to a dropof the interest rate onloans between individualsto 30– 50% (from an unspeciŽ ed original level). 35.RCF failures are usuallynot publicized. One exceptionwas thefailure in 1996 of three RCFsin Lanxi Municipality,Zhejiang Province, which even received theattention of the State Council.See RenminRibao , (25 November1996). Two reports in the Hong Kong press are in Ming Pao,27May 1998 and 3 April1999. 36.This is theestimate ofan ofŽ cial at theMoA. Only one of theRCFs interviewed in Shaanxi Province was willingto provide information on thequality of its loans: overdue loans accounted for two thirds of all loansand 55%of thetotal lending volume. The provincial RCF average in1997of total overdue, doubtful, and lost loans was 7.75%;most of these loans(6.5 percentage points)were overdue;see Fanand Wang, ‘ JijiYindao, Guifan Guanli, CujinNongcun Hezuo Jijinhui Wenjian Yunxing’ , p.3.DengAnzhi, ‘ NongcunHezuo Jijinhui De WentiYu Duice’ [‘Problemsof RCFs and countermeasures’ ], NongcunJingji 9,(September1998), p. 24f,in an article onRCFproblems reportsan average of20%overdue and non-performing loans in all RCFsin Nanchong Municipality, Sichuan Province, at theend of May 1998. Xiang Huaifang and Ceng Rongsheng, ‘ DuiGaoping Qu Nongcun Hezuo Jijinhui Zijiin YingyunDe Diaocha Fenxi’[‘ Aninvestigation and analysis of theuse offunds by the RCFs in GaopingDistrict’ ], NongcunJingji 5,(May1998), p. 34f, document the rapid growth of theoverdue and non-performing loan rate in GaopingDistrict ofthisNanchong Municipality with 8% at theend of 1995, 12% at theend of 1996,and 27.8% at theend of October 1997. Yu Jinguan, ‘ Guifannongcun hezuo jijinhui jingying keburonghuan’ [‘ Tostandardizethe management ofruralcredit cooperatives requires immediate attention’], JinrongCankao 4,(April 1997), pp. 19– 22, for90 RCFsin the12 countiesof GanzhouMunicipality (Jiangxi Province) which had established RCFs (out of 18 counties)gives the share ofoverdueloans as 40.97%at theend of 1996. In individual RCFs the extent of overdue loanscan bequitesmall, suchas inthe Shuidongjiang Township RCF in Shaodong County, Hunan Province, with 2.66%at theend of April1997. 37.For example, a ‘representative’survey of twocounties in LangfangMunicipality, Hebei Province,showed bad loansat RCFsto be22percentage pointsbelow the percentage share ofbad loans in RCCs, which is notpublished. InLangfang Municipality’ s 14Ž nancialinstitutions (presumably the complete formal Žnancialsector) badloans accountedfor 35.8% of all loansin 1998;86% of all loansto state-ownedenterprises were bad.See ZhongguoJingji Daobao [ChinaEconomic Guide ],(2June 1999). Langfang became famousfor its RCFs in 1997when the central televisionstation broadcast a critical report.

206 CHINA’S MONETARY REFORM

Žnancial institutions notapproved by the PBCare not.Short-term liquidity problemsin formal Žnancial institutions are routinelybridged by the PBCaslender oflast resort, andbad loans in formal Žnancial institutions are nocause foralarm as these institutions are state-ownedand thus backedby the central government. RCFs, onthe otherhand, have few means tobrid geliquidity problems.Once depositors doubtthe Žnancial health ofthe RCFandstart withdrawingtheir deposits, the ensuingliquid ity crisis canquickly lead tothe collapse ofthe RCF. Consequently,RCFs maintain 10–40% of their assets asdeposits atstate commer- cial banks.38 RCFs, like formal Žnancial institutions, also requiredepositors togive advancenotice in the case oflarge cash withdrawals.These precautionary measures are sufŽcient foreveryd aybusiness. Theyare, however, insufŽ cient in the case of extraordinaryevents. Whena RCFcollapses, local governmentŽ nancesinvariably are insufŽcient to guaranteeRCF deposits. Inthe muchpublicized case ofthe collapse ofthree RCFs in LanxiMunicipality, ZhejiangProvince, the PBCwas forcedto lead supportand rectiŽcation measures. In1997, bank runs on RCFs inLangfang Municipality, HebeiProvince, induced the municipal PBCto ensurethat RCFreserves withthe formal Žnancial sector wouldbewithd rawableat all times. 39 Recourseto the PBCraises the issue ofmoral hazard.RCFs use their competitive advantageover the formal Žnancial sector to gainmarket share andto advance local economicgrowth which beneŽ ts the local government.But shouldthe RCF fail, the PBCis called uponand forced to step inby the sheer magnitudeof impendinglocal social unrest.RCFs thus mayenjoy the best oftwo world s: supervision-free,high-interest bankingand a safety net in case offailure. Local governmentd epartments haveincentives to pushRCF developmentto the limit as the costs offailure fall incommensurablyon the PBCandthus the central government. Accumulationof d ubiousloans is facilitated byinexperienced Ž nancial manage- ment in the RCFs anda lack ofsupervisionover RCFs. TheMinistry ofAgriculture onlyrequires the employmentof ‘ suitable’professional personnel;head and /or manager (zhuren and/or jingli),accountant,and cashier maynot concurrently hold otherpositions. 40 Inan earlier regulation,PBC and MoA required that the

