46082-001: Study on the Financial Support for Modern Agricultural

Technical Assistance Consultant’s Report

Project Number: 46082 September 2015

PRC: Study on Modern Agriculture Demonstration Area Planning and Financial Support Mobilization – Study on the Financial Support for Modern Agricultural Development in the People’s Republic of China Financed by the Technical Assistance Special Fund

Prepared by Xia Ying

Institute of Agricultural Economics and Development, Chinese Academy of Agricultural Sciences Beijing, PRC

For the Department of Development and Planning, Ministry of Agriculture

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents. (For project preparatory technical assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Study on the Financial Support for Modern Agricultural Development in the People's Republic of China Final Report

Xia Ying

1 Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas

Catalogue Introduction ...... 5 Chapter 1 Rural Financial Development Theories and Policies in China ...... 6 1.1 Basic theories of rural finance ...... 6 1.1.1 Summary of three main rural financial theories ...... 6 1.1.2 Selection of financing channels in rural financial market ...... 6 1.1.3 Performance evaluation of rural financial institutions ...... 7 1.1.4 Construction and reform of rural financial systems ...... 8 1.2 Financial support policies on agricultural development in China ...... 10 1.2.1 Fiscal policies ...... 10 1.2.2 Policies of tax reduction and exemption ...... 13 1.2.3 Policies of differential interest rates ...... 14 Chapter 2 Current Situation of Investment and Financing of Chinese Modern Agriculture: Taking Representative MADAs as Example ...... 16 2.1 Major suppliers of agricultural investments and financing in China ...... 16 2.2 The supply status of agricultural investment and financing in recent years ...... 18 2.2.1 Fiscal input ...... 18 2.2.2 Credit ...... 20 2.2.3 Insurance ...... 29 2.3 Investment and financing demands in agriculture ...... 30 2.3.1 Farms and large specialized households ...... 30 2.3.2 Agricultural enterprises ...... 35 2.4 Features and problems of supply and demand of agricultural funds ...... 38 Chapter 3 Practical Explorations of Financial Support for the Development of Modern Agriculture: the Perspective of Product Innovation and Service Innovation ...... 43 3.1 Mortgage and guaranteed Loans ...... 43 3.1.1 The practice of rural land financialization in Chongqing Municipality ...... 43 3.1.2 The practice of land revenue guaranteed loans in Jilin Province ...... 45 3.1.3 Financial innovation in the reform of the collective forest rights in Fujian Province ...... 47 3.2 Combined loans by the interaction between government, banks and insurers ...... 48 3.2.1 “Tiandong Model” ...... 48 3.2.2 “Shouguang Model” ...... 50 3.3 Loans for cooperatives with joint guarantee: the case of Beijing ...... 51 3.3.1 Cooperative loans with joint guarantee by cooperatives ...... 51 3.3.2 Cooperative member loans with joint guarantee by cooperative members ...... 52 3.4 The various models of supply chain financing ...... 53 3.4.1 Grain supply chain loans jointly supported by financial enterprises in Henan Province ...... 53 3.4.2 Wuliming model of supply chain finance created by Longjiang Bank and COFCO

Introduction

This is the final report on financial support for modern agriculture in China, which is part of the ADB program: “The People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstrated zones” (program number: 46082). Based on field surveys in the five modern agriculture demonstration counties and official materials and data from other demonstrations zones of rural financial reforms, the report analyzes the current situations of financial services for Chinese modern agriculture, summarizes the progress and experiences of rural financial innovation, and explores existing problems. Successful international experiences of developing countries of financial support for modern agriculture and policies and measures of relevant international organizations are also summarized and used as reference for policies recommendations on improving financial support for modern agriculture in China. Some of the major conceptions which are broadly used in this report are defined here: Rural Financial System : it refers to the financial system which is composed of various banking institutions at and under county level and provides financial support for rural economic activities, including rural industrial development, agricultural infrastructure construction and rural consumption. Rural finance is not exactly the same as agricultural finance, which covers much more fields than the latter, while some of the functions of agricultural finance are implemented by urban financial institutions. Policy financial institutions are important in the system of financial support for modern agriculture, basically because agriculture is weak and fundamental in national economic system. Policy agricultural finance : it is understood in two aspects. On the one hand, it refers to policy-oriented finance, which are specific invention or steering policies to introduce financial services into agriculture. It works on those rural financial institutions by financial instruments, some of which are interest subsidy for loans, direct loans by policy financial institutions, subsidy on subsidy guarantee charges, policy agricultural insurance, etc. On the other hand, it refers to the specific policy financial institutions such as the national agricultural development bank, which assume the state policies and strategies and aim at the shortcomings of commercial or cooperative financial institutions. In sum, policy agricultural finance refers to those fiscal appropriation and loans to agricultural finance guided by national and local policies. Modern agriculture demonstration zones : These are those state-level modern agriculture demonstrations specifically certified by MOA, which aim at realizing national strategy and solving problems comprehensively. Supply and demand Main bodies of rural finance: The supply main bodies of rural finance (including credit money and product service) include: state-owned commercial banks, cooperative or shareholding banks, agriculture-related dragon-head companies, intermediary financial institutions (such as insurance, pension institutions, guarantee companies). The demand main bodies of rural finance are those market participants within county scope, which are farm households, family farms, specialized households, agricultural cooperative, agricultural companies, and agricultural service companies.

Chapter 1 Rural Financial Development Theories and Policies in China 1.1 Basic theories of rural finance 1.1.1 Summary of three main rural financial theories

In western economies, rural financial development theory is derived from general financial development theory, and discusses the relationship between financial development of the rural areas in developing countries, and agricultural development and non-agricultural development and other areas such as the income growth of rural residents, and poverty elimination. Traditionally, there are two representative theories about rural financial development: agriculture subsidized credit paradigm and rural financial systems paradigm . Actually, these two theories are opposite. Although each has its own shortcomings because of some biases, both are still meaningful for further researches. With the improvement of previous research methods, new rural financial theory based on those two theories is proposed. The new theory has the same importance as Hayek’s local knowledge theory and Stieglitz’s imperfectly competitive market theory , whose theories have great impact on directing modern rural financial development. During many years of development, the system of rural financial theory has taken shape. Currently, the rural financial theory consists of three main branch theories: the agriculture credit subsidy theory, rural financial market theory and imperfect competition market theory. These three theories have already become the theoretical basis of China rural financial research. In recent years, there is a debate related to the financial repression and financial deepening and financial restriction in the academia. Essentially, the debate is related to the application of these three theories to the selection of rural financial market system. Briefly, the three theories of rural financial market development center on the same key issue, that is how government plays its role in promoting rural economic growth in rural financial markets. Because the agriculture credit subsidy theory relies too much on government, the theory brings about two negative effects. The theory accelerates the development of rural economy at the beginning. However, it is also criticized because of poor performance on poverty alleviation and financial inefficiency, etc. The theory advocates the financial deepening proposal without the premise of stable economy in rural areas, thus suffering market failure and other defects. The imperfectly competitive market theory, proposed in late 20th century, is based on the information economics theory. The theory discriminates the function of credit market, capital market and other markets in detail, and proposes a moderate government intervention under the market operation mechanism. The views of the imperfectly competitive market theory match the advancing gradually reform. Domestic scholars compare the three theories, and most of them agree that imperfectly competitive market theory is development direction of China’s rural financial market. According to the experience of international agricultural modernization countries, such as America, France and Japan, agriculture credit subsidy theory is no longer a mainstream theory (Ding, 2010).

1.1.2 Selection of financing channels in rural financial market

The rural financing channels are an important issue of researches on rural financial development. Generally, there are two financing channels in rural areas: formal financial intermediaries and informal

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas financial intermediaries. About the causes of credit difficulty of rural formal financial institutions, according to Indian economic experts Subrata Ghatak and Ken Ingersent, most farmers are excluded from credit market because profit-seeking formal rural financial institutions have not enough branches but high operation costs. Therefore, in order to meet the rural financial demand, developing countries should increase credit supply and build a multilayered rural financial system to increase the rural financial supply. Adams (1988) mentioned two important criteria in his evaluation criterion for rural financial system. They are the number of people who offers rural official financial service and the service quality of the financial institutions, both of which prove low coverage of rural finance. Based on our country’s situation, Han Jun mentions that it is difficult for the main entities of China’s rural economy to get credit support from formal financial institutions, because the low fiscal agricultural support leads to the unbalanced development of rural financial organizations. Zhou (2004) also pointed financial organizations are not necessary the financial organization that neared farm households, thus the operation cost to obtain these farm households’ information is high for financial organizations. Moreover, the lack of contract implementation mechanism of farmers and other adverse reasons as well make rural financing difficult. Because of difficulties of formal financing in rural areas, Chinese scholars began to discuss informal financing channels. Yaron (1997) and World Bank (2004) believed that lots of ranchers and the rich got agriculture credit; however, the poor always met their financing demands from informal financial institutions. Besley (2001), Khandker (2003), Wen (2001) and other experts believed informal financial market is the main financing channel for farm households, especially the poor ones in some countries. Lou (2009) used impulse response function and variance decomposition of time series analysis, combined with the statistics of Zhejiang province in the years from 1978 to 2007, and believed there is a close relationship and long-term equilibrium between the rural finance in Zhejiang province, private finance and rural economic growth. Also, Lou believed that rural finance has adverse effects on economic growth, whereas, private financial supports has remarkable economic effects. Other researchers found that micro-credit organizations had become another financing channel for the rural financial market. Zeller (2001) believed micro-credit organizations can meet the farmers’ financing demands in terms of credit scale, interest rate pricing, regulatory system, risk management, etc., especially for the poor farmers. World Bank (1997) and Washington Conference (2003) considered that micro-credit had become the main innovation model of farmer financing. For now, the financial model of Grameen Bank has been applied in more than 100 countries.

1.1.3 Performance evaluation of rural financial institutions

The above mentioned assumptions and policy proposal for the three rural financial theories implicate the evaluation criterion of rural finance. For example, the amount of agricultural credit and the credit approval speed are the standards to measure the performance of rural financial institutions. However, actually this evaluation criterion has negative effects on enhancing the vitality of rural financial institution and its sustainability. Based on the rural finance investigation of emerging developing countries, Yaron (1992), rural finance consultant of World Bank and other consultants also thought the performance of rural finance development should be evaluated with two main ways. The first way is the contribution of rural finance to economic development, and Yaron (1992) proposed two criteria to measure such contribution: i) the growth of agricultural production measured by the

1.1.4 Construction and reform of rural financial systems

This part focuses on formal and informal financial institutions. Germids (1990) and Besley (1994) considered that rural financial market consisted of formal, quasi-formal and informal financial institution. In this section, rural financial institutions are only divided into formal financial institution and informal financial institution. As to formal financial institution, Chinese scholar Li (2000) believed that because China rural financial institutions developed slowly, farmer cannot get loans with low interest rates on time. As a result, the credit demand of the farmer is repressed. Peng (2001) pointed that rural financial system construction in China lagged behind seriously. After Zhang (2008) analyzed the weaknesses of China’s rural financial institutions in inadequate capital scale, capital allocation ability, and ability to provide a variety of financial services, he proposed that the function of Agricultural Development Bank of China, commercial financial institutions and Rural Credit Cooperative should be strengthened and highlighted. For the rural financial intermediary, Zeller (2003) analyzed the comparative advantages of every kind of rural financial intermediary, and thought the union of different kinds of rural financial institutions should be strengthened and promoted. In his opinion, the bank that located in the countryside, mutual aid team and self-help group are level one; credit union and small bank are level two and commercial bank, nationalized bank and multi-national bank are level three.

