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 four problems of new rural cooperative finance: first, a lack of legislation, insufficient policy support, and inadequate training services; second, CBRC’s unsuitability for promoting cooperative finance; third, inappropriate regulation of new rural cooperative finance; and fourth, partial failure to follow basic principles of cooperative finance. These problems are some of the reasons which lead to slow development of RFCs promoted by the CBRC. Part V puts forth solutions for the problems identified in Part IV. As a general solution, I argue that the focus of cultivating rural financial systems should be shifted from commercial finance to cooperative finance and from compulsory institutional change to induced institutional change. As for specific solutions to the problems identified in Part IV, I propose that: legislation, policy support, and training services should be provided by the government; the Ministry of Agriculture (MOA) should promote rural cooperative finance; local government should undertake appropriate regulations; and the basic principles of cooperative finance should be followed. II. LESSONS FROM THE DEVELOPMENTAL DIRECTIONS OF RURAL CREDIT COOPERATIVES A. Developmental Directions Demutualization and integration are two important developmental directions for RCCs. 1. Demutualization In 2003, China began a new round of reform which allowed RCCs to restructure as rural commercial banks, rural cooperative banks, or legal persons at the county level.7 According to the CBRC’s 2010 and 2016 Annual Reports, legal persons of RCCs decreased from 19,348 to 1,125 persons, rural commercial banks increased from 13 to 1,114 banks, and rural cooperative banks decreased from 223 to 40 banks.8 In reality, RCCs have already commercialized, and the reform just officially confirmed this trend. Although a rural cooperative bank has the term “cooperative” in its name, it should not be considered a cooperative per se. Rural cooperative banks implement the “shareholding cooperative system,” but the system follows the principle of economic democracy, i.e., one share one vote. In

7 Shenfa Nongcun Xinyongshe Gaige Shidian Fang’an (深化農村信用社改革試點方案) [The Pilot Program of Deepening Reform for Rural Credit Cooperative] (promulgated by the State Council, June 27, 2003), http://www.gov.cn/zwgk/2005- 08/13/content_22249.htm.

8 XUANCHUAN GONGZUOBU (宣傳工作部) [PUBLICITY DEP’T], ZHONGGUO YINHANGYE JIANDU GUANLI WEIYUANHUI 2010 NIANBAO (中國銀行業監督管理委員會 2010年報) [2010 ANNUAL REPORT OF THE CBRC] 30 (2011); PUBLICITY DEP’T, 2016 ANNUAL REPORT OF THE CBRC 26 (2017). 2019] Zhong 5 contrast, cooperatives adhere to the principle of political democracy, i.e., one person one vote. Shareholding systems aim for profit and can serve any person without restriction. Meanwhile, cooperatives do not aim for profit and can only serve their members. Shareholding systems require registered capital, while cooperatives have no such requirement. Therefore, it is doubtful whether the two forms of enterprise can be merged into a coherent one. Rural cooperative banks are transitional entities and rural commercial banks are the final choice.9 In 2010, the CBRC required RCCs to cancel all qualification shares and encouraged RCCs to restructure as rural commercial banks or shareholding RCCs if they satisfied the conditions of typical shareholding systems. The CBRC also encouraged RCCs not to set up new rural cooperative banks and encouraged all such banks to restructure as rural commercial banks instead.10 Therefore, the CBRC established a trend under which RCCs will finally become rural commercial banks or shareholding RCCs, achieving complete demutualization.11 2. Integration Provincial rural commercial banks have already been established in Beijing, Shanghai, and Tianjin because of the high degree of integration in urban and rural areas. Accordingly, the Chongqing Municipality and the Ningxia Autonomous Region followed suit. The Chongqing Rural Commercial Bank is also listed on the Stock Exchange of Hong Kong, but this listing may be improper because there are many rural areas in the Chongqing and Ningxia regions.12

9 Interview with Li Jianshe (李建設), former Dir. of the Rural Credit Coop. Ass’n of Daozhen, in Daozhen, Guizhou Province (July 7, 2015).

10 Zhongguo Yinhangye Jiandu Guanli Weiyuanhui (中國銀行業監督管理委員會) [The China Banking Regulatory Comm’n], Yinjianhui Youguan Bumen Fuzheren jiu Nongcun Xinyongshe Gaige Fazhan Qingkuang Da Jizhe Wen (銀監會有關部門負責人就農村信用社改革發展情況答記者問) [The Head of Relevant Department of the CBRC Answered Questions from Reporters about the Reform and Development of Rural Credit Cooperative] (Aug. 2, 2011), http://www.cbrc.gov.cn/chinese/home/docView/20110802755850841C4A0023FF19FC7F 41F99700.html.

11 RCCs in China should not be treated as cooperative finance in theory because RCCs do not follow principles of a cooperative and will be commercialized finally.

12 Chongqing has a resident population of 31 million and the rate of urbanization is only 65.5%. See Shiqing Jianjie (市情簡介) [A Brief Introduction of Chongqing] (Oct. 7, 2019), http://jyj.cq.gov.cn/zqfz/zhsq/sqjj. In addition, there are many unified legal persons based on RCCs in rural areas of big cities (e.g., Changchun, Wuhan and Guangzhou). 6 Asian-Pacific Law & Policy Journal [Vol. 21:1

Although the No. 1 Documents13 issued in 2008, 2012 to 2014, 2016, and 2018 reiterate that legal persons of RCCs at the county level should remain stable, there are two problems with this idea: first, this policy does not conform to the development of an institution; and second, this policy does not make sense. Generally, any entity has an incentive to become stronger and more influential. Therefore, an entity ought to be allowed to expand and strengthen itself in general. Small entities should continuously be allowed to enter the market to maintain a dynamic economy and satisfy the needs of specified groups. The State Council perhaps knows this but has no other alternative because no institution can replace RCCs for the time being. One focus of the new round of reform is to devolve power to lower levels and provincial associations of RCCs. The associations of RCCs were established in many provinces, which prompted local governments to speed up the integration of all RCCs into one enterprise. The normal name of a provincial association should be “X Provincial Association of Rural Credit Cooperative.” However, Jiangxi uses “Provincial Rural Credit Cooperative (Rural Commercial Bank),” which indicates a unified legal person, and intends to restructure the provincial association as Poyang Lake Bank.14 Therefore, restructuring a provincial association as a bank is a priority for local governments, especially for those governments that do not have a provincial bank.15 This is perhaps another reform trend of RCCs according to my judgment.16 B. The Lessons for New Rural Cooperative Finance In the new round of reforms, the government did not require RCCs to return to operating as cooperatives. Thus, failure was inevitable for RCCs as a form of cooperative finance. Of course, this does not mean cooperative finance is no longer needed—there is room for such finance as long as disadvantaged groups exist. Cooperative finance exists in developed

13 Every year, the Central Committee of the Communist Party of China (CPC) and the State Council jointly issue the No. 1 Document, which focuses on agriculture.

14 Interview with Peng Jishi (彭結實), Dir. of the Fin. Office of Nanchang, in Nanchang, Jiangxi Province (July 14, 2016).

15 There is a head office for the Supply & Marketing Cooperative at the national level, so restructuring RCCs should be allowed at a great area or at the national level directly. Interview with Xiao Zuoliang (肖佐良), Dir. of the Rural Credit Coop. Ass’n of Zhenhai District of Ningbo, in Zhenhai, Zhejiang Province (July 12, 2015).