38.Reserve practices varyfrom locality to localityand are speciŽed either as maximum lendingratios or as explicit reserve ratios.Thus RCFs in themunicipal-level Suizhou City, Hubei Province, may notlendmore than60% of the fundscollected. See PangZhongping, Zhang Zhengliang and Li Chengzhi, ‘ CujinJiankang Fazhan, Jianchi Guifan Guanli’[‘ Accelerate thehealthy development, adhere tostandardized administration’ ], NongcunHezuo Jingji JingyingGuanli 5,(May1997), p. 25f. RCFs in county-levelTaixing City of Taizhou Municipality, Jiangsu Province, maintaina 15%reserve (anda 80%lendinglimit); 5% of reserves are keptas cash inthe RCFs or as currentdeposits at banksand RCCs, 5% are investedin time depositsat banksand RCCs, and 5% are maintainedby themunicipal jointRCF for quick adjustment purposes. See JiangYoude and Wu Yadong, ‘ JiaqiangFengxian Fangfan Guanli De YouxiaoShouduan— Taixing Shi Nongcun Hezuo Jijinhui Shixing Zichan Fuzhai Bili Guanli’ [‘ Effective measures tostrengthen risk management— trial implementation of asset–liability ratios in the Taixing City RCFs’ ], Nongcun HezuoJingji Jingying Guanli 2,(February1997), p. 20f. 39. See Hebei JingjiNianjian 1998 [Hebei EconomicYearbook 1998 ](Beijing:Zhongguo Tongji Chubanshe, 1998),p. 60.The report does not state thecause ofthebank runs on theRCFs; perhaps the formal Žnancialsector was unableto repay RCF deposits with it in the Ž rst place. 40.Ministry of Agriculture (19 April 1995), ‘ GuanyuKaizhan NongcunHezuo Jijinhui Dengji Gongzuo De Tongzhi’[‘ Circularon starting registration of rural cooperative funds’ ], in ZhonghuaRenmin Gongheguo Falu Quanshu [PRCCollectedLaws ](Changchun:Jilin Renmin Chubanshe, 1995), pp. 1128– 1131, Art. 7.

207 CARSTEN A. HOLZ member’s congress( daibiaod ahui )ofthe RCFelect aBoardof Directors ( lishihui) anda Boardof Supervisors ( jianshihui),with the Boardof Directors choosinga headresponsible forthe day-to-daywork. 41 Inpractice, decision-makingand control mechanisms varydrastically. 42 Few RCFd irectors haveany banking experience, and on large loans the Žnal decision- makingauthority in the RCFs tendsto almost exclusively rest with government ofŽcials holdingconcurrent positions inthe RCF.TheBoard of Directors andother leadingpersonnel are usually handpickedby the townshipParty committee and government,approved by the countytier superordinate department,and then ‘democratically elected’bythe shareholders. 43 Fewlocalities insist that township Party andgovernment personnel may not hol danyposition in the RCF,most take the viewthat the RCFleadership needstobe identical withthe leadership ofthe Rural EconomicAd ministration Station ofthe agricultural departments. 44 Externalsupervision is oftenweak. 45 Localgovernment d epartments that wish to maintain their controlover RCF lendingd ecisions insist that RCFs remain non- Žnancial institutions outsidethe sphereof in uence of the PBC. 46 While the MoA andthe PBCspeciŽed in 1994that the PBCsupervises the RCF’s business and togetherwith the agricultural departments handles illegal deposit andloan business, the MoAin a regulationin 1995 only mentions the local agricultural departments as supervisoryinstitutions. 47 Thecounty agricultural department conducts anannual inspection ofthe implementation ofthe statutes andad ministrative system, this year’s business, includingproŽ t andlosses andproŽ t distribution, andthis year’s

41.Ministry of Agriculture (1994, Nongjingfa #21/ 1994),‘ Nongyebu,Zhongguo Renmin Yinhang Guanyu JiaqiangNongcun Hezuo Jijinhui Guanli De Tongzhi’[‘ MoAand PBC circular onstrengtheningthe administration ofthe rural cooperative funds’ ], inJiang, ZhongguoMinjian Jinrong Yanjiu ,pp.165– 168, Art. 9. 42.In one extreme case inShaanxi Province a full-timemanager isresponsible for the day-to-day work and the approvalof small loans.The head of the RCF approves medium-sized loans;he is the chairman ofa Boardof Trustees (dongshihui),has nobanking experience andconcurrently holds a governmentposition. Large loansneed to be approvedby the Board of Trustees intotal. In this particular arrangement aSupervisoryBoard does not exist, nor is there anexternal audit. In a differentRCF in Shaanxi Province, Board of Directors, Board of Trustees, and SupervisoryBoard have all beenestablished. The full-time Board of Directors is responsiblefor the day-to-day management, andthe part-time Boardof Trustees forimportant decisions as well as recurrentsupervision. The chairman oftheBoard of Directors is aretiredbanker. The county government auditing bureau carries outan annual externalaudit. 43.See, forexample, Dali County,‘ JianchiBuxie De ZhuahaoGuifanhua Guanli’ , andYang Longsheng, ‘ Gaige RenyuanGuanli Zhidu, Baozheng Jijinhui Jiankang Fazhan’ [‘ Reform thepersonnel administration system inorder toguarantee the healthy development of theRCFs’ ], NongcunHezuo Jingji Jingying Guanli 2,(February1997), p. 19. 44.See Chenand Liu, ‘ MingqueZhuguan Bumen Zhize, Gaohao Hezuo Jijinhui Guanli’ , ontheŽ rst positionand YangZonglian, ‘ GuanyuCujin Nongcun Hezuo Jijinhui Jiankang Fazhan De JidianShexiang’ [‘ Someconsiderations onthe healthy development of RCFs’ ], NongcunHezuo Jingji Jingying Guanli 1,(January 1997), p. 31fonthesecond position. 45.For example, in one particular RCF in Shaanxi Province the manager succeeded inevading all controlsand tolend up toa thirdof the RCF’ s fundsto a friend,with the loans subsequently not being repaid on time. Thecounty governmentand Party committee hadto refrain fromtaking legal or disciplinaryaction against the manager forthe solepurpose of notpublicizing the event. The RCF and the county government would not have been able towithstand abankrun. Similar cases ofmismanagement are reportedin other localities. See, forexample, Changjiangribao [ChangjiangDaily ],(10January 2000). 46.Yang Zonglian, ‘ GuanyuCujin Nongcun Hezuo Jijinhui Jiankang Fazhan De JidianShexiang’ , takes a particularlyardent view against any audit by external institutions except the agricultural departments. 47.Ministry of Agriculture,‘ Nongyebu,Zhongguo Renmin Yinhang Guanyu Jiaqiang Nongcun Hezuo Jijinhui GuanliDe Tongzhi’, Art.1, andMinistry of Agriculture,‘ GuanyuKaizhan NongcunHezuo Jijinhui Dengji Gongzuo De Tongzhi’, Art.15.