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas As to informal financial institutions, as the informal financial market has become the main financing channel for farmers especially for the poor farmers, more and more researchers are giving attention to this market and analyze the reasons why informal financial intermediaries emerge from every aspect. Heiko Schrader, a Germany researcher, referred informal finance as the finance market beyond the control of national credit system and relevant financial regulations. Anders Isaksson (2002) pointed out that private finance is the financial activity occurs without government supervision. It is a rational response to policy distortion and financial repression. Because of the institutional discrimination and bias against government’s credit allocation system under the financial repression, a private financial market system is required. However, Thierry Pairault proposed that the development of private finance in every country and region is the result of personal economy development. Steel (1997) pointed out that the reason for the private finance development is that private finance can use their advantages to get impeccable personal information in the local area. Therefore, private finance solves the problem of information asymmetry that formal finance cannot deal with. Germidis Dimitri (1990) thought one of the characteristics of informal finance is that there is a connection from simple credit arrangements to complex mechanism of financial intermediary between the debtor, creditor and saver. Lin (2003) and other Chinese scholars has constructed a financial market model to prove that the segmentation of financial market and informal finance market are the result of the interaction between creditors of medium and small-sized business, creditors of informal financial institutions and creditors of informal institutions. Also, they thought that adverse selection and moral hazard caused by information asymmetry are the main reasons to boom private finance. In their opinion, financial repression is only a catalyst. Lin et al.’s researches explained the reason why private finance also exists in some countries with financial liberalization. Ren (2003) pointed out that the booming of private finance is attributed to the replacement or changing of existing policy, or created by the new policy. The booming of private finance is the result of the institutional change in finance. Cui (2006) said the weakness of formal rural finance service in China is the reason for the development of private finance. Zhang (2001) used the new institutional economics as a research method, and he believed private finance satisfies the demand for finance of China’s private economy. Kellee Tsai (2001) used China as a research sample. He compared the development path of private finance and the development path of regional economy of Changle, Hui’an, Wenzhou and Zhengzhou areas, and concluded that the reason why there is a difference in financial development in different areas is that local governments implement differentiated policy to private economy. Tsai’s has the same opinion as Zhang, and they both think that private finance is a form of private economy. Based on China’s financial policies and the situation of private finance, Chinese scholars begin to discuss the legality of usury, a production of private finance. Cao (2000), Wen (2002), Li and Shi (2003) et al believed that usury is very popular in private finance, and it has really adverse effects on rural development. However, Jiang (1996), Shi (1998), Mao (2002) et al support the rationality of high interest rates, and they propose to give private finance a legal status. As to the management of rural private finance, some scholars believe rural informal finance should replace informal finance, because informal rural finance has high interest rates and low efficiency. On the contrary, some scholars think there is a lack of formal rural financial system, while informal financial system adapts to the rural environment; it is the major way for farmers to obtain financial service. Hoffand Stiglitz (1996) thought formal financial institutions should connect rural

1.2 Financial support policies on agricultural development in China

The financial policies to support agricultural development can be divided into three categories: the fiscal support policies, preferential tax policies and differential interest rate policies. These policies are mainly targeted on the reform of rural financial institutions, the support for the development of new rural financial institutions, the measures to encourage the increase of agricultural credit, premium subsidy for agricultural insurance, discount interest to help the poor, and so on.

1.2.1 Fiscal policies

1. Support policies and measures aiming at rural financial institution reform. First of all there is the support on the the shareholding reform of Agricultural Bank of China. During the process of the reform, the core capital adequacy ratio of Agricultural Bank of China is increased by receiving a sum of dollars equivalent with 130 billion RMB Yuan from Central Huijin Investment Ltd. Besides, the Cental Huijin Investment Ltd has help the agricultural bank improve its asset quality by supporting it to dispose a sum of 815.7 billion yuan non-performing loans (NPL). Secondly, the reform of RCCs (rural credit cooperatives) was supported. Subsidies of a total of 8.85 billion Yuan have been given to RCCs that suffered losses resulting from implementation of inflation-proof savings during 1994 to 1997. In addition, it was made clear that the service expenditure of provincial united cooperatives should be allocated to grass root cooperatives, which means that part of the provincial united cooperatives’ income cannot be taxed. Thirdly, the state Agricultural Development Bank was built and supported to expand its business scope so as to strengthening its role of policy-oriented supporting for agriculture. 2. Targeted cost subsidies for new rural financial institutions. Since the new rural financial institutions is just established for a short period of time and they have to face big financial pressure at the initial stage, the Ministry of Finance began to subsidize some qualified new rural financial institutions to release their financial pressure since 2008. According to the Interim Measure for New-type Rural Financial Institutions Targeted Cost Subsidies from Central Finance enacted by the Ministry of Finance in 2010, some rural financial institutions will get a subsidy of 2% of their loan average balance of the previous year only on the condition that the loan companies and rural fund mutual cooperatives have achieved a year-on-year growth in loan average balance of the previous year and met the regulatory index required by China Banking Regulatory Commission (CBRC), or village and town banks have achieved a year-on-year growth in loan average balance of the previous year, the loan-to-deposit ratio at the end of the previous year is higher than 50%, and has met the regulatory index required by CBRC. In 2010, the Ministry of Finance included the financial institution outlets in western area where basic financial services are weak into the subsidy plan. The Interim Measure for New-type Rural Financial Institutions Targeted Cost Subsidies (hereafter refer to as the “measure”) was enacted by the Ministry of Finance on March 28 th 2014, and began to take effect on April 11 th 2014. Meanwhile, the Interim Measure for New-type Rural Financial Institutions Targeted Cost Subsidies from Central Finance [Finance (2010) No. 42] enacted by the Ministry of Finance in 2010 was abolished. The new “measure” shows that qualified new rural

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas financial institutions, which refers to the village and town banks, loan companies and rural fund mutual cooperatives authorized by the CBRC in the new “measure”, can get a subsidy of 2% of their loan average balance of the current year from the financial departments. The amount of the subsidy should be borne in proportion by the central and local finance. The allocation proportions of central and local finance in eastern, central and western China are 7:3, 8:2 and 9:1 respectively. In the new “measure”, the specific requirements for financial institutions to get this subsidy are as follows: a year-on-year growth of loan average balance of the same year; the annual average loan-to-deposit ratio of village and town banks is equal to or higher than 50%; the proportion of the average balance of agricultural loans and loan average balance of small and micro enterprises is 70% of all the loans of the same year or higher, etc. 3. The policy of loan with subsidized interest. First of all, there is the policy of interest subsidy for poverty alleviation. In order to direct the financial capital into poor rural areas, money from the central finance has been arranged as subsidy for loans to the poor since 1998. Meanwhile, the system of interest subsidy for the loan for the poor central finance continues to be reformed and improved, and thus the capital sources are enlarged. By the end of 2009, a total of 8.15 billion yuan the central finance had allocated for the discount interest, and stimulated the issuance of over a 200 billion yuan loan for supporting the poor. Secondly, there is the policy of interest subsidy for loans by local-level governments. Taking Hainan province as example, to lower the financing cost of farmers, this province has implemented the interest subsidy policy for small loans by farmers. Farmers’ small loans less than 100 thousand yuan can get the lower interest rate from the government, among which, the provincial finance undertakes 5%, and the proportion of discount interest of the local city is decided by the local governments according to their financial situation. The interest rate assumed by farmers of Danzhou City is 1.5%, and that of Dongfang City is 1%. According to statistics, the number of farm households who have applied for small loans less than 100 thousand yuan reached 56.7, amounting to 1.906 billion yuan for the whole Hainan province in 2013. This province had paid government-funded interest subsidy to 53.3 thousand households, amounting to 109 million yuan in that year, which effectively alleviated the financing difficulties of farmers in their agricultural production and living. 4. Special funds for loan guarantee. In the policy documents about the innovation of agricultural financial products and financial services, mortgage loan business involved with contractual right of rural land and the right to use of cartilage are frequently referred, which have effectively expended the coverage of mortgage guarantees [1]. What’s more, the policies particularly encourage local governments with necessary conditions to set up financing guarantee companies funded by these governments, or allocate a specific fund quota from the existing financing guarantee companies to offer guarantee services to new agricultural business entities; in addition, the polies emphasize that the banking financial institutions should strengthen their cooperation with guarantee institutions that deal with the guarantee business for new agricultural business entities, appropriately expand the amplifying times of guarantee deposits, promote the financing model of “loan plus insurance”, and satisfy the capital demands of new agricultural business entities [2]. Therefore, supporting the development of agricultural guarantee institutions by the government is one of the important routes for agricultural

[1] Promote the innovation of rural financial products and services (Banking issued [2008] No. 295). [2] The guide suggestion on the financial service for new agricultural business entities such as family farm (Banking issued [2014] No. 42)

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas financial products and the businesses innovation, so as to effectively strengthen the services that financial institutions offer to agriculture, rural areas and farmers. At the local government level, guarantee institutions funded by government has become a common practice to service agriculture, rural areas and farmers. In the five counties investigated, each has guarantee companies backed by the government. For instance, Fujin city of Heilongjiang province has established Fujin Jinxing Agricultural Guarantee Company, a public institution affiliated to the municipal finance bureau; Helan county has established a small loan guarantee center for the unemployed, which is affiliated to the bureau of labor and employment service of this county, and provides guarantee services for rural women, undergraduates, scientific special commissioners to start their business or obtain a job.. Tiandong county of Guangxi Zhuang Autonomous Region has established a financing guarantee company financed by the government in 2009 to support the agriculture of Tiandong County, and it inclines to offer guarantee services for comparatively large agricultural loans. After a two-time capital increase, the capital of this company now has reached 30 million yuan. The rural commercial banks and village and town banks that cooperate with it provide a tenfold credit ceiling, which means that the amount of loan reaches 300 million yuan. In addition, the government of Hainan province actively explores the way to establish guarantee funds supported by provincial finance to benefit farmers, to deal with agricultural loans without mortgage, and to attract more financial capitals to the agricultural field by means of credit guarantee. 5. Policy-oriented funds for agricultural insurance. In 2007, the Ministry of Finance enacted Measures of Management on Pilot Areas of Agricultural Insurance Premium Subsidies from Central Finance , and launched the pilot work for agricultural insurance premium subsidies, offering premium subsidies to five crops of six provinces. The central and local governments bear 25% of the premium of the pilot insurance types respectively, and the remaining 50% was borne by the farmers, or jointly borne by the farmer, dragon-head enterprises and the financial department at the provincial, municipal and county level. Since then, the central finance has been expanding the subsidy areas continuously, raising the subsidy proportion and increasing the variety of subsidy insurance. Over these years, the investment in subsidies has been increasing continuously (The subsidies from central finance is 2.133 billion yuan in 2007, 4.869 billion yuan in 2008, 5.965 billion yuan in 2009, and 6.776 billion in 2010). At present, except for Hong Kong, Macao and Taiwan, the 31 provinces (autonomous regions, municipalities directly under the Central Government) of the Mainland China has entered the track of policy-oriented agricultural insurance pilot. There are up to 15 types of insurance related to national economy and people’s livelihood and supported by the central finance, covering all the main food production areas. The agricultural insurance subsidy has become a significant measure for finance of all levels to integrate all efforts of financing to support the agriculture, rural areas and farmers. 6. Reward and subsidy policies for agricultural loans of financial institutions. To motivate financial institutions to issue agricultural loans, the central and local governments have implemented various financial reward and subsidy policies. In 2009, the Ministry of Finance enacted The Temporary Measure of Incentive Funds Management for Increment of Agricultural Loans from the Financial Institutions at County Level , and launched the pilot work of rewarding agricultural loan increment of financial institutions at county level. As for the financial institutions at county level, if the average balance of agricultural loan of the previous year has realized a year-on-year growth of more than 15%, the 2% of the part that exceed the 15% will be rewarded, so as to stimulate the endogenous impetus of financial institutions to increase the amount of agricultural loans. In 2010, the Ministry of Finance

1.2.2 Policies of tax reduction and exemption

1. The tax preference for agricultural financial institutions. According to relevant national regulations [3], the interest income of financial institutions who issue small credit loans no more than 50 thousand yuan to the farmers are exempted from business tax; as to rural credit cooperatives, village and town banks, rural fund mutual cooperatives, loan companies, and rural cooperative banks and rural commercial banks whose institution with legal person is located in the county or lower-level areas, the business tax only should be levied at a 3% preferential tax rate; the qualified guarantee institutions that support agriculture and rural areas are exempted from business tax for three years; rural commercial banks and village and town banks can enjoy a 15% corporate income tax reduction. According to the regulations in the Notification of Pre-tax Deduction Policies for Loan-loss Reserves of Agricultural Loans of Financial Enterprises and Loans of Small and Medium-sized Enterprises , the loan-loss reserves of agricultural loans of financial enterprises and loans of small and medium-sized enterprises should be deducted before tax. 2. The tax preference for special agriculture-related business. The interest income of financial institutions from farmers’ small loans is exempted from business tax. When calculating the taxable amount of incomes, only 90% of the interest income of financial institutions from farmers’ small loans, is calculated. As specified in the Notification of Pre-tax Deduction Policies for Loan-loss Reserves of Agricultural Loans of Financial Enterprises and Loans of Small and Medium-sized Enterprises enacted by Ministry of Finance, as to the premium income of insurance companies who