16 This trend is against the requirement from the central government, because the 2016 No. 1 Document required the united association of RCCs at the provincial level to withdraw from administrative management and strengthen its service functions. See 2016 Nian Zhongyang Yihao Wenjian Quanwen (2016年中央一號文件全文) [Full Text of the 2016 No. 1 Document of the Communist Party of China] (Jan. 28, 2016), http://www.china.com.cn/legal/2016-01/28/content_37680784_5.htm. 2019] Zhong 7

countries such as the United States, France, Japan, and Germany.17 Meanwhile, experiences and lessons from RCCs provided a case study for the development of new cooperative finance in China: First, the government should be careful in choosing the right policy and adopt induced institutional change. RCCs are under the constant control of compulsory institutional change and such change reflects the will of the government more than the will of peasants. Second, property rights should be clearly defined, and cooperative finance should be set up on the basis of private property. Although cooperative finance is nonprofit, such finance does not deprive individuals of personal property. Cooperative finance exists to mutually benefit disadvantaged groups. Third, the government should legalize cooperative finance by legislation and adopt principles of the rule of law. RCC legislation stops at administrative rules and lacks authority to regulate government behavior. Fourth, basic principles of cooperative finance ought to be followed. RCCs have never abided to basic principles of cooperative finance such as voluntary entry, free withdrawal, and democratic management.18 Meanwhile, new trends of international cooperative finance have appeared, such as demutualization, marketization, broadening the scope of services, and weakening democratic management.19 However, these trends do not conform to the current reality in China because cooperatives have not yet fully developed. Fifth, the rule of shareholding “from bottom to top” and serving “from top to bottom” should be strictly followed when associations are established. The RCC associations at county and provincial levels must provide services to their members. However, neither the government nor the RCC associations should exercise administrative control because RCCs are independent legal persons.

17 JIAO JINPU ET AL. (焦瑾璞等), NONGCUN JINRONG TIZHI HE ZHENGFU FUCHI ZHENGCHE GUOJI BIJIAO (農村金融體制和政府扶持政策國際比較) [THE SYSTEM OF RURAL FINANCE AND SUPPORTING POLICY OF THE GOVERNMENT: INTERNATIONAL COMPARISON] 45-50, 61-66, 73-79, 86-90, 96-104 (2007).

18 Reasonable arrangement in the legal system is helpful for resolving the democratic dilemma of RCCs in China. See Zhang Defeng (張德峰), Nongcun Xinyong Hezuoshe: Minzhu Kunjin yu Falü Tuwei (農村信用合作社：民主困境與法律突圍) [Rural Credit Cooperative: Democratic Dilemma and Legal Solution], 6 ZHENGFA LUNTAN (政法論壇) [TRIB. POL. SCI. & L.] 96, 96-106 (2011).

19 Zhou Nan & Zhang Ping (周楠、張萍), Guoji Hezuo Jinrong Fazhan Qushi dui Woguo Nongcun Xinyongshe Gaige de Qishi (國際合作金融發展趨勢對我國農村信用社改革的啓示) [Developing Trend of International Cooperative Finance and Its Lessons for Rural Credit Cooperative Reform in China], 19 SHENGCHANLI YANJIU (生产力研究) [PRODUCTIVITY RES.] 134, 134-35 (2009). 8 Asian-Pacific Law & Policy Journal [Vol. 21:1

Sixth, different institutions ought to be set up according to different functions. Additionally, outside supporting systems, such as clearing houses and financing centers, should be established, and their services should be provided by market means. The unified clearing house across the country (NONGXINYIN) was set up to provide services to RCCs in 2006.20 While it is improper to empower the provincial association of RCCs to manage, guide, coordinate, and serve its members,21 different institutions need to undertake different functions and different bodies need to provide different services. III. TYPES AND DEVELOPMENT OF NEW RURAL COOPERATIVE FINANCE RFCs, mutual development funds for poor villages, and credit departments within peasants’ specialized cooperatives are three main types of new rural cooperative finance. A. Rural Fund Cooperatives Fund cooperatives are a typical example of new cooperative finance. In 2006, the CBRC included RFCs among its new rural financial institutions. According to the CBRC’s 2011 Annual Report, 161 RFCs were planned but only 46 were established. RFCs such as Baixin22 did not rapidly grow after obtaining financial licenses. Instead, they fell into an awkward position of fund shortages and high operating costs. One reason for these difficulties is that too much regulation from the government led to high RFC operating costs and social welfare losses.23 Some argue that RFCs are doomed to fail because of the

20 Gongsi Gaikuang (公司概況) [A Brief Introduction of the Company] (Nov. 30, 2019), http://www.nongxinyin.com/nxy/489416/489454/index.html.

21 Nongcun Xinyongshe Shenglianheshe Guanli Zhanxi Guiding (農村信用社省聯合社管理暫行規定) [The Interim Provisions of the United Association of Rural Credit Cooperative at Provincial Level] (promulgated by the China Banking Regulatory Comm’n, Sep. 18, 2003), art. 4, http://blog.sina.com.cn/s/blog_b43e133701013z9r.html.

22 The full name is Baixin Rural Fund Cooperative of Yanjia Village, Lishu County of Jilin Province, which obtained the first financial license of fund cooperative granted by the CBRC in 2007. See Zhi Fengyan (植鳳寅), Nongcun Zijin Huzhushe Shinian (農村資金互助社十年) [The Past 10 Years for Rural Fund Cooperative] (Aug. 18, 2014), http://www.cnfinance.cn/magzi/2014-08/18-19922_1.html.

23 Shao Chuanlin (邵傳林), Jinrong “Xinzheng” Beijingxia Nongcun Zijin Huzhushe de Xianshi Kunjing (金融「新政」背景下農村資金互助社的現實困境) [Practical Dilemma of Rural Fund Cooperative under the Background of Financial “New Policy”], 6 SHANGHAI JINGJI YANJIU (上海經濟研究) [SHANGHAI ECON. RES.] 27, 35 (2010). 2019] Zhong 9

congenital defect of the legislative mechanism.24 In fact, the CBRC stopped ratifying new RFCs at the beginning of 2012.25 Unfortunately, RFCs promoted by the CBRC developed slowly. The three main reasons contributing to this slow growth are: (1) market access conditions are too high; (2) it is improper to classify RFCs as banking institutions; and (3) funding sources for RFCs are limited. First, market access conditions are too high. Although a series of requirements26 can help prevent risks, personnel and capital requirements are too high for many rural areas. Second, it is improper to classify RFCs as banking institutions.27 This classification causes risk management that tends to be too strict. This strictness impedes the promotion and popularization of RFCs and decreases their value. Third, funding sources of RFCs are limited. Cooperative members are reluctant to deposit large sums of money because there is no deposit insurance. The shareholding ratio of any single peasant or small enterprise is not allowed to surpass 10%,28 and thus equity capital is limited. Moreover, it is very difficult for RFCs to obtain donations or funds from other banking institutions.29 Therefore, RFCs cannot satisfy the simultaneous financing needs of peasants for agricultural production. B. Mutual Development Funds for Poor Villages In 2006, the Office of Poverty Alleviation and Development (OPAD) and the Ministry of Finance (MOF) jointly issued a notice30 and initiated a pilot program—mutual development funds for poor villages. The program explored a new mechanism of using financial funds for poverty

24 Wang Yiping (王亦平), “Nongcun Zijin Huzhushe” Falü Guifan zhi Queshi (「農村資金互助社」法律規範之缺失) [“Rural Fund Cooperative” is Lacking of Legal Norms] 5 JINRONG LILUN YU SHIJIAN (金融理論與實踐) [FIN. THEORY & PRAC.] 66, 67 (2009).

25 WANG XIAOYA ET AL. (汪小亞等), XINXING NONGCUN HEZUO JINRONG ZUZHI ANLI YANJIU (新型農村合作金融組織案例研究) [NEW RURAL COOPERATIVE FINANCIAL INSTITUTIONS: CASE STUDY] 2 (2016).