208 CHINA’S MONETARY REFORM

workin general.The RCF neither reports to the PBCnorreceives direct PBC supervision. 48 Auditing procedures varyfrom locality to locality. SomeRCFs in Shaanxi Provincecond uct nospecial audit butmay report their accountsto the agricultural departments at year-end.InJimo Municipality, ShandongProvince, the joint RCF conductsthree complete audits peryear and maintains audit Žles oneach RCF. 49 InXiangfan Municipality, HubeiProvince, a municipal RCFofŽce attached to the municipal agricultural department conducts anannualaud it, sendsinspectors to all RCFs onceevery quarter, and initiates unannouncedexaminations. 50 Auditing practice thus varies fromsolely internal Žnancial reports tofrequent external audits. However,no aud it is evermade by any institution that is notalso directly or indirectly involvedin the runningof the RCF,questioning the quality ofthe audit. Poormanagement of RCFs augmentedby moral hazardproblems and a lack of supervisiond irectly forces the handof the central bankand thus the central government.But RCFs also affect the central governmentind irectly via the formal Žnancial sector. Anincrease inRCF deposits implies that these fundsare notbeing heldwith the formal Žnancial sector. This implies stagnating if notfalling deposits at formal Žnancial institutions, andthus fewerloans andlower proŽ ts. Enterprises whichknow that theyare unlikelyto obtain a loanfrom the formal Žnancial sector in the future,but that theycan rely onRCF fund ing,may even go beyondswitching deposits to the RCFandstop payinginterest ontheir formal Žnancial sector loans ornot repay the principal.The formal Žnancial sector is left with anincreasing share ofoverdueloans andfalling proŽtability. ThePBC as lender oflast resort is forcedto bridgeany liquid ity problemsin the formal Žnancial sector, while the central governmentwill inthe Žnal instance haveto pay for the formal Žnancial sector’s badloans. 51

Centralgovernment ind ecision Therapi destablishment andgrowth of RCFs inrecent years was accommodated by alack ofagreement between central ministries onhow to regulate RCFs. Asearly as 1986Chen Muhua, then governor of the PBC,reached an agreement with the MoAto accept RCFs as non-Žnancial institutions under the condition that they wouldnot publicly solicit deposits andremain small, local mutual-aidorganiza-

48.In at least onemunicipalityin Shaanxi Province an unspeciŽ ed degree ofconsultation takes place between the agriculturaldepartments on municipal tier andthe municipal PBC branch.This appears tobe an exception. Secondary literatureon higher-leveltier coordinationreports exclusively on the establishment of countytier andmunicipal tier RCFofŽ ces withinthe agricultural departments. See, forexample, Chen and Liu, ‘ MingqueZhuguan Bumen Zhize, GaohaoHezuo Jijinhui Guanli’ , orPang et al.,‘CujinJiankang Fazhan, Jianchi Guifan Guanli’ . 49.Zhou Fangping, ‘ Yi Tai WuNong Xing Nong De “Zhutuiqi”’ [‘Aboostto agricultural self-help’ ], Nongcun HezuoJingji Jingying Guanli 7,(July1997), p. 23f. 50.Chen and Liu, ‘ MingqueZhuguan Bumen Zhize, Gaohao Hezuo Jijinhui Guanli’ . 51.RCFs also affect thePBC’ s controlover the money supply. RCF depositsare unreportedand therefore not includedin money supply measures. If formal Žnancialsector moneysupply growth is 10%per year butRCFs gain amarket share of5% ofactual (formal andinformal Ž nancialsector) depositsin the course of oneyear,then— assuming theabsence ofaninformal Ž nancialsector before—money supply growth is infact 15.5%rather than10%. Money supplygrowth rates as publishedby the central bankthus may well beseveral percentage pointsoff the actual money supplygrowth rates. Sucha divergencecould have a substantialimpact onthe effects ofmonetarypolicy.

209 CARSTEN A. HOLZ tions. Twoyears later, the SCspeciŽed that the establishment ofa RCFrequired approvalby the PBCand registration with the Civil Affairs Administration; RCFs wereto reporton their Žnancesto these twoinstitutions annually,and to accept their supervision. 52 While RCFs wereexplicitly denoted‘ social organizationlegal persons’ (shehuituanti faren ),the questionof whetherthey are Žnancial institutions was notraised .PBCandCivil Affairs Administration wereentrusted with the implementation ofthe SCdecree; the MoAwas notmentioned in this decree.

Shiftingauthority over RCFsto the MoA This arrangementremained unchallenged until the mid-1990s,when local govern- ments beganto promotetheir RCFs. TheEighth Plenum of the ThirteenthCentral Committee in November1991 conŽ rmed the legitimacy ofthe RCFs (‘the rural cooperativefund sshall becontinued ’). 53 Lower-leveltier governmentsand Party committees respondedwith statements encouragingthe establishment andgrowth ofRCFs. Forexample, the HebeiProvince Party Committee on6 July 1992urged all local governmentsand d epartments to ‘let the rural cooperativefund sdevelop as quicklyas possible’, and‘ localities whichhave not yet acted are to implement pilot projects andto doall theycan so that cooperativefund swill bewid espread oneor two years fromnow’ . TheSC inits blueprintfor Ž nancial reformin late 1993then added a newtwist bystating that RCFs are notŽ nancial institutions, cannotcollect deposits, andcannot extend loans. 54 Inearly 1994,the Chinese CommunistParty Central Committee (CCPCC)and the SCclariŽed that ‘the rural cooperativefund sshall beturnedinto social, mutual cooperativefund ingorganiza- tions (shehuixingde zijin huzhuhezuo zuzhi );theyd onotcond uct deposit business butserve agriculture andfarmers inthe locality’. 55 Authorityover RCF matters graduallyshifted to the MoA.MoA and PBC togetherrestated that RCFs are notŽ nancial institutions andassigned responsibility forRCFs to the MoA. 56 In1995 the MoAfollowed up with aregulationon the registration ofthe RCFs. 57 While the accompanyingcircular askedthat the