[3] Notification about rural finance related to tax policy enacted by the Ministry of Finance ( Finance and Tax [2010] No. 4)

1. Lower reserve requirement ratios are implemented for small and medium rural financial institutions. In order to ensure the sufficiency of rural credit fund, in the context that the liquidity should be retrenched, rural credit cooperatives can still implement a lower reserve requirement ratio. Since 2010, People’s Bank of China has up-regulated the legal reserve requirement ratio for many times. Among these up-regulations, three times are targeted to such small and medium-sized legal entities as the rural credit cooperatives. At present, the preferential reserve requirement ratio of rural credit cooperatives is 6% lower than big commercial banks. What’s more, the reserve requirement ratio implemented by rural credit cooperatives with a higher proportion of agricultural loans and small capital scale is 7% lower than big commercial banks. Meanwhile, the legal reserve requirement ratio of the village and town banks is the same as that of local rural credit cooperatives. 2. The marketization of loan interest rate is steadily advanced so as to lower the financing costs of new agricultural business entities. The floating interest rate cap of rural credit cooperative’s loans can be extended to 2.3 times of the benchmark interest rate for loan. In terms of the interest rate of new rural financial institutions, People’s Bank of China has enacted the Guidance on Offering Financial Services to New Agricultural Business Entities Such as Family Farmers (issued by People's Bank of China [2014] No. 42). In this guidance, for eligible new agricultural business entities whose local government has introduced government-funded interest discount and risk compensation policies and who have received loans by mortgage or impawn or by introducing insurance or guarantee mechanism, etc., the interest rate should be lower than the average loan interest rate of the same type and the same level in the institution in principle. In addition, the banking financial institutions shouldn’t charge additional fees apart from the loan interest rate, and shouldn’t conduct tie-in sales with other financial products or attach other conditions to increase the financing cost. In summary, these measures aim at reducing the financing cost for new agricultural business entities practically. 3. Specific policy measures are implemented on the principle of “certain proportion of newly increased deposits should be used locally”. In 2009, People’s Bank of China and China Banking Regulatory Commission (CBRC) unitedly formulated the Assessment Method for Encouraging County-level Financial Institutions to Use a Certain Proportion of the Newly Increased Deposits in Local Loans (for Trial Implementation), and the pilot work has been conducted in some counties since 2011. 4. Management of agricultural reloan is improved. In recent years, By drawing upon the experience of using agricultural reloan, the People’s Bank of China has strengthened the adjustment of the quota of agricultural reloan among different areas, with more quota allocated to the west and the major grain production areas. Meanwhile, the village and town banks are also included in the range of agricultural reloan. In the busy season of spring plantation in 2010, the amount of agricultural reloan in the west and major grain production areas was adjusted and increased to 10 billion yuan. After the

[4] Widening the range of re-loan for supporting agriculture (Issued by People’s Bank of China[2013] No. 58)

The main sources of agricultural fund can be divided into four parts: fiscal investments, financial industrial loans, social funds financing, and self-owned fund. In this part, only the first two parts are discussed. The fiscal and financial funds have diversified forms in reality, which generally include non-reimbursable grants (e.g., fiscal investments and fiscal subsidies), low cost loans (e.g., loans with fiscally subsidized interest, various kinds of policy-oriented bank loans, loans guaranteed by the policy-oriented guarantee institutions), and commercial loans. Due to the characteristics of agriculture and compared with manufacturing and service industry, agriculture has the features of “high-risk, high-cost, long-cycle and low-benefit. Accordingly, these features also apply to investment in agriculture. Therefore, as to commercial finance, its investments in agriculture do not conform to general market rules, resulting in limitations in commercial finance’s support for agriculture. However, from the national perspective, as a fundamental industry, the intensity and breadth of agricultural investment cannot be neglected. Thus, the government has enacted various preferential policies about agricultural investments, to encourage and guide various funds to invest in agriculture, and that is why most agricultural funds are more or less policy-related.

2.1 Major suppliers of agricultural investments and financing in

China

Government agencies (mainly fiscal department and functional departments related to agriculture), commercial banks, policy-oriented financial institutions are the major suppliers of agricultural investments and financing in China. 1. Government agencies. The main investment and financing suppliers among government agencies are fiscal department, the system of Development and Reform Commission, agricultural department, forestry department, water conservancy department, transportation department and so on. Due to the limited local financial strength, the county-level fiscal department has little investment and financing capacity for agriculture. Currently, fiscal investments in agriculture are mainly in the form of transfer payment of specific fiscal funds issued by central and provincial fiscal departments, among which central finance plays the dominate role. Of these departments, special funds of agricultural department, finance department and the system of National Development and Reform Commission take a comparatively large proportion; most of the capital of water conservancy department is used to govern rivers and lakes, whereas, the capital of water conservancy construction of farmer lands take a small proportion; a small amount of the road construction capital of transportation department is used in rural low-grade road construction. 2. Commercial banks. Only the Agricultural Bank of China and China Development Bank have scaled agricultural financing among the state-owned commercial banks. 3. Policy-oriented financial institutions. At present, there are several channels through which

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas policy-oriented agricultural financing activities can be carried: --National policy-oriented financial institutions. Since 2007, China has launched a new round of reform for the financial system with the emphasis on reform of the policy-oriented banks. With the help of the reform, China Development Bank has entered the development stage of commercialized operation, and it is no longer a policy-oriented bank. Thus, currently, on national level, there is one agricultural policy-oriented financial institution in China— Agricultural Development Bank of China. --Policy-oriented guarantee institutions. Meanwhile, the policy-oriented guarantee business has achieved a breakthrough as well. China National Economic Technique Investment & Guarantee Company was established in 1993. Around 1995, some specialized credit guarantee institutions was established successively in some provinces and cities. Hence, taking the opportunity of credit guarantee for medium and small-sized enterprises, the industry of policy-oriented guarantee developed rapidly everywhere. Accordingly, the agricultural policy-oriented guarantee also started to develop. --Innovation-oriented budget outlays such as government funds and special funds. Apart from the development of policy-oriented financing institutions mentioned above, the budget outlays of the governments at all levels also have some leverage and play a guide role to some extent, and function as a kind of policy-oriented financing. What’s more, these outlays are oriented to agriculture, high-tech enterprise, medium and small-sized enterprises, housing, etc. For instance, the special fund for medium and small-sized enterprises development arranged by central budget can take the approach of discount interest loan, capital injection, etc.; the guidance fund for the commercialization of national research findings can take the approach of setting sub-fund for venture capital investment, risk compensation of loans, etc.; the guidance fund for the venture capital investment of small and medium-sized technology-based enterprise can take the approach of phased-based equity participation, follow-up investment, risk subsidy, etc. --Local government financing-platform companies. In response to the impact of international financial crisis, China launched a large-scale economic stimulus package in 2009. In order to meet the capital demand for this plan, local government at all levels had established various financing platforms one after another. There were no more than 8000 local financing platforms in 2008, whereas, that number reached ten thousand in 2010. The main purpose of these financing platforms is to raise fund for local economic construction or social development, and the main method to raise fund is bank loans. More than 50% of the credit capital is used for the construction of road and municipal infrastructure, and a small proportion is used in agricultural infrastructure construction. Apart from these channels mentioned above, the agriculture-related business of Postal Saving Bank is also policy-oriented to some extent, but profitability is still its main goal and it places extra emphasis on the operation model of commercial financial intermediary.

2.2.1 Fiscal input

The fiscal departments at all levels have been increasing their support for agriculture in recent years in China, and the methods and the effect are being improved. The amount of various agriculture-related funds is huge. Among these funds, agricultural expenditure and the expenditure of the comprehensive agricultural development are the two expenditures directly used in agricultural production. These expenditures accounted for 51.6% of the fund for supporting agriculture (Table 2-1). Table 2-1 Status of Financial Support for Agriculture in China Items 2008 2009 2010 2011 2012 2013 Agriculture 2090.5 3826.9 3949.4 4434.4 Forestry 377.3 532.1 667.3 744.6 Water conservancy 1086.8 1519.6 1856.5 2279.2 South to North Water Transfer 78.4 63.9 Poverty alleviation 322.9 374.8 423.5 493.3 Overall development of agriculture 271.8 286.8 337.8 381.7 Comprehensive rural reform 607.9 645.8 Other expenses from agriculture, 208.8 287.3 forestry, and water conservancy Total 4288.9 6720.4 8129.6 9330.2 Proportion of funds directly used in 55.1 61.2 52.7 51.6 agricultural production Data source: Financial Yearbook of China of the corresponding year Note: a small amount of the capital for poverty alleviation and comprehensive rural reform is used in direct agricultural production, which is ignored here.

According to the field investigation, the fiscal support in various regions, especially in the major grain producing areas, has played a significant role in the development of agriculture. For instance, the proportion of local fiscal revenue of Fujin City has been less than 20% of the total fiscal revenue over the years; in 2013, that proportion was only 14.1% (Table 2-2).

Table 2-2 General Financial Status of Fujin City Unit: Hundred million yuan, % Year Total financial revenue Grant from Proportion of grant Public finance the higher authority from the higher authority expenditures 2009 12.2 10.6 86.6 12.1 2010 19.3 16.4 85.1 19.2 2011 21.0 17.0 81.0 20.8 2012 26.4 21.6 81.8 26.2

2013 27.1 23.3 85.9 27.0 Data source: extracted from the data from field investigation

However, the proportion of agriculture-related expenditure is usually around 50% of the public fiscal expenditures; for example, this proportion reached 45.4% in 2012. What’s more, in Fujin City, the proportions of expenditure directly used in agricultural production in public finance expenditures and agriculture-related expenditure were 7.1% and 15.6% respectively in 2012 (Table 2-3).

Table 2-3 the Proportion of Agriculture-related Expenditure in the Total Financial Expenditure in Fujin City Unit: Hundred million yuan, % Year Public finance Agriculture-related Proportion of Agricultural Proportion of expenditures expenditure agriculture-related production agricultural expenditure expenditure production expenditure 2010 19.2 9.0 47.0 1.4 7.1 2011 20.8 8.4 40.4 0.9 4.3 2012 26.2 11.9 45.4 2.7 10.4 Data source: extracted from the data from field investigation Note: part of the other items of agriculture-related capital is used in agricultural production, which isn’t further split here.

In the direct agricultural expenditure of Fujin City, the central and provincial funds have played the dominant role; for instance, the proportions of direct agricultural expenditurewere 95.8%, 96.9% and 93.2% respectively in 2010, 2011 and 2012 (Table 2-4).

Table 2-4 General Status of the Financial Support for Agriculture in Fujin City Unit: Ten thousand yuan, % Financial Name of the Policy-or Circulation Agricultural resources Ecological Social Urban-rural agriculture-related iented and production compensatio construction programs integration capital subsidy processing n 2010 Total 13517.4 45451.3 15198.0 812.0 3762.8 11004.0 305.0 Central and 12949.4 41875.6 10198.0 812.0 2980.8 8197.0 305.0 provincial Proportion of grant from the 95.8 92.1 67.1 100.0 79.2 74.5 100.0 higher authority 2011 Total 8863.8 47245.1 12456.0 956.0 2902.0 11273.0 500.0 Central and 8592.2 44679.5 6456.0 956.0 1102.0 7350.0 500.0 provincial Proportion of grant from the 96.9 94.6 51.8 100.0 38.0 65.2 100.0 higher authority 2012 Total 27411.7 54402.7 13646.0 150.0 3015.3 19221.1 1161.0 Central and 25558.7 52082.5 5646.0 150.0 908.3 12715.5 450.0 provincial Proportion of 93.2 95.7 41.4 100.0 30.1 66.2 38.8 19

In addition, the fiscal support for agriculture-related financial institutions is almost the same as that for agricultural production expenditures in Fujin City. The fiscal fund of county level accounts for less than 20% of the premium subsidy of agricultural insurance, and 25% of the reward for agriculture-related loan increment of county-level financial institutions (Table 2-5).