26 The Provisional Measures for the Administration of Rural Fund Cooperatives, supra note 3, at art. 9.

27 Id. at art. 2.

28 Id. at art. 20.

29 WANG ET AL., supra note 25, at 48.

30 Guanyu Kaizhan Jianli “Pinkuncun Cunji Fazhan Huzhu Zijin” Shidian Gongzuo de Tongzhi (關於開展建立「貧困村村級發展互助資金」試點工作的通知) [The Notice about Pilot Program of Establishing “Mutual Development Funds for Poor Villages”] (promulgated by the Office of Poverty Alleviation & Dev. and the Ministry of Fin., May 18, 2006), http://www.fsou.com/html/text/chl/772/77236.html. 10 Asian-Pacific Law & Policy Journal [Vol. 21:1 alleviation. Specifically, the government allocated some funds to support mutual development funds while villagers borrowed money from such funds to support agricultural production on a rotating basis. At the end of 2014, 2.17 million villages in 1,284 counties across China established mutual development funds. The cumulative fund reached six billion yuan and 71.8% of the cumulative fund was derived from central and local governments. Mutual development funds for poor villages maintain good assets and stable operations, while the non-performing asset ratio is only 1.48%.31 The OPAD issued the Guiding Opinions32 and the Operations Manual, which emphasized risk management and put forward four principles and four red lines. The four principles consist of: (1) voluntary establishment, (2) democratic management, (3) serving members, and (4) risk sharing. The four red lines refer to: (1) absorbing only members’ contributions without taking deposits; (2) mainly providing mutual credit service to members without making loans to outsiders; (3) mainly using surplus for accumulation but not for fixed returns; and (4) operating within the village and refraining from developing into large-scale fund cooperatives.33 In the past ten years, the pilot program of mutual development funds for poor villages has made a lot of progress. However, some problems still exist, including: (1) uneven regional development, (2) a small mutual development fund and inactive operation, (3) unsound incentive mechanisms, and (4) the necessity of strengthening management capacity.34 C. Credit Departments within Peasants’ Specialized Cooperatives With the development of peasants’ specialized cooperatives, various modes of rural credit cooperatives appear. Although the 2007 Peasants’ Specialized Cooperative Act does not mention credit services, many cooperatives provide such services. For example, at the end of 2013, there were 982,400 specialized cooperatives across the country, among which 30,000 cooperatives engaged in credit services.35 Credit departments within peasants’ specialized cooperatives have demonstrated a few problems. First, by not adhering to a closed system of

31 WANG ET AL., supra note 25, at 5.

32 Guanyu Jinyibu Zuohao Pinkuncun Huzhu Zijin Shidian Gongzuo de Zhidao Yijian (關於進一步做好貧困村互助資金試點工作的指導意見) [The Guiding Opinions about Furthering Pilot Program of Establishing “Mutual Development Funds for Poor Villages”] (promulgated by the Office of Poverty Alleviation & Dev. and the Ministry of Fin., Sept. 17, 2009), http://fpb.anshun.gov.cn/fpgz/201803/t20180301_3178361.html.

33 WANG ET AL., supra note 25, at 5.

34 Id. at 86-87.

35 Id. at at 24. 2019] Zhong 11 membership, some credit departments within peasants’ specialized cooperatives bring on too many members. Second, some do not obey the rule of mutual help and make loans in the form of usury. Third, fake banks appear in some areas where credit departments within peasants’ specialized cooperatives are popular, creating a huge risk. Fourth, some credit departments have already fallen into a payment crisis, endangering local financial stability.36 The 2014 No.1 Document encourages rural fund cooperative organizations to develop on the premise of membership, adopt closed systems, refrain from taking deposits or making loans to outsiders, and not pay fixed returns. Against this background, Shandong initiated a new round of pilot program of rural financial cooperatives in 2015, which is the only program ratified by the State Council across the country. At the end of August 2019, 345 peasants’ specialized cooperatives engaged in credit services, attracting 2,400 participating members. Since the program was initiated, 6,397 loans were made and the total amount reached 273.14 million yuan.37 The Shandong pilot program established three innovations, namely (1) voluntary contributions when lending money; (2) no establishment of pooled funds; and (3) cooperative custodian bank and supervision by local financial authority at all levels. These innovations have not achieved the intended results because it is difficult for the government to put a prohibition on establishing a pooled fund. Moreover, cooperative custodian banks have no incentive to participate, and thus the government needs to coordinate and designate such banks. Finally, it is difficult for the government to enforce regulatory responsibility because the higher level government has more power but less responsibility while the lower level government has less power but more responsibility.38 Aside from RFCs, mutual development funds for poor villages, and credit departments within peasants’ specialized cooperatives, there are two more types of new rural cooperative finance. One is the peasant fund cooperative sponsored by the Supply & Marketing Cooperative. There are more than 600 such cooperatives in Shandong.39 However, there is no complete data available on such cooperatives in China. Another is the fund

36 Id. at 69-71.

37 SHANDONGSHENG DIFANG JINRONG JIANDU GUANLIJU (山東省地方金融監督管理局) [THE SHANDONG LOCAL FIN. AUTH.], XINNONGCUN HEZUO JINRONG SHIDIAN GONGZUO 2019 NIAN 8 YUE JINZHAN QINGKUANG (新農村合作金融試點工作2019年8月進展情況) [THE PROGRESS REPORT ON PILOT PROGRAM OF NEW RURAL COOPERATIVE FINANCE BY THE END OF AUGUST 2019], http://dfjrjgj.shandong.gov.cn/articles/ch02948/201909/ccb5ec4c-e71c-4dc7-83cd- d44b676323ea.shtml. 38 WANG ET AL., supra note 25, at 5.

39 Id. at 24-25. 12 Asian-Pacific Law & Policy Journal [Vol. 21:1 cooperatives set up by peasants spontaneously, for which there is no complete data available across the country either. However, Anhui Province has 155 such cooperatives according to incomplete statistics.40

IV. PROBLEMS IN DEVELOPING NEW RURAL COOPERATIVE FINANCE Four problems are identified: (1) no legislation, insufficient policy support, and inadequate training service; (2) CBRC’s unsuitability for promoting cooperative finance; (3) inappropriate regulation of new rural cooperative finance; and (4) partial failure to follow basic principles of cooperative finance. A. Lack of Legislation, Insufficient Policy Support, and Inadequate Training Services 1. Lack of Legislation Although rural cooperative finance has been operating since the establishment of the People’s Republic of China, there is no legislation passed by the National People’s Congress governing RCCs. The highest law applicable to RCCs are the administrative rules promulgated by the competent authority, which are subject to constant change. Such rules cannot ensure relevant parties’ rights and cannot restrict the government’s behavior. RCCs are a failure and the lack of legislation passed by the People’s Congress is one of the main reasons for their failure. RFCs promoted by the CBRC have no legislation either. Some local governments place high hopes on such cooperatives, encouraging them to expand the object and content of their services and endowing them with some government role. However, these efforts have led to the erosion of the development of cooperatives.41 The CBRC stopped ratifying RFCs in 2012 and such cooperatives are almost certainly a failure as well. Mutual development funds for poor villages piloted by the OPAD have the same problem. Although such funds are relatively successful, their main goal is poverty alleviation. When the goal is completed,42 such funds may disappear. Credit departments within peasants’ specialized cooperatives have the same problems, too. Cooperative finance was included in the draft Act of the Peasants’ Specialized Cooperative but was deleted when passed by

40 Id.

41 Interview with Shi Zhuang (石狀), President of Daozhen Branch of the People’s Bank of China, in Daozhen, Guizhou Province (July 8, 2015).