52.State Council(17 September 1988, PRC SCdecree #18/1988),‘ JijinhuiGuanli Banfa’ [‘ RCFadministration measure’], in Yinhangfa quanshu [CollectedBanking Laws ](Beijing:Zhongguo Shangye Chubanshe, 1995), p. 63f. 53.Eighth Plenum of theThirteenth Chinese Communist Party Central Committee (19November 1991), ‘ Guanyu JinYi BuJiaqiang Nongye He NongcunGongzuo De Jueding’[‘ Decisionon furtherstrengthening agriculture and ruralwork’ ], in ZhongguoGongchandang Dangnei Fagui Zhidu Shouce [ChineseCommunist Party Party-internal Lawsand Regulations Handbook ](Beijing:Hongqi Chubanshe, 1997), pp. 728– 739. 54.State Council(25 December 1993,Guofa #91/ 1993),‘ GuanyuJinrong Tizhi Gaige De Jueding’[‘ Decision onreform oftheŽ nancialsystem’ ], in ZhonghuaRenmin Gongheguo Guowuyuan Gongbao [PRCSCBulletin ] 31, (1993),pp. 1488– 1496. 55.Chinese Communist Party Central Committee (1994,Zhongfa #4/ 1994),‘ ZhonggongZhongyang, Guowuyuan Guanyu1994 Nian Nongye He NongcunGongzuo De Yijian’[‘ CCPCCand SC suggestionson agriculture and rural workin 1994’ ]. 56.Ministry of Agriculture,‘ Nongyebu,Zhongguo Renmin Yinhang Guanyu Jiaqiang Nongcun Hezuo Jijinhui GuanliDe Tongzhi’. 57.Ministry of Agriculture,‘ GuanyuKaizhan NongcunHezuo Jijinhui Dengji Gongzuo De Tongzhi’. RCFsmay inpractice haveabandoned registration with the PBC much earlier. Forexample, Tai Xiangdong,‘ Tuixinggufentian henongcun hezuo jijinhui, jiasu nongye chanyehua jincheng’ [‘ Promotingthe share-holding system forland holdings andpromoting the RCF accelerates theprogress of agricultural structural change’ ], ShaanxiZhengbao 1, (January 1998),p. 30,reporting on theestablishment of aRCFinXiaoying Village (Liquan County, Xianyang Municipality,

210 CHINA’S MONETARY REFORM

superordinated epartment ofthe RCFstrive forPBC support, the regulationstates unambiguouslythat establishment ofaRCFonlyrequires approvalby the township governmentand then registration with the county-levelagricultural administration. Supervisionover RCFs is exercised bythe agricultural departments; nomentioning is madeofthe PBCwhichin the previousregulation 58 was still namedas exercising supervisoryauthority. TheclariŽ cation that the RCFis amutual aid (orcooperative) organization with as its superordinate department the MoA,opened the doorfor the explosivegrowth ofRCFs. Inmore and more localities governmentand Party committee beganto promotethe establishment ofRCFs. In1995 the ShaanxiProvince Party Committee andthe Shaanxigovernment, for example, requested that bythe endof the eighth Five-YearPlan 60% of all townshipswere to have established RCFs. 59

PBCbacklash TheSC ina blueprintfor rural Žnancial reformsubsequently ad monishedthat RCFs maynot collect deposits. 60 If theyd id,theywere to beincorporatedinto the RCCs. ThePBC andthe MoAwere requested to issue ‘rural cooperativefund administration regulations’which, however, appear to havenever been issued .The Rural EconomicAd ministration Station that handles RCFmatters within the Rural CooperativeEconomy Guid anceOfŽ ce ofthe MoAwas orderedto stop workand toreport to the SC.While the central governmentsearched for a policy,the growth ofthe RCFs continuedunabated .Forexample, the ShaanxiProvince TVE Admin- istration Bureauin June 1997 encouraged the furthergrowth of the TVERCFs. 61 Yet the PBChadnew incentives to persist. In1996 the RCCs weresplit offthe ABCas supposedly independent banks;because RCCs thenlacked a superordinate departmentand more often than not were insolvent, the PBCbecame sadd led with the task ofrestructuring the RCCs andnurturing them backto health.RCFs, by attracting rural deposits, werein part to blame forlow RCC proŽtability, andthus becameincreasingly the target ofPBCcriticism. 62 Forexample, the PBCbranchof apovertycounty in ShaanxiProvince, after promptingby its superiormunicipal

Footnote 57 continued ShaanxiProvince) in 1990, does not mention any particular approval procedure. The county urgently needed funds toestablish its ‘ dragonhead’ enterprises soit started aRCFopen to the public based on the principle ‘ voluntarily purchaseshares, freely withdrawshares’ . 58.Ministry of Agriculture,‘ Nongyebu,Zhongguo Renmin Yinhang Guanyu Jiaqiang Nongcun Hezuo Jijinhui GuanliDe Tongzhi’. 59.Xi’ an Municipality Government (27 April 1995, Shizheng banfa #52/ 1995),‘ Xi’an Shi Renmin Zhengfu BangongtingZhuanfa Shi Nongyeju Guanyu Jiji Fazhan He BanhaoNongcun Hezuo Jijinhui De YijianDe Tongzhi’ [‘Xi’an Municipality government ofŽ ce circular transmittingthe suggestions of themunicipal agricultural ofŽ ce on energeticallydeveloping and managing the rural cooperative funds’ ], Xi’an Zhengbao [Xi’an Bulletin ]5,(May 1995), p. 33f. 60.State Council(22 August 1996, Guofa #33/ 1996),‘ GuanyuNongcun Jinrong Tizhi Gaige De Jueding’ [‘Decisionon thereform oftherural Ž nancialsystem’ ], in ZhonghuaRenmin Gongheguo Guowuyuan Gongbao 26, (1996),pp. 1032–1038. 61.Shaanxi Province TVE Administration Bureau (10 June 1997), ‘ GuanyuWo Sheng Shiban Xiangzhen Qiye HezuoJijinhui Qingkuang De Baogao’[‘ Reporton thesituation of theexperimental TVE cooperative funds in Shaanxi Province’]. 62.On the relative size ofRCF depositsvs. RCC depositssee thelast columnin Table 5.