Table 2-5 Fiscal Expenditure on Agricultural Finance in Fujin City Unit: Ten thousand yuan Award for agriculture-related Premium subsidy Year loan increment of county-level of agricultural financial institutions insurance 2010 Total 2740 513.1 Central and provincial 2054.2 425.2 Proportion of grant from the higher authority 75.0 82.9 2011 Total 256.1 640.5 Central and provincial 192.1 524.8 Proportion of grant from the higher authority 75.0 81.9 2012 Total 563.4 1035.1 Central and provincial 422.5 844.8 Proportion of grant from the higher authority 75.0 81.6 Data source: extracted from the data from field investigation Note: Fujin City has no new-type rural financial institution, so the financial expenditure doesn’t include the targeted cost subsidies for new-type rural financial institutions.

2.2.2 Credit

The agriculture-related business of banking industry has been improved in recent years, and the financial products are becoming richer and richer. At the end of 2013, the agriculture-related loan balance of banking financial institutions (excluding bills) was 20880 billion yuan with a year-on-year growth of 18.4%, and was 4.5% higher than the growth rate of other loans during the same period (Figure 3-3). The capital and financial strength of the rural credit cooperatives has been reinforced continually, with significant profit growth for nine consecutive years, and its capacity for supporting agriculture is growing. The three types of new rural financial institutions: the village and town banks, loan companies and rural fund mutual cooperatives are making continuous development and the competitiveness of rural financial market is being improved continually. By the end of 2013, the loan balance of these three institutions was 365.1 billion yuan with a year-on-year growth of 56%. The financial services have covered all the towns nationwide 1. Taking the year of 2011 as example, the proportion of the loans directly used in agricultural production in various loans reached 9.84% (Table 2-6).

1 The People’s Bank of China, The financial stability report of China in 2014

Agricultural means of production 3118 0.55 817.7 1.04 Agricultural materials and 6347.4 1.11 585 0.74 circulation of agricultural by-products Agricultural science and technology 210.2 0.04 20.8 0.03 Rural infrastructure construction 10000.4 1.75 2241 2.85 Subtotal 46798 8.20 7751.2 9.84 Others 73671 12.91 14757.2 18.74 Total 120469 21.10 22508.4 28.58 2012 Agriculture, forestry, animal husbandry, 6699 0.99 888 0.98 side-line production and fishery Fundamental construction of farmland 1176 0.17 220 0.24 Agricultural product processing 7318 1.08 1110 1.22 Agricultural means of production 3629 0.54 583 0.64 Agricultural materials and circulation of 7315 1.08 1001 1.10 agricultural by-products Agricultural science and technology 255 0.04 64 0.07 Rural infrastructure construction 11236 1.66 1455 1.60 Subtotal 37628 5.57 5321 5.85 Others 71645 10.60 13647 15.00 Total 109273 16.17 18968 20.85 Data source: Finance Yearbook of China of the corresponding year

As to the accessibility of agricultural financial services, at the end of 2013, there have been 468 rural commercial banks, 122 rural cooperative banks, 1803 rural credit cooperatives and 987 village and town banks (Table 2-7).

Table 2-7 Outlets of Agriculture-related Financial Institutions at the End of 2012 Name of the institution Number Number of business outlets Number of employees Rural credit cooperatives 1927 49034 502829 Rural commercial banks 337 19910 220042 Rural cooperative banks 147 5463 55822 Village and town banks 800 1426 30508 Loan companies 14 14 111 Rural fund mutual cooperatives 49 49 421 Total 3274 75896 809733 Data source: CBRC (China Banking Regulatory Commission)

Table 2-8 Profitability Status of Main Agriculture-related Financial Institutions from 2007 to 2011 Institution Items 2007 2008 2009 2010 2011 Rural credit cooperatives Profit ratio of assets 0.45 0.42 0.41 0.36 0.74 Profit ratio of capital 10.36 9.87 9.72 8.34 15.3 Rural commercial banks Profit ratio of assets 0.70 0.79 0.80 1.01 1.2 Profit ratio of capital 12.97 133.71 13.36 13.82 15.43 Rural cooperative banks Profit ratio of assets 0.84 1.03 1.05 1.19 1.3 Profit ratio of capital 13.29 15.87 15.85 16.05 17.06 New-type Rural financial institutions Profit ratio of assets 0.34 0.59 and Postal Saving Bank of China Profit ratio of capital 16.17 20.01 Data source: CBRC (China Banking Regulatory Commission)

In the field of agricultural policy-oriented finance, financial institutions have also made some progress. Table 2-9 shows the current status of agricultural financial business of main policy-oriented financial institutions in China.

Table 2-9 the Delivery of Domestic Agricultural Policy-oriented Financial Services

Positioning of Agricultural Representative Financial Category Name Departments Involved Policy-oriented Financial Products and Services Services

Policy agricultural banks agricultural Policy policy-oriented loans for policy-oriented financial water conservancy services in rural construction, construction, loans for and plays its core role as The whole bank dragon-head enterprises of policy-oriented finance in agricultural guiding commercial finance industrialization, and loans to serve agriculture and rural for agricultural and rural areas. infrastructure construction, etc. China Development Bank ChinaDevelopment It implements the national macroeconomic policies, raises and guides social funds, and is dedicated to promoting the market construction and Project Appraisal market plan with financing, Loans for rural

Department Ⅲ promotes regional infrastructure construction coordinated development and supports the development of bottleneck fields such as urbanization and “Three Rural Issues”. Commercial Financial Institutions Financial Institutions Commercial Its strategic positioning is to focus on “agriculture, rural

Agricultural Bank of China Bankof Agricultural areas and farmers”; this division serves “agriculture, Six core projects(poverty rural areas and farmers” and Finance Division of alleviation, good harvest, county economic “Agriculture, Rural “Liuhao”, “Longteng”, development, implements the Areas and Farmers” “One Thousand Cities”, and policies that support “Huyue”) agriculture with finance, and explores new models of addressing “Three Rural Issues”.

Postal Savings Bank of China of SavingsPostal Bank It plays the role as the largest financial network New country special communicating and financing business, deposit Rural Service connecting the economy and receipt pledge petty loans, Department society of rural and urban and micro-credit loans pilot areas, perfects rural financial business, etc. services by virtue of its branches covering all the 23

Rural cooperative financial institutions institutions cooperative financial Rural for farm households. Based on the principle of cooperative system, it attracts Personal comprehensive Rural Cooperative Bank Rural farmers, rural industrial and consumption loans, commercial businesses, personal business loans, business entities and other personal engineering The whole bank economic organizations to machinery mortgage buy shares, and provides loans, and financial support to farm student-home-based households, agriculture, and loans. rural economic development. The joint-stock system is the

Rural Commercial Bank Commercial Rural Micro-finance to farm direction of the reform of households , forestry rural credit cooperatives in property mortgage loans, Basically the whole the future, and its main task loans for poverty bank should be providing financial alleviation of farm services to farm households, households, and start-up agriculture, and rural loans for women, etc. economic development.

New type rural financial institution financialinstitution New rural type specialized to farm Loan companies Loancompanies households, agriculture, and rural economic development. Guaranteed loans, loans on The whole company These loans are mainly used credit, etc. in supporting farm households, agriculture, and rural economic development. It is found upon the free will uul mutual of farmers from a town or an The whole cooperative All the products administrative village, and the small rural l enterprises.

Micro-credit companies companies Micro-credit It optimizes rural financial market, and addresses the financing difficulties Almost all the products encountered by “agriculture, rural areas and farmers” and small and medium-sized enterprises. Agricultural assurance Financial Markets/Financial Tools Tools FinancialMarkets/Financial Including agricultural assurance assurance Includingagricultural companies play a leading role among these non-bank Crop insurance, breeding financial institutions. The industry insurance, pests rural assurance service system Full coverage and diseases insurance, and are perfected and completed natural disaster losses to provide important technical insurance, etc. support and assurance guarantee to rural financial innovation.

Agricultural securities markets markets securities Agricultural Solving the financing difficulties through securitization of agricultural products, transferring risks in Listed companies in All the products agricultural production, and agriculture promoting the development of agricultural dragon-head enterprises. Agricultural Agricultural investment Investing equity capital in

funds funds mid-term agricultural All the products China Agriculture Industry enterprises with relatively Development Fund complete supply chains Notes: Beside the institutions mentioned in the table, local governments have established agricultural investment companies, agricultural financing guarantee companies and similar institutions etc., to offer agricultural policy-oriented financial services, the majority of which these institutions are controlled by the local public financial sectors.

The progress made by the various banks is as follows: 1. Agricultural Bank of China (ABC) The Finance Division of “Agriculture, Rural Areas and Farmers” of ABC has enlarged its scope of pilot reform. On October 2013, county-level branches of ABC in 538 counties in Jiangsu, Zhejiang, Hunan, Yunnan, Jiangxi, Shanxi, and Guangdong provinces were included in the scope of pilot reform of Finance Division of “Agriculture, Rural Areas and Farmers” of ABC, and the policy of differential deposit reserve rate, supervision fee reduction and exemption, and business tax reduction and exemption, etc. are continued. Since the scope of pilot reform has been enlarged, the proportion of the business volume and the amount of profit of the pilot branches in all the county-level branches of ABC has risen from 40% to 80%. With respect to the support for “agriculture, rural areas and farmers” and the development of county-level financial services, ABC pays high attention to the demand of finance derived from rural reform and the construction of new-type urbanization, and improves its capacity in serving the urban-rural integration. ABC is dedicated to supporting modern agriculture, and improving the financial services offered to new-type business entities such as leading specialized households, family farms, farmers' cooperatives, agricultural enterprises, etc. It has also made innovations in the financing methods for agriculture-related clients, and continues to deepen the reform of financial business system of “agriculture, rural areas and farmers” in order to build a mechanism in favor of the improvement of the county competitiveness and release the vigor of county-level branches. Financial service model for new-type urbanization has been innovated, and a “Product Box” serving

Table 2-10 Main Business of ADBC Classification Specific Business Agricultural Loans for grain, cotton and oil purchase, reserve, and redeployment and sales production Special reserve loans for meat, sugar, tobacco, wool, and chemical fertilizer etc. Loans for grain, cotton and oil seeds Loans for agricultural means of production, including the circulation and sales of agricultural means of production Agricultural product Loans for industrialized dragon-head enterprises in farming, forestry, animal processing husbandry, side-line production and fishery and grain, cotton, and oil processing enterprises Loans for grain warehousing facilities and cotton enterprise technology and equipment upgrading Loans for agricultural small businesses and loans for agricultural science and technology Rural infrastructure Rural road network, power grid, water network, and information network, and rural energy and environmental facilities construction Agricultural Farmland water conservancy capital construction and transformation, agricultural infrastructure production base development and construction, agricultural ecological environment construction, and agricultural technical services system and rural circulation system construction Intermediate business Issue financial bonds Appropriating financial funds for supporting agriculture Insurance agency business, fund settlement agency business, collection and payment agency business Inter-bank borrowing, bills rediscount, bonds counter purchase and transaction in cash, and interbank deposit and withdrawn, etc. Sources: ADBC annual report 2012.

Along with the constant advance of supporting rural construction and continuous adjustment of agricultural structure, the ADBC has gradually changed its development strategy, and further strengthened its positioning as “a policy bank” that supports rural and agricultural development. In

2 ABC, “Annual Report 2013”.

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas 2011, based on “One Body with Two Wings” model, the ADBC made clear that the strategic orientation of its future development would stick to the “Two–wheel Driven” strategy and further strengthen its policy-oriented financial support. One of the wheel in this strategy is the continued support of ADBC to agricultural and side-line products purchase”; the other one is “to support building new socialist countryside”. These two wheels are regarded as the core driving force of this development strategy. The “Two-wheel Driven” strategy is more comprehensive and advanced than the “Two Wings” (middle/long term loans to support the production and processing of agricultural and side-line products, and agricultural and rural development) in the earlier strategy of “One Body with Two Wings”. On the one hand, it indicates that the theoretical exploration and practical experiences of financial support to new countryside construction have been enriched, and ADBC has found a good way to advance new countryside construction; on the other hand, it reflects ADBC’s upgrading and innovation in the understanding of policy-oriented agricultural finance under the new circumstances. “Two wheel Drive” strategy is the central idea for ADBC to advance new countryside construction under the new circumstances. On the basis of the proven experiences (such as the model of “industrialization, urbanization and agricultural modernization” coordinated development in pilot provinces), this strategy is of great significance to the further realization of the function of policy-oriented finance to the development of new countryside. At the same time, in addressing the food security issue, the ADBC has formulated the core mission for the current period and for some time in the future; that is “to perfect financial services, adjust credit structure, control management risks, deepen system reform, comprehensively improve the quality, construct a harmonious bank, and steadily advance the construction of modern agricultural policy-oriented bank with the focus on two key tasks: guaranteeing national food security and the stabilization of major agricultural products markets, and supporting agricultural and rural infrastructure construction”. To sum up, based on the traditional fundamental business such as purchase of grain, cotton and oil, the ADBC is exerting itself to develop middle/long term policy-oriented credit business for agricultural development and rural infrastructure construction, and satisfactory results have been achieved and valuable development experience has been accumulated. In the future, the ADBC will further exert itself to develop middle/long term policy-oriented credit business for agricultural and rural infrastructure construction emphasizing on supporting new countryside construction and water conservancy construction, deepen and extend the development of policy-oriented finance under the new circumstances, and guide more funds to flow back to agriculture and countryside.