42 We must ensure that all rural poor people will be lifted out of poverty by 2020 under the current standard. See Guanyu Daying Tuopin Gongjianzhan de Jueding (關於打贏脫貧攻堅戰的決定) [The Decision on Winning a Decisive Battle against Poverty] (promulgated by the Communist Party of China and the State Council, Nov. 29, 2015). 2019] Zhong 13

the People’s Congress in 2007.43 It is regrettable that history repeated itself when an amendment to this act was passed in 2017. 2. Insufficient Policy Support Policy support from the government for rural cooperative finance mainly includes: (1) input of fiscal funds at the beginning; (2) establishment of deposit insurance; (3) permission of fund cooperatives to receive and distribute fiscal funds for assisting agriculture; and (4) tax preference. There is no policy support for RFCs promoted by the CBRC except for targeted cost subsidies provided by the MOF.44 Piloted by the OPAD, huge fiscal funds were put into mutual development funds for poor villages. At the end of 2014, 71.8% of money from the government was put into these mutual development funds for poor villages,45 but no other policy support was provided. The 2017 Peasants’ Specialized Cooperative Act has a chapter for policy support, including fiscal funds and tax preferences. Thus, credit departments within such cooperatives can enjoy the policy support mentioned above. However, neither deposit insurance nor permission to receive and distribute fiscal funds supports such credit departments. 3. Inadequate Training Services The 2007 Provisional Measures for the Administration of Rural Fund Cooperatives and the 2017 Peasants’ Specialized Cooperative Act do not mention training services, but the 2009 Operations Manual for Pilot Program of Mutual Development Funds for Poor Villages does. A whole chapter called “Capacity Building” is aimed at providing such services for the management and members of such cooperatives. The competent authorities provide some training services for RFCs and credit departments within peasants’ specialized cooperatives, but such services are inadequate. B. CBRC’s Unsuitability for Promoting Cooperative Finance The CBRC is responsible for supervising commercial banks, so it is unsuitable for the CBRC to foster and supervise cooperative finance. According to CBRC’s 2011 Annual Report, 635 village and township banks (VTBs) and 46 RFCs were established,46 while 1,027 VTBs and 161

43 Li Changping & Yu Jianrong (李昌平、於建嶸), Yaogei Nongmin Hezuo Jinrong de Quanli (要給農民合作金融的權利) [The Right to Cooperative Finance Should be Given to Peasants], 8 ZHONGGUO GAIGE (中國改革) [REFORM CHINA] 62, 62 (2006).

44 Nongcun Jinrong Jigou Dingxiang Feiyong Butie Zijin Guanli Banfa (農村金融機構定向費用補貼資金管理辦法) [The Administrative Measures about Funds for Subsidizing Targeted Cost of Rural Financial Institutions] (promulgated by the Ministry of Fin., Mar. 11, 2014), http://www.gov.cn/xinwen/2014-03/28/content_2648910.htm.

45 WANG ET AL., supra note 25, at 5.

46 1,443 VTBs and 48 RFCs have been established. See PUBLICITY DEPARTMENT, The 2016 ANNUAL REPORT OF THE CBRC 27 (2017). 14 Asian-Pacific Law & Policy Journal [Vol. 21:1 cooperatives were planned.47 The data indicates that the new policy of rural finance promoted by the CBRC gives priority to VTBs. There are many RFCs that encompass large areas whose members and operators are all peasants. Such cooperatives must be liquidated by themselves during adverse events. However, the CBRC currently has insufficient personnel to implement proper supervision. On the contrary, VTBs are directly controlled by existing banks, and the latter can take over operations or restructure VTBs should any issues occur. This greatly encourages the supervisory authority to develop VTBs.48 However, a VTB is actually a branch of the holding bank because the main sponsor should be a bank, and as a commercial entity, its deviation from serving peasants is very obvious. Therefore, a serious deviation appears in the new policy of rural finance because the supervisory authority is too worried about taking risks and damaging its reputation or interests. C. Inappropriate Regulation of New Rural Cooperative Finance Fund cooperatives emphasize autonomy and reject excessive administrative intervention. This requires that government regulation should neither be too strict nor too flexible. Too much regulation is harmful to the system and normal function of cooperatives. If restrictions are too lenient, it is difficult for the government to function as a guide and prevent risks. RFCs were heavily regulated by the CBRC. Many prudential requirements have been formulated, including capital adequacy ratio, single member loan ratio, affiliated member loan ratio, top ten-member loan ratio and reserve adequacy ratio for asset loss.49 These requirements serve to regulate commercial banks, not to regulate such cooperatives, thereby resulting in over-regulation. There has been a surge of fund cooperatives spontaneously set up by peasants. The place of symbolic significance is Fengyang County of Anhui, where 57 cooperatives were established, and the Association of

47 Guanyu Zuohao “Xinxing Nongcun Jinrong Jigou 2009nian – 2011nian Zongti Gongzuo Anpai” Youguan Shixian de Tongzhi (關於做好《新型農村金融機構2009年 — 2011年總體工作安排》有關事項的通知) [The Notice about Related Matters of Completing “the Overall Work Plan of New Rural Financial Institution 2009 – 2011”] (promulgated by the China Banking Regulatory Comm’n, July 23, 2009), http://www.cbrc.gov.cn/chinese/home/docDOC_ReadView/20090729F8AC83BD742CA 421FF03EE4C729AC800.html.

48 Xie Yongmo (謝勇模), Shi Shichang Zhunru, Haishi Jihua Zhunru? (是市場准入，還是計劃准入?) [Market Access or Planned Access?] 9 YINHANGJIA (银行家) [CHINESE BANKER] 114, 117 (2009).

49 The Provisional Measures for the Administration of Rural Fund Cooperatives, supra note 3, at art. 47. 2019] Zhong 15

Peasant Fund Cooperative is the first association of such kind in China.50 Some peasant fund cooperatives were registered as private non-enterprises at the Bureau of Civil Affairs, some were approved by town governments and had no registration, and others did not follow any formalities prior to their establishment.51 Many “superior administrative units” regulate fund cooperatives, including the Bureau of Agriculture, the Bureau of Industry and Commerce, and the Bureau of Finance.52 Except for the Bureau of Finance, the other regulatory units suffer from incompetence, so under- regulation pervades. Appropriate regulations exist for mutual development funds for poor villages and credit departments within peasants’ specialized cooperatives piloted by Shandong in 2015. The former produced many organizations that inherently belong to fund cooperatives and have achieved relative success. The latter has been piloted for four years but no satisfactory results have been achieved yet. More importantly, there is a large number of peasants’ specialized cooperatives spontaneously engaged in credit services in Shandong and other provinces that have little or no regulation. D. Partial Failure to Follow Basic Principles of Cooperative Finance RFCs, mutual development funds for poor villages, and credit departments within peasants’ specialized cooperatives all follow the principles of membership, closed system, and democratic management.53 However, the CBRC classifies RFCs as enterprises, requires registered capital, allows RFCs to be set up at large villages and towns, and limits withdrawal unreasonably,54 all of which do not conform to basic principles of cooperative finance. The classification of such cooperatives as enterprises is a cause for great concern. The cultivation of cooperative culture is just beginning, and services of such cooperatives cannot be

50 Xie, supra note 48, at 114.

51 Interview with Jiang Luobin (蔣羅斌), Dir. of the Rural Credit Coop. Ass’n of Xiangyin County, in Xiangyin, Hunan Province (July 14, 2015).