211 CARSTEN A. HOLZ branch,wrote to the countygovernment in late 1996proposing that ‘the county governmentorganize the relevant departments to,in accordancewith the law,ban andinvestigate the illegal Žnancial institutions inour county’ . 63 It was,however, careful to pointout that this excludedthe ‘rural cooperativefund s’d irectly under the agricultural department; the TVEcooperativefund was illegal. As inother counties,the local governmentwas highlyprotective ofthe onlyŽ nancingsource oflocal economicgrowth und er its control.In the absenceof a conclusivecentral policy,the documenthad no immediate effects. 64 Inmid -1997the PBCwas Žnally giventhe greenlight togo ahead and ‘ clean up’the RCFs. InShaanxi Province the provincialgovernment on 21 July 1997 approvedthe suggestions ofthe provincialPBC branch and Agricultural Bureauon ‘cleaningup’ the RCFs betweenAugust and December 1997. 65 On5October1997 the Shaanxiprovincial government approved a further‘ adjustment ofthe Žnancial order’as suggestedby the PBC.This led to aurryof circulars bygovernment departments onall tiers. 66 SomeRCFs temporarily halted all lendingin late 1997 until the investigations werecompleted . Inthe end,those RCFs that wereestablished after 1September1996 or without approvalof the countytier agricultural departments (orthe PBC) wereto be dissolved.All otherRCFs couldcontinue operation but shares (deposits) werenow tobe held for at least ayear.‘ Usagefees’ pai donshares wereto becomparable tothe interest rates ofthe bankingsystem. Lendingbecame limited to members. PBCand agricultural departments inShaanxi Province also requesteda clear internal administrative structure with shareholdermeetings, Boardof Directors and SupervisoryBoard ,while local governmentand Party leaders wereprohibited from holdinglead ership positions inthe RCFs. 67 Thecampaign began in August1997 and was overby the endof the year.Few RCFs wereliqui dated.The return on d eposits (shares) came downsigniŽ cantly,

63.A listof illegalŽ nancialinstitutions was attached.Twenty copies of the document were forwardedto the county Partycommittee, thecounty People’ s Congress,the municipal PBC branch, and leading employees of thecounty PBC branchitself. 64.In response to the widespread growth of theRCFs, the PBC of thesame municipalitydemonstratively issued goldenplaques to all ‘legal’Ž nancialinstitutions— but not to cooperative funds. The signs are displayedin prominent positionabove the banks’ front doors and read ‘Xbranchis alegalŽ nancialinstitution approved by the PBC. Deposits at thisinstitution enjoy the protection of the laws ofthestate. [Signed:]PBC branch,Y municipality’. As of1998 suchplaques violate Art. 18 of a PBCregulation on depositwithdrawal which prohibits PBC branches from issuing anydeposit guarantees. See People’s Bankof China (23 March 1998, Yinfa #49/ 1998),‘ FangfanHe ChuzhiJinrong JigouZhifu Fengxian Zanxing Banfa’ [‘ Temporarymeasure oncarefully handling the risk of bank runs at Žnancial institutions’], in ZhongguoRenmin Yinhang Wengao [PBCBulletin ]2,(1998),pp. 3– 9. 65.Shaanxi Province Government, ‘ ShaanxiSheng Renmin Zhengfu Pizhuan Zhongguo Renmin Yinhang Shaanxi ShengFenhang, Shaanxi Sheng Nongyeting Guanyu Qingli Zhengdun Nongcun Hezuo Jijinhui De YijianDe Tongzhi’. 66.See, forexample, Shaanxi Province TVE Administration Bureau (29 November 1997, Shaanxiang qijingfa #179/1997),‘ ShaanxiSheng Xiangzhen Qiyeju Guanche Sheng Zhengfu Guanyu Zhengdun Jinrong Zhixu Youguan WentiDe PifuDe Tongzhi’[‘ ShaanxiProvince TVE Administration Bureau circular onthe reply by theprovincial governmentregarding the rectiŽ cation of certain problemsin theŽ nancialorder’ ]. 67.See ShaanxiProvince Government, ‘ ShaanxiSheng Renmin Zhengfu Pizhuan Zhongguo Renmin Yinhang ShaanxiSheng Fenhang, Shaanxi Sheng Nongyeting Guanyu Qingli Zhengdun Nongcun Hezuo Jijinhui De Yijian De Tongzhi’; JinrongShibao ,(16August 1997, 14 December 1997),and ShaanxiXinxibao [ShaanxiNews ], (24 April 1997,13 October1997).

212 CHINA’S MONETARY REFORM

eventhough it still exceededthe bankinterest rate bya fewpercentage points. 68 Limited lendingto members hadno effect as membershipsharehold ingrequire- ments werelow. RCFs nolonger ad vertised aggressively andnewspaper coverage ofRCFs ended.