Table 2-11 Overview of ADBC’s Main Business Cumulative Balance Balance of 2012 Accumulative Total of Items (billion yuan) (billion yuan) 2012 (billion yuan) Grain and Oil Loans 896.2 340.9 Agricultural Science and 19.5 Technology Loans Agricultural Means of 30.5 25.7 8.2 Production Loans Rural Circulation System 21.9 10.7 Construction Loans Agricultural Small Business 7.3 Loans

3. China Development Bank (CDB) Accelerating agricultural modernization and supporting new countryside construction are the key directions of CDB’s agriculture-related financial business. By the end of 2012, CBD had issued agricultural industrial loans of 21.6 billion yuan, and new countryside construction loans of 135 billion yuan. Meanwhile, the CDB is the holding bank of 13 village and town banks, and a shareholder of 2 village and town banks. The strengthened basic management to village and town banks has improved their operating performance and service ability, and made them active in supporting “agriculture, rural areas and farmers” and the real economy at primary level such as small and micro businesses. The loan balance at the end of 2012 was 4.33 billion yuan, among which the agriculture-related loan balance was 3.09 billion yuan, and small and micro loan balance was 2.5 billion yuan. The full-year net profit was 130 million yuan, and the benefited farm households were 179 thousand.

2.2.3 Insurance

Agricultural insurance is an effective policy instrument for establishing and perfecting the agricultural support and protection system and assisting agricultural development. In 2007, the central fiscal department began to implement the agricultural insurance premiums subsidy, and China’s agricultural insurance began to develop fast. In 2013, “Agricultural Insurance Regulations” was formally implemented, and agricultural insurance was further accelerated, playing an active role in stabilizing agricultural production, accelerating the increase of farmers' income, and improving rural financial environment, etc. The principle of China’s agricultural insurance is “government instructs, market operates, autonomously and voluntarily acts, and collaboratively advances”, and several models have been formed throughout the country. The first one is to choose eligible insurance companies to provide underwriting services through bidding, and the companies who provide such services should be responsible for their own management decisions and profits and losses. The second one is that several insurance companies form a co-insurance entity to provide underwriting services jointly, and each company apportions the premium and takes their share of risks. The third one is that the government and insurance companies provide underwriting service jointly. The premiums are credited to a special account for agricultural insurance funds and insurance account according to the agreed proportion, and the two parties take risks proportionally. The fourth one is the government entrusts eligible insurance companies to provide underwriting service. The insurance companies only charge commission fees, and the premiums are deposited in the government’s account, but the risks will also be borne by the

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas government solely. Currently, the first two models are adopted by most regions. Financial support has played an important role in the development of agricultural insurance. In 2013, the premium income with financial subsidies accounted for 97% of the total premium income. Agricultural insurance in China also has encountered several problems during its development, such as low degree of assurance, limited income insurance products, same premium rate for grain crops, commercial crop and livestock in some regions, and the scientificity and mechanism of risk diversification of disasters needs to be further improved. The development of China’s agricultural insurance could be generalized in three aspects. Firstly, the coverage of agricultural insurance has been enlarged steadily, and the risk assurance ability has been improved. According to the geographical distribution, started from 5 provinces (autonomous regions, and municipalities) at the pilot period, agricultural insurance has now covered the whole county. As to the variety of insurance, there are already 15 types of insurance subsidized by central government. From the perspective of the risk assurance ability, as China’s agricultural insurance has basically covered all agricultural industries, it has extended upward and downward to the agricultural industrial chains, extending gradually from natural disaster risk, epidemic disease risk and so on in the production field to the market risk, agricultural products quality risk and so on in the circulation field. Secondly, the number of business entities in the market is increasing constantly. In 2012, insurance companies that develop agricultural insurance business have increased from 6 at the beginning of the pilot to 25, and a moderately competitive market environment is forming gradually. Thirdly, the policy support has been strengthened year after year. In 2012, the agricultural insurance premiums that benefit from financial premium subsidy policy reached 23.25 billion yuan, accounting for 97.98% of the total premiums. Insurance that receive financial subsidies is still the major type insurance of China’s agricultural insurance, which has effectively reduced farmers’ premium cost. Lastly, the function of economic compensation continues to perform. In 2012, a total indemnity of 14.82 billion yuan was paid to 28.18 million farm households, which played an active role in stabilizing agricultural production and promoting the increase of peasants’ income. In some region where the insurance is widely covered, the indemnity has become an important source of funds to help resume production after the disaster. In 2012, the total premium income of agricultural insurance of the whole nation was 24.013 billion yuan, with a year-on-year growth of 38%. So far the scale of China’s agricultural insurance business ranks only second to the United States, and China has become one of the most active agricultural insurance markets in the world. In 2013, the premium income reached 30.66 billion yuan, with a year-on-year growth of 27.4%. The indemnity paid to 31.77 million farm households affected by disasters amounted to 20.86 billion yuan, with a year-on-year growth of 41%. 1 billion mu of major crops were insured, and the insurance amount was over 1,000 billion yuan.

2.3 Investment and financing demands in agriculture

2.3.1 Farms and large specialized households

From November 2013, the research group began to conduct on-site investigations to one county 30

The difference in average land area among those provinces is huge. For example, the average land area of Hubei, Guangxi, Ningxia, and Heilongjiang is 224.3 mu, 110.2 mu, 484.8 mu and 1,427.4 mu respectively. Table 2-13 Average Land Area of the Interviewed Farms and Leading Specialized Households of the Provinces Hubei Guangxi Ningxia Heilongjiang Average Land Area (Mu) 224.3 110.2 484.8 1427.4 Among the investigated counties, Jianli county of Hubei, Helan county of Ningxia, Fujin county of Heilongjiang are major agricultural counties, but the farmers of these counties do not fully understand relevant policies related to family farms and leading specialized households. The investigation shows that financial support and technology support has covered a certain number of farm households, especially those of Hubei province and Guangxi Zhuang Autonomous Region. It is commonly believed that it is necessary for the state to offer financial support to family farms and leading specialized households. As to the business status of the respondents, the average revenue was 709.5 thousand yuan in 2013 (from 100 valid samples); the average expenditure was 901.2 thousand yuan (from 97 valid samples); the average liability was 449.9 thousand yuan (from 70 valid samples). Corresponding to the farm scale, the average revenue, average expenditure and average liability of Heilongjiang and Ningxia farmers were significantly higher than those of Hubei and Guangxi farmers. Meanwhile, the gross income of Heilongjiang and Ningxia farmers was higher than them that of Hubei and Guangxi farmers, which revealed the importance of agricultural production scale to revenue. Among the 111 respondents, 70 had liabilities, thus the occurrence rate of liability was 63.1%. In the investigation, three sources of liability were offered: bank loans, the underground financial markets or usury, borrowings from friends or relatives. The number of farm households who owned liabilities from the three sources was 50, 17 or 47 respectively. In the aspect of balance of liability, bank loans accounted for the highest proportion of the total liabilities, reaching 44.7%. Underground financial markets or usury accounted for the least proportion, which was 17.1%. Table 2-14 the Structure of Liability Sources of the Respondents in 2013

The structure of liability sources Proportion (%) Occurrence rate (%)

Bank loans 44.7 71.4

Underground financial markets or usury 17.1 24.3

Borrowings from friends or relatives 35.6 67.1

In terms of the fixed assets of the farmers, the average assets of the 88 valid samples were 1449 thousand yuan. The investigation divided the capital used by farmers to purchase fixed assets into four categories: government funding, equity fund, bank loans, and other debts. The investigation results show equity fund is the primary source of the capital used by the farmers to purchase fixed assets, up to 73.8%. Government funding accounts for the least proportion, which is only 1.4%. It is worth noting that although the proportions of bank loans (9%) and other debts (15.8%) were relatively low, they were quite popular among farmers. The occurrence rates of the two were 53.4% and 67.0% respectively. The low proportion and high occurrence rate of these two sources revealed the fact that, the demands of finance by farmers was strong, but the external sources of finance lacked availability. Given the fact that a major part of other debts was borrowed from friends and relatives, which can be seen as the quasi-equity fund, therefore, the capital sued by farmers to purchase fixed assets was mainly comprised of the farmers’ equity fund. When the external sources of finance are inaccessible, the farm households have to develop their owned fund.

Table 2-15 the Composition of the Capital Used by Farmers to Purchase Fixed Assets

The capital used to purchase fixed assets Amount Ratio Households Occurrence rate

The total value of fixed assets 12752 - - -

Government funding 178 1.4 14 15.9

Equity fund 9408 73.8 - -

Bank loans 1148 9.0 47 53.4

Other debts 2018 15.8 59 67.0

Regarding credit funds, most of the farm households admitted that they had suffered from shortage of funds recently, especially those of Fujin City of Heilongjiang Province, and the proportion was up to 90.3%. Table 2-16 Basic Information about the Financial Items of the Respondents Unit: % Items of the investigation Hubei Guangxi Ningxia Heilongjiang Receiving Financial Support 11.5 28.0 20.7 3.2 Receiving Technology Support 42.3 28.0 10.3 19.4 Knowing about Related Policies 26.9 36.0 31.0 25.8 The Necessity of Financial Support 65.4 68.0 86.2 74.2 Receiving Credit Support 46.2 48.0 31.0 38.7 Shortage of Funds in Recent Times 61.5 68.0 86.2 90.3 Financing with Security Guarantees 38.5 36.0 41.4 41.9

Corresponding to the widespread shortage of funds, the farm households generally believe it is extremely difficult to get access to finance timely. Of the total 87 valid samples, 68 consider it relatively difficult or difficult to access to finance timely (72.2%), which is basically consistent with the feedback from farm households of different provinces. In Hubei and Heilongjiang, that situation appears to be more prominent, up to 88.2% and 85.2% respectively.

Table 2-17 the Level of Complexity of Timely Financing Unit: % Level of Complexity Hubei Guangxi Ningxia Heilongjiang Total

Easy 3.7 1.1

Relatively easy 11.8 18.8 5.7

General 12.5 25.9 14.8 14.9

Relatively difficult 29.4 31.3 44.4 22.2 32.2

Difficult 58.8 37.5 25.9 63.0 46.0

Since the agricultural operation of the respondents is already on a certain scale, they not only have a high demand for solving the capital insufficiency, but also a relatively high requirement on the scale of fund demand. Of the 75 valid samples, 34 (45.3%) have a fund demand of more than RMB 500,000; only 4 (5.3%) have a fund demand of less than RMB 100,000. Currently, the quota for farm household co-guarantee loans of rural credit cooperatives and postal savings banks in most regions is less than RMB 100,000, so the fund demands of the interviewed farm households cannot be resolved by petty loans or co-guarantee loans, so financial institutions need to innovate in their business at least in the aspect of capital supply quota.

Table 2-18 Borrowing Demand Scale of Farm Households

Borrowing Needs Households Ratio

> 500,000 34 45.3

300,000~500,000 17 22.7

100,000~300,000 20 26.7

50,000~100,000 3 4.0

30,000~50,000 1 1.3

Total 75 100.0

Note: some data of the investigation are missing.

Farm households also mentioned the mismatching between demand and supply with respect to life of loan. Of the 76 valid samples, 40 (52.6%)said they expected the life of loan to be over 3 years, while only 10.5% of the interviewed farm households expected the life of loan to be less than 1 year.

