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New Rural Cooperative Finance in China: the Problem and Its Solution

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New Rural Cooperative Finance in China: the Problem and Its Solution New Rural Cooperative Finance in China: The Problem and Its Solution Michael Zhiyong Zhong * I. INTRODUCTION ..................................................................................... 2 II. LESSONS FROM THE DEVELOPMENTAL DIRECTIONS OF RURAL CREDIT COOPERATIVES ......................................................................... 4 A. Developmental Directions ............................................................ 4 1. Demutualization .................................................................... 4 2. Integration ............................................................................. 5 B. The Lessons for New Rural Cooperative Finance ........................ 6 III. TYPES AND DEVELOPMENT OF NEW RURAL COOPERATIVE FINANCE .. 8 A. Rural Fund Cooperatives ............................................................. 8 B. Mutual Development Funds for Poor Villages ............................. 9 C. Credit Departments within Peasants’ Specialized Cooperatives 10 IV. PROBLEMS IN DEVELOPING NEW RURAL COOPERATIVE FINANCE ...... 12 A. Lack of Legislation, Insufficient Policy Support, and Inadequate Training Services ..................................................... 12 1. Lack of Legislation .............................................................. 12 2. Insufficient Policy Support .................................................. 13 3. Inadequate Training Services .............................................. 13 B. CBRC’s Unsuitability for Promoting Cooperative Finance ....... 13 C. Inappropriate Regulation of New Rural Cooperative Finance .. 14 D. Partial Failure to Follow Basic Principles of Cooperative Finance ....................................................................................... 15 V. SOLUTIONS FOR DEVELOPING NEW RURAL COOPERATIVE FINANCE .. 17 A. General Solutions ....................................................................... 17 1. From Commercial Finance to Cooperative Finance............ 18 2. From Compulsory Institutional Change to Induced * Professor, School of Law, Chongqing Technology and Business University, No. 19, Xuefu Ave., Nan’an District, Chongqing 400067 China, [email protected]. Visiting Scholar, College of William and Mary, Aug. 2018 – Feb. 2019; Academic Visitor, Oxford University, Mar. 2013 – Feb. 2014; Post-doctor, Central South University, Sep. 2003 – Dec. 2005; Ph. D. in Law, Xiamen University, Sep. 1999 – Jun. 2002; Master of History, Shaanxi Normal University, Sep. 1993 – Jun. 1996. The author thanks all those who provided help during the field investigation. From 2014 to 2016, the author traveled to villages and towns of: Daozhen County, Guizhou Province; Cities of Changsha and Yueyang, Xiangxi Autonomous Prefecture, Counties of Xiangyin and Yongshun, Hunan Province; Nanchang City and Nanchang County, Jiangxi Province; Ningbo City and its Zhenhai District, Zhejiang Province. The author is grateful for research funding provided by the Planning Office of Philosophy & Social Sciences of Jiangxi Province. 2 Asian-Pacific Law & Policy Journal [Vol. 21:1 Institutional Change ............................................................ 19 B. Specific Solutions........................................................................ 20 1. Legislation, Sufficient Policy Support and Training Services ............................................................................... 20 2. The Ministry of Agriculture Should Promote Rural Cooperative Finance ............................................................ 22 3. Local Government Should Undertake Appropriate Regulation ........................................................................... 23 4. Following Basic Principles of Cooperative Finance ........... 24 VI. CONCLUSION ...................................................................................... 26 I. INTRODUCTION Although many new policies1 in rural finance have been adopted since 2003, their results have been less than satisfactory. For example, rural credit cooperatives2 (RCCs) have already commercialized, and associations at county and provincial levels are increasingly becoming an enterprise. Rural fund cooperatives (RFCs)3 promoted by the China Banking Regulatory Commission (CBRC)4 develop slowly. Although mutual development funds for poor villages5 develop quickly, their goals are 1 Rural financial reform in China should not depend on policies anymore, so “legislation ought to be actively promoted”. See Wang Yuyu (王煜宇), Nongcun Jinrong Fazhihua de Taguo Jingjian (農村金融法制化的他國鏡鑒), [Establishing Legal System for Rural Finance from Foreign Experience], 4 GAIGE (改革) [REFORM] 150, 153 (2017). 