Campaignagainst illegal Žnancialinstitutions Decisive newpolicies wereoriginally expectedfrom the Fifteenth Party Congress in September1997 but d idnotemerge. On 14 October 1998 the ThirdPlenum of the Fifteenth CCPCC,in amajor decision onagricultural development,avoided placingany clear-cut constraints onRCFdevelopmentand only stated that ‘various types ofeconomic entities organizedby farmers in shareholdingform are anew product ofreformand shall beactively supported,receive correct guidance,and be gradually perfected’. 69 Yet the SCon13 July 1998issued aregulatoryframework banning illegal Žnancial institutions andillegal Žnancial activities. 70 While this regulatoryframe- workd idnotspecify whichtype of quasi-Ž nancial institution is illegal, the PBC (with the approvalof the SC)was quickto issue acircular on11 August 1998 identifyingind ividual categories ofillegal institutions andbehavior. 71 This circular forthe Žrst time explicitly listed individualtypes ofcooperative fund sas illegal, andissued instructions onhow to deal with them. Thecircular requestedthat variousfund sandŽ nancial institutions, all runby governmentsand their departments, be‘ cleanedup’ and reorganized . 72 If any Žnancial activities suchas acceptanceof deposits fromthe publicor lend ingwere undertaken,these hadto stop bythe endof June1999. The circular reconŽrmed the 1988SC decision (withoutreferring to it) that cooperativefund srequiredPBC

68.The MoA and PBC required RCF ‘ usagefees’ to be nohigherthan the corresponding bank interest rates. See Ministryof Agriculture,‘ Nongyebu,Zhongguo Renmin Yinhang Guanyu Jiaqiang Nongcun Hezuo Jijinhui Guanli De Tongzhi’, Art.7. The RCFs can evade thespirit of thisregulation by payingbank interest rates plusdividends ondeposits. Interest rate caps onloans can easily be outedthrough handling fees, compensatingbalances and repaymentscheduling. In one particular county in Shaanxi Province, RCFs in April 1998 offered ‘ usagefees’ of 8.28–9% perannum on ‘1-yearshares’ (without dividend payments), while the state-determined interestrate inthe Žnancialsystem on1-yearŽ xed-termdeposits was 5.22%. 69.Third Plenum of theFifteenth Chinese Communist Party Central Committee (14October 1998), ‘ Zhonggong ZhongyangGuanyu Nongye He NongcunGongzuo Ruogan Zhongda Wenti De Jueding’[‘ CCPCCdecision on some veryimportant issues ofagriculture and rural work’ ], in ZhonghuaRenmin Gongheguo Guowuyuan Gongbao 26, (18 November1998), pp. 996–1011. 70.State Council(13 July 1998, SC decree #247/1998),‘ Feifa JinrongJigou He Feifa JinrongYewu Huodong QudiBanfa’ [‘ Measures toeliminate illegalŽ nancialinstitutions and illegal Ž nancialbusiness’ ], ShaanxiZhengbao 15,(15 August 1998), pp. 4– 6. 71.State Council(11 August 1998, Guobanfa #126/ 1998),‘ GuowuyuanBangongting Zhuanfa Zhongguo Renmin YinhangZhengdun Luan Jizi LuanPi Jinrong Jigou He LuanBan Jinrong Yewu ShishiFang’ an De Tongzhi’[‘ SC ofŽce circular passingon the implementing scheme ofthe PBC onrectifying the disorderly raising of funds, the disorderlyapproval of Ž nancialinstitutions, and the disorderly conduct of Ž nancialbusiness’ ], in ZhonghuaRenmin GongheguoGuowuyuan Gongbao 24,(22 October 1998), pp. 949– 955. 72.The funds and other Ž nancialinstitutions include cooperative funds ( jijinhui),mutualaid funds ( huzhuzu), savingsfunds ( chujinhui),fundsservice departments( zijinfuwu bu ),share service departments( gujinfuwu bu ), clearingcenters ( jiesuanzhongxin )andinvestment companies ( touzigongsi ).

213 CARSTEN A. HOLZ approvaland must beregistered withthe Civil Affairs Administration. All illegal activities andinstitutions wereto be examinedin a Žrst step bythe endof 1998and thenrectiŽ ed in asecondstep bythe endof March 1999; the PBCŽnally was to havechecked on the rectiŽcation bythe endof June 1999. 73 However,the circular didnot resolve the conict betweenPBC and MoA. In a short sentence those RCFs registered with the agricultural departments—as well as ‘intermediate institutions’of the Žscal departments—were explicitly excludedfrom the reorganizationcampaign. While the PBCthus managedto start amajor campaignagainst varioustypes offund srunby local governments,the vast majority ofcooperative funds were exclud ed.

Demise of the RCFs? ThePBC circular of11August1998, although presenting a three-stage reorganiza- tionschedule to be completed by mid -1999,also gavea separate deadline ofthe endof 2000 for the wholecampaign, one and a half years after completionof the three-stage rectiŽcation. The PBC mayhave realized that is was facingan uphill battle, butit also raised the possibility that the campaignmay later enter anew phaseto incorporate the RCFs underthe agricultural departments. 74 By March 1999,the SCŽnally was readytod issolve the RCFs. 75 Ina secret decree it demandedthat RCFs across the countrystop all operation;the domestic media were neither allowedto reporton the decision noron the subsequentimplementation. Largeand healthy RCFs wereto join RCCs, andall otherRCFs wereto be disbanded. SichuanProvince was the Žrst target, mobilizing 100,000people to dissolve its 4435RCFs. ByJuly 1999,1874 RCFs (accountingfor more than half ofall RCF assets) hadbeen fold edinto RCCs. Theremaining 2561 were reportedly d isbanded, with 75%of the deposits alreadyreturnedto the depositors,and the rest to follow