52 Jiao Jian (焦建), Nongcun Zijin Huzhushe Duotou Guanli Shengcun Fazhan Jiduo Kunnan (農村資金互助社多頭管理生存發展極度困難) [Overlapping Regulation of Rural Fund Cooperative, Its Survival and Development are Extremely Difficult], XINLANG CAIJING (新浪财经) [SINA FIN.] (Jan. 28, 2013), http://finance.sina.com.cn/nongye/nyhgjj/20130128/142014424614.shtml.

53 New rural cooperative finance deviates from closed system, mutuality and democracy to some extent. See Wang Yang (王楊), Xinxing Nongcun Hezuo Jinrong de Yihua ji Falü Guizhi (新型農村合作金融的異化及法律規制) [New Rural Cooperative Finance: Deviation and Its Legal Regulation], 10 NONGCUN JINGJI (農村經濟) [RURAL ECON.] 72, 72 (2018).

54 The Provisional Measures for the Administration of Rural Fund Cooperatives, supra note 3, at art. 4, 8, 9 and 27. 16 Asian-Pacific Law & Policy Journal [Vol. 21:1 differentiated from services of other institutions such as commercial banks, encouraging some cooperatives to pursue profits.55 Fund cooperatives are cooperatives and should only be required to have members’ contributions that conform to the articles of association, not registered capital. The registered capital of Xingle RFC of Yurun Town of Ledu County at Qinghai Province is 360,000 yuan, with two private enterprises each contributing 100,000 yuan.56 Thus, the contribution of one enterprise amounts to 28%, which greatly exceeds 10% of the red line of supervision.57 Fund cooperatives belong to community institutions and may lose their nature of cooperative finance if allowed to operate in large villages and towns. The Zhoujiazhuang RFC of Jinzhou City of Hebei Province was set up in a large village, with its registered capital reaching up to 10 million yuan, and has 13,006 members.58 It is doubtful whether effective cooperation can be carried out at such a large size. Fund cooperatives should obey the rule of free entry and withdrawal. However, members can only withdraw when RFCs earn profits during the same year and the capital adequacy ratio is no less than 8% after an approved withdrawal.59 These conditions are very harsh and such cooperatives may follow the same disastrous road as RCCs if no effective withdrawal mechanism exists. There are other concerns as well. For example, financial professionals and brokers, state-owned ranches, and county associations of RCCs are among members of some RFCs.60 Financial professionals and brokers are obviously not peasants. The state-owned ranches and county associations are obviously not small enterprises either. Once such cooperatives are controlled by industry, commercial, or financial capital, the cooperatives will be demutualized. In the past, peasants were exploited by industrial61 and commercial capital.62 Today, we must be watchful whether

55 NONGCUN HEZUO JINRONG DE FAZHI CHUANGXIN (農村合作金融的法制創新) [RURAL COOPERATIVE FINANCE: LEGAL SYSTEM INNOVATION] 345-46 (Chen Rongwen (陳榮文) ed., 2011).

56 Id.

57 The Provisional Measures for the Administration of Rural Fund Cooperatives.

58 Xie, supra note 48, at 115.

59 The Provisional Measures for the Administration of Rural Fund Cooperatives, supra note 3, at art. 27.

60 Xie, supra note 48, at 115.

61 Industrial capital refers to capital in various industries such as manufacturing, mining, transportation, and construction.

62 Commercial capital refers to capital specialized in commodity circulation in a capitalist society. See Shangye Ziben (商業資本) [Commercial Capital], HANYU DACIDIAN 2019] Zhong 17 new rural cooperatives will follow the path of RCCs. The most important goal is to define peasants and small enterprises63 in the countryside. Mutual development funds for poor villages can only register as nonprofit organizations, set up at administrative villages,64 and allow members to join in and withdraw freely.65 Thus, the mutual development funds for poor villages follow the basic principles of nonprofit, mutuality, and voluntariness. Credit departments within peasants’ specialized cooperatives piloted in Shandong follow the principles of nonprofit and voluntariness but do not strictly follow the principle of mutuality. This is because such funds can be established at large villages or towns when needed.66 V. SOLUTIONS FOR DEVELOPING NEW RURAL COOPERATIVE FINANCE I divide these solutions into “general” and “specific” here. A. General Solutions Two general solutions are included in this paper, namely that the focus of cultivating rural financial systems should be turned from commercial finance to cooperative finance67 and from compulsory institutional change to induced institutional change.

(汉语大辞典) [CHINESE DICTIONARY], http://www.hydcd.com/cd/htm_a/28282.htm.

63 It is more reasonable for limiting membership to natural persons (ordinary peasants). See Lan Hong & Mu Zhengshe (藍虹、穆爭社), Zhongguo Xinxing Nongcun Hezuo Jinrong Fazhan Shida Wenti Lunzheng (中國新型農村合作金融發展十大問題論爭) [Ten Controversial Questions about the Development of New Rural Cooperative Finance in China], 4 SHANGHAI JINRONG (上海金融) [SHANGHAI FIN.] 35, 35 (2017).

64 Administrative village refers to an area that is designated for the convenience of administration, governed by an administrative organization, and forms a basic unit for a large village. An administrative village is governed by its villagers independently and the villagers’ committee enjoys such right. See Hangzhengcun (行政村) [Administrative Village], ZHIJIA CIHAI (之家辞海), http://ciyu.cihai123.com/c/1131742.html.

65 The Operations Manual for Pilot Program of Mutual Development Funds for Poor Villages, supra note 5, at ch. 1.

66 Shandongsheng Nongmin Zhuanye Hezuoshe Xinyong Huzhu Yewu Shidian Fang’an (山東省農民專業合作社信用互助業務試點方案) [The Provisional Measures for the Administration of Pilot Program for Mutual Credit Service within Peasants’ Specialized Cooperative in Shandong Province] (promulgated by Shandong Province, Jan. 29, 2015), art. 6, http://www.xuecheng.gov.cn/artcontent.jsp?artid=80145 [hereinafter The Pilot Program for Mutual Credit Service within Peasants’ Specialized Cooperative in Shandong Province].

67 The development of credit service within peasants’ cooperative is a process of accumulating political, social, administrative and legal legitimacy. See Zhao Xiaofeng (趙曉峰), Nongmin Hezuoshe Xinyong Hezuo de Shengzhang Jizhi Fenxi (農民合作社信用合作的生長機制分析) [Analysis of the Growth Mechanism of Credit Service within Peasants’ Cooperative], 6 XIBEI NONGLIN KEJI DAXUE XXUEBAO (SHEHUI KEXUEBAN) (西 18 Asian-Pacific Law & Policy Journal [Vol. 21:1

1. From Commercial Finance to Cooperative Finance68 For many years, the rural financial reform actively promoted by the government has involved restructuring the organization of commercial finance in the countryside, including RCCs; however, this reform has not yet achieved obvious results.69 Because financial market forces are dwindling, it would be a mistake to champion the establishment of a diversified system of competition in the countryside to solve the problem of rural financing.70 Although cooperatives are still in their infancy and funds are small, rapid development of such cooperatives should be the main strategy to advance rural financial reform. On one hand, fund cooperatives are an original form of cooperative finance closer to peasants and can satisfy loan demands excluded from commercial institutions. On the other hand, fund cooperatives are institutional instruments that connect the production of peasants, promote market transaction, and change the relation of distribution. Therefore, no commercial finance can replace them.71 Even though cooperative finance should be relied upon, it is doubtful whether the government has enough incentive to develop it. The CBRC prefers to establish VTBs while local government favors small loan companies.72 If the current system is not changed, it might be difficult to

北農林科技大學學報（社會科學版)) [J. NW. A & F U. (SOC. SCI. ED.)] 32, 32-39 (2017).