Table 2-19 Life of Loan Expected by Farm Households

Expected Life of Loan Households Ratio

>3 years 40 52.6

1~ 3years 28 36.8

<1 year 2 2.6

Relatively flexible 6 7.9

Total 76 100.0

The loan interest rate expected by the interviewed farm households is extremely low: 69.6% of the farm households expect the loan interest rate to be below 5% and 48.1% of the farm households expect the loan interest rate to be lower than 2%, which is much lower than the national benchmark loan interest rate with a one-year term and equals to the current inter-bank offered rate (SHIBOR of August 7, 2014 is 5.00%).

Table 2-20 Acceptable Loan Interest Rate Expected by Farm Households

Acceptable Loan Interest Rate Farm Households Ratio >20% 0 0.0 10-20% 2 2.5 5-10% 22 27.8 2-5% 17 21.5 <2% 38 48.1 Total 79 100.0

The farm households expect that the borrowing channels can be focused on financial institutions within the system, such as Rural Credit Cooperatives (57.7%), Agricultural Bank (50.5%) and Postal Saving Bank (22.5%), while the role of new rural financial institutions is not so significant (13.5%); with respect to the off-system finance, the channel of borrowing from relatives and friends also plays an important role (12.6%), while underground financial markets are hardly used by farm households as a funding channel.

Table 2-21 Borrowing Channels Expected by Farm Households

Expected Borrowing Channels Households Ratio Agricultural Bank 56 50.5 Rural Credit Cooperatives 64 57.7 Postal Savings Bank 25 22.5 Village and Town Banks 10 9.0 Rural Mutual Cooperatives 5 4.5 Underground Financial Markets 1 0.9 Relatives and Friends 14 12.6 34

According to the asset-liability status of farm households and their purchase of fixed assets, the following two conclusions can be drawn: (1) liabilities are comparatively common among farm households and most of the liabilities arise from the development of production, and can be deemed as benign liabilities; (2) regular finance is the main channel for agricultural financing. Considering the current financing approaches and fund demands of farm households, it is believed: firstly, fund shortage and difficulty in acquiring funds are common among farm households; they are highly associated with each other, and even can be considered as two aspects of one problem; secondly, the farm households have extremely high fund demands, and to some extent, some unreasonable factors may exist, but even if such unreasonable factors are excluded, their demands are still higher than the current service capacity of financial institutions. To solve this problem requires financial institutions to innovate their services and the state to make a system breakthrough.

2.3.2 Agricultural enterprises

1. Basic situation

The number of agricultural enterprises in the sample is 41, of which 32 were established after 2000, one is state-owned, one is collectively-owned, 34 are private-owned, two are joint-stock and two are foreign invested and Hong Kong, Macao and Taiwan-invested. The average registered capital is RMB 25.157 million, with the highest being RMB 199.12 million and the lowest being RMB 500,000. By the end of 2013, the average number of staffs and workers was 95.7 and the average output of main products amounted to RMB 120.81 million (from 35 valid samples). By the end of 2013, the average assets amounted to RMB 114.13 million, the average owner’s equities amounted to RMB 62.221 million, and the average liability scale amounted to RMB 51.92 million (from 29 valid samples).

Table 2-22 Registered Capital of Sample Enterprises

Registered Capital (RMB 10,000) Households ≦100 2 >100& ≦500 5 >500& ≦1000 5 >1000& ≦2000 7 >2000& ≦5000 7 >5000 3

With respect to the industrial distribution of these sample enterprises (29 valid samples), according to the International Standard Industrial Classification (United Nations Statistics Division, May 2004), seven are categorized into agriculture (mainly plantation and cultivation), 15 are categorized into manufacturing industry (agro-product processing and food processing), and four are categorized into commercial industry (agro-product circulation and agro-production means circulation).

Table 2-23 Industrial Distribution of Sample Enterprises

Industry Households Remarks

As is known from data in 2013, the asset-liability structure of these enterprises was relatively healthy, with the average asset-liability rate, average fixed asset ratio and average fixed ratio being 45.5%, 35.5% and 65.1%, respectively. From the angle of industrial features, due to relatively heavy investment in equipment, plants and technology, both of the fixed asset ratio and fixed ratio are relatively high in manufacturing industry; by contrast, the asset-liability ratio is relatively low in agriculture, whereas its fixed asset ratio and fixed ratio are both the highest with the fixed ratio reaching 112.4%. The relatively high fixed asset ratio indicates inadequate working capital of the enterprises and is extremely unfavorable to their daily operation, which is consistent with the difficulty in getting loans and inadequate working capital reflected by the agricultural enterprises during the investigation. The extremely high fixed ratio of agricultural enterprises that exceeds 100% indicates that all fixed assets of such enterprises are purchased with their equity capital, and there is a tendency of severe capital inadequacy.

Table 2-24 Asset Structure of Sample Enterprises (2013)

Plantation and Agro-product Agro-materials Total cultivation Processing circulation

Average total assets (RMB 10,000) 3203.9 15860.0 8931.5 111413.0

Asset-liability Ratio (%) 40.3 46.1 44.6 45.5

Average Fixed Assets (RMB 10,000) 2150.3 4968.6 3936.0 4048.7

Fixed Asset Ratio (%) 67.1 31.3 44.1 35.5

Fixed Ratio (%) 112.4 58.1 79.5 65.1

Average Owner’s Equities (RMB 10,000) 1912.6 8548.8 4952.5 6222.1

Average Total Liabilities (RMB 10,000) 1291.3 7313.1 3979.0 5192.0

The average liability scale of the 29 enterprises amounts to RMB 51.92 million, of which 90.0% is current liabilities and 10.0% is long-term liabilities, showing an extremely high liability structure ratio. There is little difference in current liability and long-term liability structure among different enterprises, but the difference in specific liability items is relatively big. With respect to current liabilities, the ratio of short-term loans in the total liabilities is relatively high among manufacturing and commercial enterprises (51.9% and 47.8% respectively), while the ratio of short-term loans is relatively low (24.8%), but the accounts payable is extremely high (60.0%) among agricultural enterprises, which

Table 2-25 Liability Structure of Sample Enterprises

Plantation and Agro-product Agro-materials Type of Liabilities cultivation processing circulation Total

Average Liabilities 1291.3 7313.1 3979.0 5192.0

Liability Structure Ratio 6.34 11.15 3.75 9.0

Current Liabilities Scale (RMB 10,000) 1115.4 6711.3 3140.8 4675.1

Ratio (%) 86.4 91.8 78.9 90.0

Scale (RMB 10,000) 320.9 3795.4 1900.0 2575.5 Short-term Loans Ratio (%) 24.8 51.9 47.8 49.6

Scale (RMB 10,000) 774.8 2867.5 1203.0 2060.6 Accounts Payable Ratio (%) 60.0 39.2 30.2 39.7

Long-term Liabilities Scale (RMB 10,000) 175.9 601.8 838.3 516.9

Ratio (%) 13.6 8.2 21.1 10.0

Scale (RMB 10,000) 175.9 601.8 723.5 501.1 Long-term Loans Ratio (%) 13.6 8.2 18.2 9.7

Sum of Long and Scale (RMB 10,000) 496.8 4397.2 2623.5 3076.6 Short-term Loans Ratio (%) 38.5 60.1 65.9 59.3

Investigation indicates that the channel for sample enterprises to get loans from financial institutions is quite narrow. The manufacturing enterprises have relatively diversified approaches to get institutional loans and have received loans from all major financial institutions; yet, the planting and cultivating enterprises have a relatively limited source to get loans and the two loans offered by China Development Bank are both policy-oriented loans, so their sources of commercial finance are limited to Rural Credit Cooperatives and local financial institutions only. As observed in the investigation, large-scale state-owned financial institutions hardly provide such services to the mentioned enterprises.

Table 2-26 Structure of Loans from Financial Institutions of Sample Enterprises

Financial Plantation and cultivation Agro-product processing Agro-materials circulation Total institutions Scale Households Scale Households Scale Households Scale Households Industrial and Commercial Bank of China 4850 4 4850 4

Bank of China 2870 3 2870 3

Agricultural Bank of China 10275 3 7100 1 17375 4

Agricultural Development Bank of China 14985 3 14985 3

Rural Credit Cooperative 400 3 200 1 600 4

New Development Bank 1100 2 500 1 1600 3

Other financial 20 1 21565 5 21585 6 institutions

Total 1520 6 68245 22 7100 1 76865 29

*Other institutions: local banks, Postal Savings Bank, local investment companies, new rural financial institutions, etc., mostly from local banks such as Bank of Ningxia, Longjiang Bank and Guangxi Beibu Gulf Bank.

2.4 Features and problems of supply and demand of agricultural

funds

1. The current ratio (0.42) of agricultural enterprises is quite low, which causes significant adverse impacts on the daily operation and solvency of enterprises.

Based on the asset-liability status of enterprises, their operation status and financing environment can be simply assessed. In 2013, the current ratio of agricultural food processing, food manufacturing and beverage manufacturing in China was 1.22, 1.26 and 1.26 respectively, while the average current ratio of the sample enterprises was 1.15. Among these sample enterprises, the current ratio of manufacturing enterprises (1.20) was quite close to that of commercial enterprises (1.22), but the current ratio of agricultural enterprises was excessively low (0.42), which had significant adverse impacts on their daily operation and solvency.

Table 2-27 Current Ratio of Sample Enterprises

Items Current Ratio Plantation and cultivation 0.42 Agro-product processing 1.20 Agro-materials circulation 1.22 Total 1.15 2. There is always a gap between the supply and demand of funds, and the approaches to solve the problem differ by industries

Table 2-28 Approaches to Fill the Fund Gap

Number of enterprises Approaches Plantation and cultivation Agro-product processing Agro-materials circulation Loans from financial institutions 4 16 4 Private capital investment 3 8 2 Inter-enterprise financing 1 5 4 Private loans 2 1 5 National finance 1 4 4 Self-raised funds by staff and workers of the enterprise 1 1 1 Note financing 1 Foreign capital 1 These loans are basically used by these enterprises in the same way. Infrastructure construction and technical reform remain to be the major motives for enterprises to apply for loans, and manufacturing enterprises is the only category that depends relatively more on bank loans for working capital.

Table 2-29 Usage of Loans by Enterprises in Recent Three Years

Applications of Loans Plantation and cultivation Agro-product Agro-materials circulation processing Capital Construction 5 4 4 Technical Reform 3 10 1 Distribution of Salaries Make-up of working capital 7

3. Difficulties in getting loans is still the major concern of enterprises and the solution to the shortage of collateral is desperately needed

The major financing channels for the sample enterprises are formal financial institutions, but they also agreed there are certain difficulties in obtaining loans. Of the 37 enterprises, 15 (up to 41%) considered it was relatively difficult or extremely difficult to get loans; which was more representative in the 8 plantation and cultivation enterprises, 6 of which said it is relatively difficult or extremely difficult. As to the reasons for difficulties in loans, the respondent didn’t said much about the outlet 39

Table 2-30 Difficulties in Loans and Degree of Demand Satisfaction

Items Plantation and Agro-product Agro-materials cultivation processing circulation

Having Fund Gaps in Recent 3 Years 6 17 6

Difficulties in Extremely easy 1 getting bank loans Relatively easy 2 2 General 2 12 3

Relatively difficult 5 5 3

Extremely difficult 1 1

Major Reasons Lack of local financial institutions 2 for Loan Difficulties Excessively high requirements for 3 14 3 loans by financial institutions

Complicated procedures in 2 1 getting loans

Relatively high loan interest rates 1 1

Excessively high extra cost of 1 1 loans

Degree of Basically satisfied 5 11 2 Satisfaction of Loan Demands Partially satisfied 1 9 4 Rarely satisfied 2 1 2

4. The sample enterprises show certain preferences in financing channel, financing mode and supporting mode respectively

According to their operation experiences, the sample enterprises have expressed their ideas about financing demands and the way to improve financial services. Most of them (62.2%) indicated that loans from financial institutions would remain to be the major financing channel in the future, meanwhile (18.9%) they also expressed their hope for state financial support; in terms of financing modes expected by these sample enterprises, credit loans is strongly favored (87.5%); as to financing support modes, loans with discounted interest service is more preferred by the sample enterprises (73.0%).