73.The Shaanxi Province government took up the issue on9October1998 with the establishment of a leading group.See ShaanxiProvince Government (9 October 1998, Shaanzheng banfa #71/ 1998),‘ ShaanxiSheng Renmin ZhengfuBangongting Guanyu Renzhen Kaizhan ZhengdunJinrong “ SanLuan” Gongzuo De Tongzhi’[‘ Shaanxi Provincegovernment ofŽ ce circular onsincerelystarting off the work on rectifying the “ three disorderly”elements inthe Ž nancialsystem’ ], ShaanxiZhengbao 21,(15 November 1998), p. 28f. Municipalities (and prefectures) were requiredto likewise establishleading groups. Results of the reorganization were tobe reported to the provincial governmentby theend of May1999. Reports in themedia onany Ž nancialmatter, includingon varioustypes of localfunds, required prior PBC approval. 74.The national supply and marketing cooperative in early 1999,for example, did not at all requirethe cooperative fundsrun by thelocal supply and marketing cooperatives to be disbanded. All it is concernedabout is thatfunds be nolonger ‘ publicly’collected. See JinrongShibao ,(13January 1999). A major difŽculty in closing cooperative funds isthe fact thatthe central bankhas noauthorityover these institutions.Closure of illegal Ž nancialinstitutions requires actionby publicsecurity organs in accordance withthe criminal code;public security, on the other hand, may not bequaliŽ ed to determine whatconstitutes an illegal Ž nancialinstitution. The PBC thusneeds to Ž rst identifythe particularinstitution to be closedand then report to public security for action. See Xinbao [HongKong Economic Journal],(21November 1998), for the legal intricacies. Inpractice, localpublic security organs may well dragtheir feet, especially ifso encouraged by the local government. 75.An article in GuojiaJixie GongyejuJijingwang ,(11November 1999), hints that the reason for the dissolution was thecentral government’s ordersto close inefŽcient or polluting enterprises, and those enterprises thatuse backwardtechnology. Since these enterprises were amongthe customers ofthe RCFs, the central governmentcould nolonger ignore the RCF issue.

214 CHINA’S MONETARY REFORM

within3 years. 76 Otherprovinces followed suit after alengthyd elay.In Hebei Province,the provincewith the second-largest numberof RCFs, all RCFs were reportedsuccessfully dissolved by15 September 1999. In Heilongjiang Province the dissolution ofRCFs wentund er wayin August 1999, and in Gansu Province RCFs stoppedaccepting new d eposits on15November1999. 77 Atthe endof 1999, the SCdecree was still awaiting implementation in most otherprovinces. ThePBC is Žrmly in chargeof this Žnal campaign.The SC requestedthe PBC toreach agreements with individual provincialgovernments on the dissolution of the RCFs. This suggests provincialvariation in implementation that maytake into accountthe ability andwillingness ofthe governmentson provincialand sub-prov- incial tiers tostep inand reimburse depositors while loans are beingrecovered .But the PBCalso has asecondagend a,namely the resolution ofthe insolvent RCC problemthat has beenlingering on ever since the PBCwas burdenedwith the RCCs in1996.

Conclusions Since their establishment in the early 1990s,RCFs haveserved the rural economy well. Theyprevented the outow of fund sfromrural to urbanareas andserved manyof those enterprises andhousehold sneglectedby formal Žnancial institutions inthe countryside.Yet the central governmentin 1999requested that the ‘counter- revolution’from the countrysidebestopped in its tracks withoutso far addressing the cause oftheir rise: the demandfor a higherd egreeof at least semi-regulated Žnancial intermediation inthe countryside.This mayimprove the fortunesof some formal Žnancial institutions, yet in1999 the rural economywas sufferingfrom a lack offund s(at otherthan usury rates) as hardly everbefore. Furthermore,the dissolution ofthe RCFs provedcostly to the countryside.The superordinategovernment departments oncounty and township tier that organized the RCFs, togetherwith their governments,bear all the burdenof the sudden dissolution. Notonly do they have to guarantee the badloans oftheir RCFs, but theyalso haveto pay for the damagecaused by quickly d issolving RCFs. Banks in 1999d idnotlend to TVEswithout a third-partyguarantee or security; yet a valuationof enterprise assets bythe relevant governmentdepartments is as expensiveas 10%of the actual valueof the assets. Theshare ofTVEloans intotal formal Žnancial sector loans in Chinafell fromclose to 10%in the early 1990sto alowof 6.45% in 1998and continued to fall duringthe Žrst 10months of 1999. Rural householdsagainmust rely onpersonal loans, all toofrequently at usury rates.78 Thenegative impact ofthe dissolution ofthe RCFs onthe rural economy ies inthe face ofthe decision reachedby the ThirdPlenum of the Fifteenth

76. See JinrongShibao ,(9July 1999). 77. See JinrongShibao ,(25September 1999), HeilongjiangRibao [HeilongjiangDaily ],(8August 1999), and Xinhuashe [New ChinaNews Agency ],(17November 1999). 78. See ZhongguoXiangzhen Qiyebao ,(30November 1999), GuojiaJixie GongyejuJijingwang ,(11November 1999), and ZhongguoTongji Nianjian 1999 , p. 624.

215 CARSTEN A. HOLZ

Chinese Communist Party Central Committee on14October1998 about promoting growthin the countryside. 79 TheSC’ s March1999 d ecree maywell notbe the Žnal wordon rural Žnancial intermediation. RCFs couldbe hard to eradicate in poorregions to beginwith, whereRCCs are so far reluctant to lend.RCFs, if abolished,could resurface as smaller, covertinstitutions. ThePRC TVELawfurthermore allows county-tierand higher-leveltier governmentsto establish TVEdevelopmentfund s. 80 While sources offund ingcomprise governmentfund s, part ofthe increase in local TVEtaxes, and retained proŽts, theyalso includeotherfund sprovidedby rural collective organiza- tions, TVEs—and farmers (Art.21). The fund sare to beused primarily to support TVEs,but the categories are broadenough to encompass other uses (Art.22). This pits the PRCTVELawsquarely against the PRCPBCLawand the PRC Commercial BankLaw, which require PBC approvalfor all Žnancial institutions. 81 Lower-leveltier governmentd epartments couldchallenge the currentd issolution of RCFs bysetting upidentically functioning,and perfectly legal TVEdevelopment funds. Yet the central governmentcould be planning further ahead .RCFs represent a monetarycounterrevolution from the countrysideintwo respects. Theylend locally (rather thanchannel fund sto urbanareas), andtheir lendingpractices divergefrom formal Žnancial sector rules suchas oninterest rates. 82 RCCs havethe potential to rise upto bothchallenges. Since their separation fromthe ABCtheyno longer deposit upto half oftheir fundsat the ABC,butonly the 8%minimum reserve with the PBCasall otherŽ nancial institutions do.RCCs also, uniquelyamong all formal Žnancial institutions, couldad just their lendingrates upwardby up to 60%above the otherwise nationwideuniformrates until April 1996,and since thenby up to 40%.By merging Ž nancially soundand innovative RCFs into the moreoften than notinsolvent RCCs withtheir highoverhead sandtrad itional bankingpractices, the PBCmay be injecting just the newblood the RCCs badlyneed .RCFs might continueto operateas before,only now as adepartment within the RCCspecializ- ingin small loans with the typeof risk that RCCs formerlycould not or were not willing tohand le.