68 Restructuring the Chinese system of cooperative finance is a solution for remedying the weaknesses of the financial system in China. See Chen Jingwei (陳經偉), You Nongcun Zijin Huzhu Zuzhi Tan Zhongguo Hezuo Jinrong Tixi Chonggou (由農村資金互助組織談中國合作金融體系重構) [Restructuring Chinese System of Cooperative Finance from the Perspective of Rural Fund Cooperative Organization], 9 XUESHUJIE (學術界) [ACADEMICS] 185, 198 (2017).

69 The rural financial reform has not “solved” yet because a diversified system of rural financial organization has not been set up, moderate competition of rural financial market has not been formed, a differentiated regulatory system of rural finance has not been established, and traditional ideas of rural financial development have not changed. See WANG XIAOYA ET AL. (汪小亞等), NONGCUN JINRONG GAIGE: ZHONGDIAN LINGYU HE JIBEN TUJING (農村金融改革：重點領域和基本途徑) [THE RURAL FINANCIAL REFORM: IMPORTANT AREAS AND BASIC APPROACHES] 13-16 (2014).

70 Zhou Li & Zhou Xiangyang (周立、周向陽), Zhongguo Nongcun Jinrong Tixi de Xingcheng yu Fazhan Luoji (中國農村金融體系的形成與發展邏輯) [The Formation and Developmental Logic of Rural Financial System in China], 8 JINGJI XUEJIA (經濟學家) [ECONOMIST] 22, 28 (2009).

71 Xie, supra note 48, at 117.

72 Most local governments are more interested in such companies since they do not take deposits, must obey many regulatory restrictions, and have less risk. In the meantime, such companies are very big and registered capital reaches up to hundreds of millions. See Xie, supra note 48, at 117. 2019] Zhong 19 produce enough incentive to induce the government to change its focus to cultivate cooperative finance.73 2. From Compulsory Institutional Change to Induced Institutional Change RFCs promoted by the CBRC belong to compulsory institutional change. However, the CBRC stopped ratifying such cooperatives in 2012. With only 48 cooperatives across the country according to the CBRC’s 2016 Annual Report, RFCs are almost a failure. Mutual development funds for poor villages also belong to compulsory institutional change. Although such funds have achieved relative success, these funds may disappear when their goal of poverty reduction is completed. Credit departments within peasants’ specialized cooperatives belong to induced institutional change and so do peasants’ specialized cooperatives that spontaneously engage in credit services. Such services are an innovation by the people and can be classified into informal finance. However, the government believes these services involve too much financial risk. In reality, such cooperatives only make loans among their members who generally come from the same administrative village. Therefore, they will not produce much risk. If a specialized cooperative fails, the losses will be borne by its members. The government should be more tolerant to such cooperatives and allow them to compete with RFCs promoted by the CBRC. Through competition, we can find whether the rule drawn up by the government conforms to the real needs of peasants and a good interaction mechanism can be formed. The government is often too cautious and emphasizes strictness when a new institution is piloted. In reality, strictness should be emphasized for compulsory institutional change while leniency should be emphasized for induced change, which means that innovations by the people need to be allowed to advance as far as possible. Only when a major problem appears will new rules likely be adopted. The government can use the mechanism of benefit induction to encourage informal fund cooperatives to register. For example, such cooperatives can enjoy some preferential policies after registering but without having to obtain a license.

73 The bottleneck problem for restricting the reform of rural finance is lack of cooperative institution mainly owned by peasants and the corresponding legal system, and it is also a deviation from the reform path. See Zhu Guoping & Guo Lianqiang (祝國平、郭連強), Nongcun Jinrong Gaige de Guanjian Wenti, Shenceng Yuanyin yu Zhanliu Zhongdian (農村金融改革的關鍵問題、深層原因與戰略重點) [Rural Financial Reform: Key Issues, Deep Reason and Strategic Focus], 6 JIANGHAN LUNTAN (江漢論壇) [JIANGHAN TRIB.] 46, 52 (2018). 20 Asian-Pacific Law & Policy Journal [Vol. 21:1

Based on the above reasoning, I conclude that the cultivation of cooperative finance should turn to induced institutional change, i.e. mainly depend on endogenous institutions set up by peasants themselves. B. Specific Solutions I argue that: legislation, sufficient policy support, and training services should be provided by the government; rural cooperative finance should be promoted by the MOA; appropriate regulation should be undertaken by local government; and the basic principles of cooperative finance should be followed.

1. Legislation, Sufficient Policy Support and Training Services74 RFCs approved by the CBRC belong to micro formal financial institutions, and it is doubtful whether such cooperatives can effectively survive. According to the experiences of Japan, Korea75 and Taiwan,76 cooperative finance is attached to peasant association and is a dependent institution. Cooperative finance was included in the draft Act of Peasants’ Specialized Cooperatives but was deleted due to opposition from supervisory authorities. Peasant cooperative finance has advantages including symmetric information, democratic management, and lower cost. Therefore, the idea of endangering financial security seems absurd. Non- peasants as well as foreigners can set up financial institutions. Large banks lose tens of billions every year as a result of bad debt, dead loans, or debt repudiation without endangering financial security, which begs the question: how can security arise when peasants engage in cooperative funds?77

74 One scholar argues that the right to obtain help from the government means that members collectively have a right to ask the government for help to develop their cooperative. See Zhang Defeng (張德峰), Hezuoshe Jiti Sheyuanquan Lun (合作社集體社員權論) [On Collective Right of Cooperative Membership], 5 ZHENGFA LUNTAN (政法論壇) [TRIB. POL. SCI. & L.] 3, 11 (2014); the scholar pointed out later that indirect governance when promoting cooperatives requires legal rules to be established such as education, fiscal support, self-decided internal interest rate, antitrust exemption and so on. See Zhang Defeng (張德峰), Woguo Hezuo Jinrong zhong de Zhengfu Jiaoshe Beilun Jiqi Falü Xiaojie (我國合作金融中的政府角色悖論及其法律消解) [Cooperative Finance in China: The Paradox of Government’s Role and Its Legal Solution], 1 FAXUE PINGLUN (法學評論) [L. REV.] 59, 59 (2016).

75 JIAO ET AL., supra note 17, at 75, 138.

76 Shan Yuli (單玉麗), Taiwan Nongye Jinrong Gaige Zhilu yu Qianjing (台灣農業金融改革之路與前景) [The Road of Reform and Its Prospect of Agricultural Finance in Taiwan], 4 YATAI JINGJI PINGLUN (亞太經濟評論) [ASIA-PAC. ECON. REV.] 62, 62 (2007).

77 Li & Yu, supra note 43, at 62, 67. 2019] Zhong 21

The encouraging news is that the 2009 No. 1 Document allows specialized cooperatives to carry out a pilot program of credit cooperatives. The 2012 No. 1 Document asks for peasants’ specialized cooperatives to be led to engage in credit services according to certain standards, while the 2014 No. 1 Document requires rural cooperative finance to be developed on the basis of peasant cooperatives and supply and marketing cooperatives. The 2015 No. 1 Document emphasizes that effective ways to develop new rural cooperatives should be explored and credit departments within peasants’ cooperatives should be piloted prudentially. Positive changes can be made out from the above documents. Credit cooperatives attached to other cooperatives increasingly gain attention. The CBRC and the MOA78 jointly issued an opinion79 against this background to encourage peasants’ specialized cooperatives that are qualified to develop credit services, while many local governments issued similar documents.80 However, it is regrettable that similar mutual insurances were allowed but credit services were not when the Peasants’ Specialized Cooperative Act was amended in 2017. Thus, I recommend that the Standing Committee of the National People’s Congress amend the above law as soon as possible to include credit cooperatives.81 If the Peasants’ Specialized Cooperative Act was amended in the future and credit services were included, credit services within such cooperative could enjoy the policy support of the government such as input of fiscal funds and tax preferences.82 Permission of fund cooperatives to

78 In 2018, the name changed to the Ministry of Agriculture and Rural Affairs.

79 Guanyu Zuohao Nongmin Zhuanye Hezuoshe Jinrong Fuwu Gongzuo de Yijian (關於做好農民專業合作社金融服務工作的意見) [An Opinion about Doing a Good Job in Financial Services for Peasants’ Specialized Cooperatives] (promulgated by the China Banking Regulatory Comm’n, Feb. 5, 2009), http://www.cbrc.gov.cn/govView_EE56D596B69F42C1982D6350FC1BDE44.html.