2 Rural credit cooperatives refer to rural cooperative financial institutions ratified by the People’s Bank of China (PBOC). The main hallmarks of an RCC are (1) capital comes from its members, (2) administration is democratically handled by its members, and (3) financial services are mainly provided for its members. See Nongcun Xinyong Hezuoshe Guanli Guiding (農村信用合作社管理規定) [The Provisions of the Administration of Rural Credit Cooperative] (promulgated by the People’s Bank of China, Sep. 15, 1997, no longer valid), art. 2, https://code.fabao365.com/law_223162.html. 3 Rural fund cooperatives refer to cooperative community banking financial institutions ratified by the CBRC whose capital comes from voluntary contributions by peasants from large villages (towns), administrative villages, and small enterprises in the countryside and whose businesses such as deposits, loans, and settlements are provided for their members. See Nongcun Zijin Huzhushe Guanli Zanxing Guiding (農村資金互 助社管理暫行規定) [The Provisional Measures for the Administration of Rural Fund Cooperatives] (promulgated by the China Banking Regulatory Comm’n, Jan. 22, 2007), art. 2, http://www.china.com.cn/policy/txt/2007-01/30/content_7735498.htm. 4 The China Insurance Regulatory Commission merged into the CBRC in 2018 and is now known as the China Banking and Insurance Regulatory Commission (CBIRC). 5 Mutual development funds for poor villages refer to production and development funds owned, used, administrated, and enjoyed by the people. These funds are established 2019] Zhong 3 limited and special because such funds focus on poverty alleviation. Credit departments within peasants’ specialized cooperatives piloted in Shandong Province have made some progress but have not yet been promoted across the country. Through field investigations, I find that a lack of freedom, cooperation, and fairness are some of the main reasons that cause slow development in rural finance. I concentrate my analysis on cooperatives in this article and divide it into four main parts. Part Ⅱ analyzes the developmental direction of RCCs and the lessons learned from such development. The two developmental directions examined are demutualization and integration. Lessons learned from using RCCs as a case study include: (1) the government should choose the right policy and adopt the mode of induced institutional change; (2) property rights should be defined clearly and cooperative finance6 should be set up on the basis of private property; (3) the government ought to legalize cooperative finance by legislation and adopt the rule of the law; (4) basic principles of cooperative finance should be followed; (5) the rule of shareholding “from bottom to top” and serving “from top to bottom” should be abided by strictly when associations are established; and (6) different institutions should be set up according to different functions, and outside supporting systems should be established. Part III describes the different types and problems of new rural cooperative finance. There are three main types: RFCs, mutual development funds for poor villages, and credit departments within peasants’ specialized cooperatives. RFCs promoted by the CBRC develop slowly because of the following problems: market access conditions are too high, it is improper to classify such cooperatives as banking institutions, and funding sources are limited. Mutual development funds for poor villages have made much progress but still exhibit some problems. Credit departments within such cooperatives piloted in Shandong expand quickly but not quickly enough. At the same time, many peasants’ specialized cooperatives provide credit services spontaneously with no or almost no regulation. in poor villages and are guided by a poverty alleviation fund from the department of finance based on mutual aid money from the voluntary contributions of villagers according to a certain ratio and are supplemented by endowments from society without any additional conditions. See Pinkuncun Huzhu Zijin Shidian Caozuo Zhinan (貧困村互助資金試點操 作指南) [The Operations Manual for Pilot Program of Mutual Development Funds for Poor Villages] (promulgated by the Office of Poverty Alleviation & Dev. and the Ministry of Fin., Sept. 17, 2009), art. 1(1), http://www.doc88.com/p-5486268499839.html. 6 Cooperative finance refers to a form of financial institution based on principles of cooperative, including voluntary and open membership, democratic member control, member economic participation, autonomy and independence, education, training and information, cooperation among cooperatives, and concern for community. See International Co-operative Alliance: Seven Co-operative Principles, PLUNKETT INST. (Oct. 7, 2019), http://plunkettinstitute.ie/principles/international-co-operative-alliance- seven-co-operative-principles/. 4 Asian-Pacific Law & Policy Journal [Vol. 21:1 Part IV identifies the
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