79.The PBC in late 1999and early 2000countered the trend towards rural Ž nancialdis-intermediation with a host ofnew regulationson RCC lending to rural households, including a regulationon small loansas well as oneon mutual loan-guaranteegroups. But whether these measures are successful remains tobeseen. 80.National People’ s Congress(29 October 1996). ‘ ZhonghuaRenmin Gongheguo Xiangzhen Qiye Fa’ [‘ PRC TVELaw’ ], inFang Weilian, XiangzhenQiye FaShiyong Zhinan [Guideon theUse oftheTownship and Village EnterpriseLaw ](Beijing:Zhongguo Nongye Chubanshe, 1997), pp. 192–197. 81.Art. 31 of thePRC PBC Law requiresPBC approvalfor the establishment, transformation, and termination ofall Žnancialinstitutions. According to Art.11 of the PRC Commercial BankLaw ‘withoutPBC approval no unit orperson may collect depositsfrom the public or conductother commercial bankingbusiness’ . See NationalPeople’ s Congress(18 March 1995), ‘ ZhonghuaRenmin Gongheguo Zhongguo Renmin Yinhang Fa’ [‘ People’s Republicof ChinaPeople’ s Bankof ChinaLaw’ ], in ZuixinZhongyang Yinhang Shiwu Quanshu [LatestCentral Bank Almanac ] (Beijing:Zhongguo Jinrong Chubanshe, 1995), pp. 309–313, and National People’ s Congress(10 May 1995), ‘ZhonghuaRenmin Gongheguo Gongshang Yinhang Fa’ [‘ People’s Republicof ChinaCommercial BankLaw’ ], in ZuixinZhongyang Yinhang Shiwu Quanshu ,pp.313–321. 82.The RCF movement never represented a challengeto thestate monopolyon banking.RCFs were runby local governmentand Party departments, not by private households. Yet fromthe point of view of rural Ž nancial intermediation,ownership appears far less relevantthan fund  owsand lending practices.

216 CHINA’S MONETARY REFORM

Ultimately, the PBCas central bankwill wantto divest itself ofthe RCCs; administration ofapproximately50,000 RCCs is nota task the PBCis particularly well suited to fulŽll. Yet the RCCs’history as quasi-branchesof the ABCimplies that the central governmentis responsible forbailing outthe RCCs, whose aggregatenet worthis, bynow publicly ad mitted,negative. 83 Countygovernment andParty committees are responsible forthe Žnancial health ofRCFs, but successfully refuse responsibility forthe accumulatedbad loans ofthe RCCs (and would,if forcedto, accept responsibility, notbe able to bearthe Žnancial burden). Thecase ofHebeiProvince, one of the twoprovinces in whichRCFs havebeen dissolved,providesa hint as to the reforms that maybe about to unfold.InHebei Province,the provincialgovernment injected 1.576byuan into the RCCs in an overall deal withthe PBConthe abandonmentof the RCFs. 84 ThePBC thus strikes abargainwith individual provincialgovernments in whichit defacto sells offthe RCCs tothe locality. Inthe Žrst instance, the locality is the province,but in the end it maywell meanthe countygovernment, as the provincialgovernment is unlikely tohave much interest inrunning RCCs that maythen be exploited by the county government.This wouldallow the PBCto focuson its coresupervisory task ofall Žnancial institutions. RCCs are currentlyestablishing supra-organizationsin the formof ‘ joint RCCs’( lianshe)onmunicipal andeven provincial tier that greatly facilitate PBCsupervision, but also create amoreresilient rural Žnancial institution byspread ingrisk across localities. At the same time, selling offre-capitalized RCCs to—presumably in the Žnal instance—the countytier gives local governmentsa degreeof in uence on local Žnancial intermediation, whichthey had previously sought through the establish- ment ofRCFs, andmakes them responsible forthe Žnancial health ofRCCs, which theywere previously able toavoi d.This wouldbridgethe traditional chasm betweenthe centrally controlledformal Žnancial sector butthe locally ownedrural economy.A precedent exists. In1998 the urbancred it cooperatives,originally set upby the formal Žnancial institutions, weremerged into urban cooperative banks (later renamedurban commercial banks)with, as controllingowner, the municipal government,while the PBCis exercising rigoroussupervision. The monetary counterrevolutionfrom the countrysidemaynot have been crushed after all. Rather, it mayhave accelerated the transition froma centrally controlled,exclusive and highlyloss-making rural Žnancial sector to aŽnancially viable andmore consumer- orientedone.

83. People’s Bankof ChinaQuarterly Statistical Bulletin 15,(1999), p. 25. 84. See JinrongShibao ,(25September 1999), which treats RCCs andRCFs as oneissue. To judgeby1997 Ž gures, thisamount could be equivalentto up to 2% of RCC deposits.See ZhongguoJinrong Nianjian 1998 [Financial Yearbookof China 1998 ](Beijing:Zhongguo Jinrong Chubanshe, 1998), p. 622.

217