80 E.g., Shandongsheng Nongmin Zhuanye Hezuoshe Xinyong Huzhu Yewu Shidian Guanli Zhanxing Banfa (山東省農民專業合作社信用互助業務試點管理暫行辦法) [The Provisional Measures for the Administration of Pilot Program of Mutual Credit Service within Peasants’ Specialized Cooperative in Shandong Province] (promulgated by Shandong, Jan. 29, 2015), http://www.xuecheng.gov.cn/artcontent.jsp?artid=80145.

81 In China, mutual cooperative departments on the basis of specialized cooperatives amount to 51% of all fund cooperatives, cooperatives set up spontaneously by peasants amount to 25%, and RFCs approved by the CBRC are less than 1%. See Fu Qiong (付瓊), Jiyu Zhuanye Hezuoshe de Neishengxing Nongcun Zijin Huzhu Zuzhi Yanjiu (基於專業合作社的內生型農村資金互助組織研究) [Research on Endogenous Rural Fund Cooperative on the Basis of Specialized Cooperative], 11 DANGDAI JINGJI YANJIU (當代經濟研究) [CONTEMP. ECON. RES.] 70, 71 (2013).

82 Nongmin Zhuanye Hezuo Shefa (農民專業合作社法) [The Peasants’ Specialized Cooperative Act] (promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2017), art. 65, 67, https://www.sohu.com/a/238923877_764974. 22 Asian-Pacific Law & Policy Journal [Vol. 21:1 receive and distribute fiscal funds for assisting agriculture is easy to solve but deposit insurance is not. RFCs promoted by the CBRC are allowed to take deposits from insiders but mutual development funds for poor villages are not, which is understandable because the latter are special funds. However, the credit service within the peasants’ specialized cooperative piloted in Shandong is not allowed to take deposits either. Although such cooperatives can take funds from their members, they can take only 5 million yuan at any time. Moreover, there are many restrictions, such as a prohibition against pooled funds and double ceilings for any single natural person member.83 This impedes the solving of the rural financial problem because such cooperatives cannot obtain adequate funds. Perhaps this is one of the reasons that other provinces have not yet followed in Shandong’s footsteps. Only when people realize that peasant cooperatives must take deposits from their members can we solve deposit insurance. The training services are the easiest problem to solve and should mainly target managers of fund cooperatives to strengthen their management skills and cultivate cooperative culture. The 2009 Operations Manual for Pilot Program of Mutual Development Funds for Poor Villages has a whole chapter for training services from which peasants’ specialized cooperatives can borrow. Moreover, time, effort, and adequate money is needed. 2. The Ministry of Agriculture Should Promote Rural Cooperative Finance The CBRC is too worried about financial risk and created overly strict regulatory rules. These strict regulatory rules are a major reason why RFCs develop slowly. The value of the CBRC is to prevent and control financial risk. While it is normal to consider the risks first, the key solution to the problem of peasant financing is to develop various institutions, especially cooperatives.84 Therefore, there is a conflict between risk prevention and development. The solution is that other government departments should take charge of the development function.

83 The Provisional Measures for the Administration of Pilot Program of Mutual Credit Service within Peasants’ Specialized Cooperative in Shandong Province, supra note 80, at art. 3, 15, 17, 23.

84 The key solution for remedying market failure is to identify, decide and supervise inappropriate exclusionary behavior from rural financial institutions, not to increase supply. See Cheng Huixia (程惠霞), Nongcun Jinrong “Shichang Shiling” Zhili Qianti zai Panduan: Gongji Buzu Haishi Jinrong Paichi (農村金融「市場失靈」治理前提再判斷：供給不足還是金融排斥) [Reassessment of the Premise for Remedying Rural Financial “Market Failure”: Supply Shortage or Financial Exclusion], 11 JINGJI LILUN YU JINGJI GUANLI (經濟理論與經濟管理) [ECON. THEORY & BUS. MGMT.] 101, 101 (2014). 2019] Zhong 23

Because the MOA is responsible for furthering economic and social development in rural areas, it is proper for the department to promote cooperative finance. The Agricultural Credit Administration can be set up to undertake the function. It is worth mentioning that cooperative finance also includes mutual guarantees and agricultural insurance cooperatives. Mutual guarantees can be included in credit cooperatives and act as a supplementary means of advancing development, but agricultural insurance cooperatives should be distinguished from credit cooperatives. The former China Insurance Regulatory Commission undertook functions of the government in the area of agricultural insurance and experienced similar problems as the CBRC. Functions of agriculture insurance cooperatives must be transferred to the MOA and the Agricultural Risk Administration established within this department. Of course, the CBIRC can still supervise commercial agriculture insurance under this model. 3. Local Government Should Undertake Appropriate Regulation Because the CBRC does not have offices and personnel at all counties and it is difficult for new rural financial cooperatives to extend their services beyond provincial boundaries, RFCs should be handed over to local governments for supervision.85 Local financial authorities supervise mutual credit services piloted in Shandong, but the MOA guides peasants’ specialized cooperatives that engage in such services spontaneously.86 It is ambiguous if “guide” means regulation or promotion here; however, the roles of regulation and promotion should be undertaken by different government departments, so I advise that local financial authorities regulate rural cooperative finance and the MOA promote such services. Since rural cooperative finance belongs to community finance, self- discipline and social regulation can prevent much potential risk. These activities are also a manifestation of trusting peasants’ ability to self- organize, self-supervise, and self-develop. Thus, such finance does not need much regulation. What kind of regulation and how much is needed? This question is up to the economist, not the jurist, to answer.87

85 The No. 1 Document 2015 requires regulatory responsibility of local government to be put into practice. See 2015 Nian Zhongyang Yihao Wenjian Quanwen (2015年中央一號文件全文) [Full Text of the 2015 No. 1 Document of the Communist Party of China], XINHUASHE (新華社) [XINHUA NEWS AGENCY] (Feb. 2, 2015), http://www.farmer.com.cn/uzt/ywj/gea/201601/t20160128_1176622.htm.

86 The Pilot Program for Mutual Credit Service within Peasants’ Specialized Cooperative in Shandong Province, supra note 66.