Table 2-31 Expectations of Sample Enterprises in Satisfying Loan Demands

Agro-product Agro-materials Expectation in Satisfying Loan Demands Plantation and cultivation processing circulation

Loans from financial institutions 7 12 4

Self-raised by staff and workers 1

Expected financing State financial input 1 3 3 approaches Capital market 1 financing

Foreign capital 1

Stock exchange 1 financing

Expected financing Credit loans 1 18 8 mode Mortgage 2

Guarantee 1

Pledge 1

Loans with discounted interest 6 16 5 Expected financing Loan guarantee or 1 1 support mode loan insurance

Project fund support 1 5 2

5. Enterprises show no obvious preference in joining in enterprise alliance or supply-chain financing

Of the 37 sample enterprises, 14 (37.8%) have joined enterprise alliances of their respective industry or region and 50% of them indicated that the alliance they had joined could help with loans or guarantee. As a whole, enterprises show no strong preference for one-time loans or cycle loans in industrial chain financing, but the preference of different enterprises is inconsistent in this regard, enterprises of the plantation and cultivation category (85.7%) in particular show extremely strong preference for one-time loans, which may be associated with the nature of their production.

Table 2-32 Development of Industrial Chain Financial Services of Sample Enterprises

Plantation and Agro-product Agro-materials Type of enterprises cultivation processing circulation Joining an enterprise alliance or not? Yes 4 8 2 Status of financial services Providing loans 1 1 development by enterprise alliance Providing guarantee 4 1 Not providing 3 4

The innovation in rural financial products and services follows the rule that demand creates supply. Modern agriculture, characterized by large-scale industrialized production, requires not only scale operation of lands and intensive management of the labor force, but also large amounts of money, so as to meet consumers’ demands and increase the producers’ income. Under this trend, new types of business entities (such as family farms, farmers’ cooperatives, and agro-related business) with larger production scale and higher capital requirement compared with general famers emerge and become major carriers for the development of modern agriculture.. Attention has been given to innovations in financial products and services regarding new business entities gradually and financial supporting policies exclusive to new business entities have been made by competent authorities. Under the guidance of People's Bank of China and China Banking Regulatory Commission, several regions have been actively exploring innovations in rural financial products and services and worked out diversified rural financial solutions. Some provinces have implemented rural land mortgage, represented by Chongqing City, and Lishu County in Jilin Province. As a pilot county, Tiandong County in Guangxi Zhuang Autonomous Region has implemented omni-directional reform and innovation. Beijing City has innovated the pattern of loan for farmer specialized cooperatives by various types of “Joint Guarantee Loans”. Besides, supply chain financing is being carried out in several places.

3.1 Mortgage and guaranteed Loans

After the Third Plenum of the 17th CPC Third Plenary Session, the understanding and policymaking regarding the real rights or property attribute of resource assets such as agricultural lands and forest lands have been strengthened. The decision made at the Third Plenary Session of the 18th CPC Central Committee explicitly stated that “farmers are granted the right to possess, use, benefit from and circulate their contractual land management rights as collateral or guarantee”, which further deepened the understanding of the decision of the Third Plenum of the 17th Central Committee; that is “farmers will be granted more sufficient and guaranteed land contractual management rights”, and “to the land contractual management rights will be perfected”. “The Guide to Provide Financial Services to New-Type Business Entities Including Family Farms” ([2014]Yin Fa, No.42) issued in 2014 by People's Bank of China requires banking institutions to “make greater effort to innovate rural financial products and services, and provide diversified financing solutions according to the differentiated capital demands varying between different types and between the different scales of operation of new agricultural business entities including family farms”, which includes broadening the scope of collateral.

3.1.1 The practice of rural land financialization in Chongqing Municipality

As the only municipality in central and western China, Chongqing was authorized as a pilot area for urban-rural comprehensive reform, and has a strategic position in promoting regional coordinated

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas development and advancing the reform and opening up. Under the guideline of “actively promoting reform experiment and constructing the mechanism to balance urban and rural development”, Chongqing has been actively exploring the reform experiment of rural land financialization. On November 23rd 2010, Chongqing government introduced the “Recommendations on accelerating rural financial service reform and innovation” ([2010]Yufu Fa, No.115), which set forth definite work goals for rural financial service reform and innovation, that is “to innovate rural financial institutions with focus on comprehensively promoting property rights mortgage financing including the land contractual management rights, rural residential housing and forest; innovate and perfect rural finance organizing system emphasizing on the development of new rural financing institutions; innovate supporting system of rural financial service centering on the advancement of rural credit and equity circulation and the establishment of rural financial risk sharing mechanism, so as to provide comprehensive financial support to the integrated development of rural economy”. Relevant departments of Chongqing have introduced series of normative documents, and the Chongqing Mode of rural land financialization has been initially formed. The main practices of Chongqing are as follows: Within the city of Chongqing, land contractual management rights can be used as collateral to apply for a loan no matter how these rights were obtained. Similar to other forms of bank credit, rural land mortgage loan should be concerned about the risks of the collateral (land contractual management right), as well as the evaluation of the borrower’s credit and the benefits of the industrial projects. The borrower should enjoy a good credit standing, and observe disciplines and laws; the agricultural industry projects to which the loans are issued should achieve good benefits, and the first source of repayment should be fully guaranteed. When dealing with land contractual management right mortgage, the value of which should be determined by the negotiation between the parties to the mortgage or by the assessment of appraisal agencies approved by the parties. The determination of the collateral value need no assessment from professional appraisal agencies in principal if the loan amount is within 1 million yuan, and can be done by the negotiation between the lender and borrower; if the loan amount is over 1 million yuan, the assessment could be entrusted to a qualified professional appraisal agency, and fee thus incur will be paid according to the minimum standard. Rural land mortgages are publicly displayed if they are registered, which is an important condition for the right to rural land mortgage to take effect. The registration agencies are the competent administrative departments. The registration fees may be deducted, exempted, or charged pursuant to the minimum standard. Asset management companies could be established with the support from Chongqing agricultural guarantee companies, and be responsible for disposing non-performing assets arising from rural land mortgages. If the performance period expires and the borrower fails to repay the loan, or the mortgage is realized according to the agreement made by the parties, the mortgagee and mortgagor can dispose the mortgaged property by negotiation, the proceeds obtained from the disposal will be paid to mortgagee in priority, and the value exceeding the obliges’ rights will be attributed to the mortgagor, and the gap will be paid off by the obligors. If no agreement upon the negotiation is reached, the parties to the mortgage can apply for arbitration to financial arbitration institutions or institute a legal proceeding to people's courts as agreed in the contract. The collateral of rural land mortgages can be disposed by auction, selling, circulation and so on. All things being equal, the collective economic organization and their eligible members have the right of first refusal. The land contractual management right should be disposed within the collective economic organizations. If they are

3.1.2 The practice of land revenue guaranteed loans in Jilin Province

Jilin Province is a traditional major agricultural province, while the proportion of loans to farm households is only 6% of the total loans. In order to deepen the financial reform, promote financial innovation, improve financial services, and further strengthen the support of finance to “Three Rural Issues”, Jilin Province has proposed that they would “constantly broaden the scope of collateral, actively improve the supporting management measures, and propel the pilot project of mortgage and pledge loans of forest rights, rural land contractual management rights, farm machinery and homestead”, and actively explore new model of rural land financialization--land revenue guaranteed loans. In this model, farm households transfer their land contractual management rights to real rights finance companies which make commitments to financial institutions that they will be jointly liable. “This model takes the future income rights of land as a guarantee of farmers’ loans for the first time, and breaks the patterns of taking physical objects as collateral or joint guarantee by several other farmers.” Jilin Province also hopes to make a breakthrough with this model in dealing with the rural financial dilemma and solving the intractable problem of rural-urban financial dualistic structure it brings, and explores a fundamental way to solve the “Three Rural Issues”, in order to balance the urban 45

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas and rural development, and provide local practices with reference value for breaking rural-urban dualistic structure. The key practices of Jilin model are as follows: County-level governments establish Real Rights Financing Service Center and Real Rights Financing Agricultural Development Co., Ltd (“RRFAD”). They are the same organization with two names, and are the joint financing platform led by governments. A farmer household transfers his land contractual management rights to a real rights financing company, and meanwhile the company subcontracts the land contractual management rights to that farmer household. After the contract is signed, the farmer household should return the original copy of “Certificate of Rural Land Contractual Management Right” to the issuer who will keep it. The contracting parties apply for change of registration on the land contractual management right register book and Certificate of Rural Land Contractual Management Right, indicating that the new land management right contractor is the real rights financing company. The transfer amount that the company should pay to the farmer household and the contracting amount that the farmer household should pay to the real rights financing company will offset and no gap will be left. When the farmer household applies for a loan from a financial institution, the real rights financing company will sign a “guarantee contract” that provides joint guarantee liability with the farmer household, and the real rights financing company guarantees the liability to the financial institution with responsible property consisting of land circulation earnings, capital owned by the company and credit revolving assurance fund set up by the government. If the farmer household repays the principal and interest of the loan to the financial institution without delay, the transfer contract of land contractual management rights between the farmer household and the real rights financing company will be terminated automatically. The farmer household delivers the discharge issued by the financial institution who has offered the loan to the real rights financing company, and the company is obliged to apply for alteration registration to the issuer and the land contractual management right will return to the farmer household. If the farmer household fails to repay the loan on time, the subcontract relationship between the two parties will be terminated automatically. At this time, the real rights financing company will pay back the amount of loan for the farmer household, and such amount will offset the equal part of the transfer amount. Meanwhile, the real rights financing company is entitled to solicit a contractor who offers the highest price. The least unit of subcontracting duration is “year” and the estimated transfer amount will be subject to principal and interest of the loan. The farm household is entitled to take part in the bidding, and on equal terms he has the priority to get the contractual right. If the amount obtained from the subcontracting reaches or exceeds the principal and interest that the original farm household has borrowed, the transfer contract will be terminated automatically, and the land contractual management right will return to the farmer after the subcontracting period expires. The part of the aforesaid amount that exceeds the principal and interest of the loan lent to the original farmer household will be turned over to the farmer. If there is money left over from the subcontracting after deducting the principal and interest of the loan, the real rights financing company is obliged to pay this left part to the farmer household. In order to guarantee the survival interest of the farmer, the farmer household could only use 2/3 of his land contractual management right for land revenue guaranteed loans, and there is still 1/3 of the lands left for provisions so that the lands will not be lost and the basic living will be guaranteed even if he couldn’t pay back the loan on time and the land contractual management right is subcontracted. During the period of subcontracting, subsidies related to the land will still belong to the original farmer

Rural Land Contracting The real rights financing The company guarantee contract

Collecting new contractor

Transfer of Repayment possession

Application/repayment of loan Commercial Banks Farm households

Offering loan

Chart 3-1 The Process of Land-Revenue Guaranteed Loans in Jilin Province

3.1.3 Financial innovation in the reform of the collective forest rights in Fujian

Province

Fujian province is rich in forest resources with a forest coverage of 3.1%, ranking the first place in China. In 2003, Fujian first implemented the reform of the system of collective forest rights, and issued a unified forest right certificate. The forest land management right and the ownership of forest recorded by the certificate can function as capital, and can be used in mortgage finance as collateral. In recent years, Fuzhou Branch of the People's Bank of China has enhanced their cooperation with forest departments and promoted the innovation of forest right mortgage business, and has achieved good effects in supporting agriculture. 1. Fuzhou Branch of the People's Bank has joined hands with the forestry administration to organize the enactment of the “Guidance on Promoting Financial Innovation and Facilitating the Development of Forestry” endorsed by the provincial government, which guides financial institutions participating in innovation and as a special credit policy, provides policy support for the innovation. 2. It has promoted the construction of supportive service system involving forest right registration, evaluation, and circulation, and established 74 forest right registration management organizations basically covering all the forest regions in the province and 66 county-level forest right trading platforms, providing services for forest right registration and management, assets appraisal and circulation of forest resources. 3. It has incorporated forest insurance into pilot policy-oriented insurance, which has effectively 47

3.2 Combined loans by the interaction between government, banks and insurers

3.2.1 “Tiandong Model”