87 One scholar argues that the CBRC only needs to supervise market access and business scope of RFCs. See Zhang Defeng (張德峰), Lun Nongcun Zijin Huzhushe de Zhengfu Youxian Jianguan (論農村資金互助社的政府有限監管) [On Limited Government Regulation of Rural Fund Cooperative], 6 XIANDAI FAXUE (現代法學) [MOD. 24 Asian-Pacific Law & Policy Journal [Vol. 21:1

4. Following Basic Principles of Cooperative Finance88

Nonprofit, mutuality, voluntariness, and democratic management89 are basic principles of cooperative finance. If the Peasants’ Specialized Cooperative Act is amended to include credit services, some rules that do not conform to cooperative finance in the 2007 Provisional Measures for the Administration of Rural Fund Cooperatives will no longer automatically apply. For example, the above act classifies such cooperatives as nonprofit mutual economic organizations rather than enterprises and only requires contribution that conforms to the article of association rather than the registered capital.90 The above law does not mention geographic scope which may be reasonable for a specialized cooperative, but it also reflects that the legislation is conservative because China only has legislation on specialized, not comprehensive, cooperatives or peasant associations. In fact, production cooperatives cannot be separated from credit or insurance cooperatives, so credit or insurance cooperatives attached to other cooperatives should become the most important direction of new rural cooperative finance. Therefore, specialized cooperatives ought to develop toward comprehensive cooperatives. In practice, the RFC has already developed into a comprehensive peasant association.91 I argue that China should take geographic scope into consideration and limit cooperative location to administrative villages to preserve mutuality.92 However,

L. SCI.] 126, 131 (2012); the scholar pointed out later that government regulation of cooperative finance is limited to two aspects: (1) regulation of business activities for legality, and (2) regulation of registration for qualification of civil subjects (or market access). See Zhang Defeng (張德峰), Woguo Hezuo Jinrong zhong de Zhengfu Jiaoshe Beilun Jiqi Falü Xiaojie (我國合作金融中的政府角色悖論及其法律消解) [Cooperative Finance in China: The Paradox of Government’s Role and Its Legal Solution], 1 FAXUE PINGLUN (法學評論) [L. REV.] 59, 66 (2016).

88 The 2014 No. 1 Document asks new rural cooperative finance to stick to exclusive membership, the principle of a closed system (namely not taking deposits from nor making loans to outsiders), and no fixed returns. See 2014 Nian Zhongyang Yihao Wenjian Quanwen (2014年中央一號文件全文) [Full Text of the 2014 No. 1 Document of the Communist Party of China], XINHUAWANG (新華網) [XINHUA NEWS NETWORK] (Jan. 20, 2014), http://www.farmer.com.cn/uzt/ywj/gea/201601/t20160128_1176624.htm. 89 Xie Ping (謝平), Zhongguo Nongcun Xinyongshe Tizhi Gaige de Zhenglun (中國農村信用社體制改革的爭論) [The Controversy about Structural Reform of Rural Credit Cooperative in China], 1 JINRONG YANJIU (金融研究) [J. FIN. RES.] 1, 2 (2001).

90 The Peasants’ Specialized Cooperative Act, supra note 82, at art. 2, 12.

91 Jiang Bolin (姜柏林), Cong Nongcun Zijin Huzhushe dao Zonghe Nongxie de Fazhan (從農村資金互助社到綜合農協的發展) [The Development from Rural Fund Cooperative to Comprehensive Peasant Association], 6 YINHANGJIA (銀行家) [CHINESE BANKER] 101, 102-104 (2010).

92 The amount of member and geographic scope of cooperative at the grass-roots or primary level cannot be too large and stock rights cannot be too decentralized, otherwise 2019] Zhong 25

peasant cooperatives must be allowed to set up associations93 at the level of large villages, counties, and provinces.94 The only limit mentioned from the procedure applies to when a member withdraws from a cooperative,95 so other conditions depend on the articles of association. In turn, this prompts concerns about whether the liberty of withdrawal will be guaranteed. Whether an article of association for limiting withdrawal is legal ought to be adjudicated in court, but the applicability of this decision depends on whether the judiciary is sound. Between liberty and restriction, the liberty of withdrawal is more fundamental. However, the CBRC96 requires the following conditions for withdrawal: (1) earning profits within the same year, (2) having no less than 8% of capital adequacy ratio after withdrawal, and (3) receiving approval. These conditions are unreasonable and should be abolished. The liberty of withdrawal is the most important article to embody voluntariness and must be guaranteed.97 At least 80% of the members of cooperatives should be peasants,98 which will guarantee that peasants control the cooperative. It is well known that “peasant” refers to a status, not only a profession, in China. The term “peasant” must be defined, otherwise those who have already become businessmen or entrepreneurs will control cooperatives, and such cooperatives will become instruments by which commercial and industrial cooperative will be commercialized inevitably. See Heng Xingyuan (馮興元), Lun Nongcun Xinyongshe Xitong Jinrong Jigou de Chanquan, Zhili yu Liyi Guanxi (論農村信用社系統金融機構的產權、治理與利益關係) [On Property Right, Governance and Interest Relationship of Financial Institution of Rural Cooperative Credit System], 2 SHEHUI KEXUE ZHANXIAN (社會科學戰線) [SOC. SCI. FRONT] 31, 37 (2017).

93 Zhang Defeng (張德峰), Lun Woguo Hezuo Jinrong Hangye Zuzhi Tixi de Falü Chonggou (論我國合作金融行業組織體系的法律重構) [On Legal Restructuring of Organizational System of Cooperative Finance in China], 5 XIANDAI FAXUE (現代法學) [MOD. L. SCI.] 70, 70-81 (2014).

94 The Peasants’ Specialized Cooperative Act amended in 2017 has already included a separate chapter to set standards for united associations but still has no geographic limitations.

95 The Peasants’ Specialized Cooperative Act, supra note 82, at art. 25.

96 The Provisional Measures for the Administration of Rural Fund Cooperatives, supra note 3, at art. 27.

97 RCCs can cancel the right of withdrawal through article of association or agreement for stability, but the utmost length of time is 5 years. See Zheng Jingyuan (鄭景元), Woguo Nongcun Xinyongshe Sheyuan Zige zhi Biandong (我國農村信用社社員資格之變動) [Change of Membership of Rural Credit Cooperative in China], 5 QINGHUA DAXUE XUEBAO (ZHEXUE SHEHUI KEXUEBAN) (清華大學學報（哲學社會科學版)) [J. TSINGHUA U. (PHIL. & SOC. SCI. ED.)] 170, 180 (2016).

98 The Peasants’ Specialized Cooperative Act, supra note 82, at art. 15. 26 Asian-Pacific Law & Policy Journal [Vol. 21:1 capital exploits peasants. Once non-peasants control cooperatives, mutuality, democratic management, and nonprofit will no longer exist.99 VI. CONCLUSION This article focuses on rural financial reform in China from the perspective of cooperatives. I aim to discover the cause of the problems facing rural cooperative finance and conclude that a lack of freedom, cooperation, and fairness are some of the main reasons behind these problems. I also aim to provide some ideas of solutions to these issues. The government finally allowing RCCs to be commercialized provides a compelling case study to new cooperative finance. At present, new rural cooperative finance has four main problems: (1) a lack of legislation, policy support, and training services; (2) the CBRC’s unsuitability for promoting cooperative finance; (3) inappropriate regulation of new rural cooperative finance; and (4) partial failure to follow basic principles of cooperative finance. In summary, I argue that: the focus of cultivating rural financial systems should be shifted from commercial finance to cooperative finance and from compulsory institutional change to induced institutional change; the government should provide legislation, policy support, and training services; rural cooperative finance should be diversified and promoted by the MOA; supervision should be undertaken by local government; and basic principles of cooperative finance should be followed.

99 Zhang Defeng (張德峰), Nongcun Hezuo Jinrong Zuzhi Yizhi Sheyuan jian Liyi Chongtu de Falü Pingheng (農村合作金融組織異質社員間利益衝突的法律平衡) [Legal Balance between Different Members of Rural Cooperative Finance with Conflict of Interest], 4 FASHANG YANJIU (法商研究) [STUD. L. & BUS.] 90, 90-98 (2014).