On the premise of reinforcing rural financial infrastructure in local towns and major administrative villages, Guangxi Tiandong County has established its rural financial service supporting system of “ One Office, One Right, and One Rating ”, constructed a triune mechanism of “ Insurance + Guarantee + Paymen t” serving the “Three Rural Issues”, and formed the duplicable, easy-to-popularize, and sustainable “Tiandong Model”, relying on a small amount of financial input as leverage. The basic components of this model are as follows: One Office : The Financial Service Office on “Three Rural Issues” was set up in 162 administrative villages of the county, and the office is composed of the two “village committees”, college-graduate village officials and rural bellwethers, and is responsible for assisting the banks and insurance companies, and servers as a bridge and bond to connect financial institutions and rural residents. It has brought the work of credit collection, pre-loan investigation, loan collection, insurance services, and finance knowledge publicity to the village level, and solved the problem of bank outlet and manpower shortage. By 2013, the loans issued to farm households through The Financial Service Office for Addressing “Three Rural Issues” had reached 811 million yuan among 32,206 households. One Right : The rural property right are used for financing in the market; that is to say, the county activates the rural production factors with support from Tiandong County Rural Property Trading Center. The rural residents are guided to handle rural property circulation, rural property mortgage loans, rural asset appraisal, and policy and regulation consulting, etc. So far, the center has conducted 48

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas 57 rural property transactions with the turnover of 187.16 million yuan (among which: 26 are land circulation certificating involving 14, 883.82 mu and a turnover of 153.86 million yuan; 30 are mortgage loans of rural property rights including forest rights, land management rights, and production facility, farm houses and beneficiary rights, etc. with an amount of 32.09 million yuan; 1 is to dispose the banks’ 1.212 million yuan non-performing assets ); and organized 33 rural asset appraisals with the value of 117.58 million yuan. One Rating : It means farmer credit rating. On the basis of rural credit reference system established in 2009, Tiandong County updated 83 thousand farm households’ information of the county and rated their credit in 2013, and incorporated the county’s 1,251 small and micro businesses, farmer specialized cooperatives, and specialized households of crop and animal production into credit rating system. Those who are rated as high-grade are offered unsecured loan support. Tiandong’s credit system construction was appreciated by Joint Inter-Ministerial Meeting of National Social Credit System Construction and its successful experience was popularized to 14 cities in Guangxi and several other provinces. In 2013, Tiandong-model credit system was duplicated in Baise Youjiang District, Tianyang County, and Pingguo County, and in 2014 it will be applied to other 8 counties in Baise City. Insurance : The policy-oriented agricultural insurance is vigorously promoted in the county. The Rural Insurance Service Station has been established in all the 10 townships in the county, insurance service points has been set up in all administrative villages (including communities), and the village insurance service network has realized fully coverage. Agricultural insurance covers characteristic agricultural industries such as sugarcane, banana, mango, bamboo, rice, and wood, and underwritten areas reached 395 thousand mu in 2013. Left-behind children insurance and broiler chicken insurance were developed in 2013. The yearly premium revenue of policy-oriented agricultural insurance was up to 9.6415 million yuan of that year with a year-on-year growth of 14.8%; the compensation amount was 2.509 million yuan, and the loss ratio was 26.02%. The vegetable price index insurance was set about to be promoted on January, 2014, which is initiated in Guangxi Zhuang Nationality Autonomous Region. Guarantee : Guarantee institutions have a role to play. Tiandong Farmers Aid Guarantee Company was set up to lower the bank’s credit risks. So far, the loans guaranteed by the company have added up to 140 cases with a loan balance of 76.78 million yuan. At the same time, public financial funds can be leveraged with the agricultural credit risk compensation mechanism. The risk compensation fund with an amount of 8 million yuan was established according to a certain proportion of the amount of agriculture related loans, and it is used for the risk compensation of various types of financial institutions’ loans serving “Three Rural Issues” according to the principle of “earmarking a fund for its specified purpose only, retaining the surplus, rolling the use, and no reimbursement for the overspending”. So far, the fund has been used for the reimbursement for the bad debt of 615 thousand yuan of ABC’s petty loans, the bad debt of 730 thousand yuan of rural commercial bank’s agriculture related loans, and bad loans of 88 thousand yuan of “ Xiangzhouhongxiang Rural Mutual Financial Cooperative”. Payment : The construction of payment system has been reinforced to tackle the problem in settlement and deposit and withdrawal of pretty cash of farm households. By 2013, banking financial institutions set up 45 physical outlets, and installed 90 ATM machines, 1153 POS machines, and 940 telephones for bank transfer, with all the indexes higher than the national average level. On this basis, Tiandong Rural Commercial Bank installed 322 Guishengtong payment terminals in the whole county,

3.2.2 “Shouguang Model”

Generally speaking, “Shouguang Model” means that the government sets up a small business association and a policy-oriented guarantee company, the bank innovates credit systems and financial products, and then eligible small businesses are selected to offer the credit support. It is mainly reflected in the innovation of rural financial reforms with various means of mortgage to ensure farmers’ and small businesses’ credit demands. In 2008, Shouguang City issued a series of pilot measures for rural financial reform, including “Interim Procedures for Greenhouse Mortgage Loan in Shouguang City”, “Interim Procedures for Rural Housing Mortgage Loan in Shouguang City”, and “Interim Procedures for Land Use Right Mortgage Loan in Shouguang City”, etc. On May 2009, government of Shouguang City issued “Policy Measures for Accelerating the Development of Rural Financial Reform”, which stipulates that the applicants who are in the need of 4 vegetable greenhouse mortgage loans, land use right mortgage loans and rural housing mortgage loans will get the greenhouse ownership certificate, the land use right certificate and the house ownership certificate in priority issued by the registration authority; the farmers who develop production and establish economic entities and are eligible for vegetable greenhouse, rural housing and land management right mortgage loans will enjoy preferential loan interest rates within the current interest rate range; financial institutions who carry out the aforesaid mortgage loan business will be given risk compensation rewards based on 1.5% of the annual average amount of new vegetable greenhouse, rural housing and land management right mortgage loans; if there are unliquidated obligations for the borrowers when the performance period expires, the registration authority will handle the ownership transfer procedure in priority without transfer fee; qualified villages are encouraged to establish collateral buyback mechanism for the farm households who have applied for loans in case of foreclosures due to temporary financial difficulties; the progressive situation of vegetable greenhouse, rural housing and land management right mortgage loans is included in the year-end performance assessment of the townships(street offices). As is known, the Bank of Weifang, the Shouguang Rural Commercial Bank, the Shouguang Rural Bank, the local Agricultural Bank of China, and the local Postal Savings Bank of China have conducted vegetable greenhouse mortgage loan business successively. According to the official statistical data, by the end of June 2013, Shouguang City Economic Management Bureau had issued 1,047 vegetable greenhouse ownership certificates for 1027 farm households free of charge, and 127 vegetable greenhouse ownership certificates for 114 agricultural dragon-head enterprises and farmers’ cooperatives, offering greenhouse mortgage loans of 600 million yuan. Apart from the vegetable greenhouse mortgage loan, Shouguang City has also introduced the rural housing mortgage loan similar to the former, and primarily targets at farm households who develops industrial management of agriculture and self-employed and private businesses. In addition, the available collateral for 50

3.3 Loans for cooperatives with joint guarantee: the case of

Beijing

3.3.1 Cooperative loans with joint guarantee by cooperatives

Loans jointly guaranteed by farmers’ cooperatives are a new financial product exclusively for the cooperatives, developed by the Beijing Municipal Research Center for Rural Economy and Beijing branch of the Agricultural Bank of China in 2012. Loans jointly guaranteed by farmer cooperatives means that at least three farmer cooperatives form a joint-guarantee group and apply for credit from Agricultural Bank of China in the name of the group, with the joint responsibility of guarantee borne by all members. The legitimate appliers of this loan are those demonstration cooperative with at least county-level certification, who have signed cooperation agreements and letters of commitment on joint guarantee with other group member. The credit amount for a single demonstration cooperative of municipal level or above shall not exceed 8 million yuan, and the amount for a single demonstration cooperative of county level shall not exceed 5 million yuan. What’s more, the sum of all the loans of joint guarantee group members cannot exceed the sum of guaranteed amount of the joint guarantee group members. These loans are mainly used for circulation, seasonal and temporary liquid capital demands in the process of the borrower’s regular production and business. The term of the loans should be no more than one year in principle, and the longest term is two years. The loan whose term is over one year should be reported to the branch bank for approval. The interest rate of the loans follows related regulations of People’s Bank of China and Agricultural Bank of China. Meanwhile, certain preferential policy can be applied to the interest rate when the loans are in the scope of national policy for supporting agriculture. As to the repayment method of the loan, it can be determined by the characteristics of cash flow of the borrower and the requirement of risk control. When the term is less than half a year, periodical payment of interest and one-time payment of principal when the term expires can be adopted; when the term is more than half a year, the payment of principal and interest 51

3.3.2 Cooperative member loans with joint guarantee by cooperative members

This is an innovative product introduced by Huifeng Village and Town Bank of Miyun County in 2010. Loans of this model are targeted at members of the cooperative, and require that the member should have one year or above occupational experience in this industry or in relevant industrial field. The guarantee group should be composed of four to eight members of the cooperative, and the members within this group provide cross-circulation to each other, and the cooperative should provide guarantee for the loan. The guarantee amount is about 50 thousand to 500 thousand yuan. As for the chairman or council members of cooperative, and core members who hold more than 20% of the cooperative’s share and play significant role in the operation or management of the cooperative, the amount of loan can be up to 700 thousand yuan with term of one year. If the cycle of production in an industry is comparatively long, the loan term can be extended to two years. According to the production cycle and the cash backflow, the repayment method can be flexible, for example on a weekly, fortnightly, monthly, quarterly or semi-yearly basis, which can release the repayment pressure of the borrower. Since 2010, Huifeng Village and Town Bank of Miyun County has introduced a loan product mainly for the members of the cooperative. By the end of 2013, this program has accumulatively issued loans of 35 million yuan, covering 170 members from more than 40 cooperatives.

3.4.1 Grain supply chain loans jointly supported by financial enterprises in

Henan Province

The loan for grain supply chain with joint financial support in Henan province is to integrate the financial resources of agricultural financial institutions, and take the principle of “grand combination and delicate division of work ”. Focusing on the grain production, purchase, and processing industries, and taking the core members of order-based agriculture, grain purchase and processing enterprises and food enterprises as emphasis of the support, this model can develop a strategic cooperation supported by industrial chains, and realize the seamless connection of credit support between each link in the grain supply chain, so as to promote the agriculture to enter a virtuous cycle in development. The detailed operational approaches are as follows: 1. A tripartite agreement between the enterprise, the bank and the core members of the association is signed, and the mechanism of information communication is established, so as to ensure the closed operation of loans and the capital linkage of planting link and purchase link. 2. The purchase funds will be lent mainly to the core members and small farmers, which will be guaranteed by existing orders of the member companies. The circulation of capital of banks, enterprises and core members is realized through a special bank account closely, which can enhance the approval efficiency and the loan pertinence. 3. The grain processing enterprises can receive capital support according to the supply and marketing contract with the food enterprises and the grain pledge, so as to give loan support to the whole course including grain planting, purchase and processing . 4. Food processing enterprises are offered corresponding liquid capital loans, which help to expand the market, and process local grain products in priority, thus promoting the development of the whole grain industry. The main characteristics of this model are as follows: 1. The systematic risk of the agricultural industry chain has been considerably reduced. The grain industrial chain financing takes the industrial chain as the tie, and forms a comparative perfect financing system, which can decrease the fluctuation of grain production in a single link and reduce the credit capital risk of the bank. 2. The features of each bank’s credit products will be fully utilized. With the signing of the strategic agreement, banks can provide targeted capital support to farmers, enterprises and related links within the business scope permitted by their own credit policy, which will lead to joint force and realized a win-win situation. 3. Close running of capital. Conduct close running to the capital in the grain planting and purchase links, and ensure the special fund is used for specified purpose only, so as to ensure the capital withdrawal.

COFCO

What is supply chain finance? Quoted from the words of Guan Xihua, president of Longjiang Bank, it is to bind the upstream and downstream medium and small-sized enterprises, the farmers, and the consumers together, centered on the core enterprises of the supply chain, and provide systematic financial solutions to support agricultural supply chain. In 2009, with Biochemistry Energy (Zhaodong) Limited Company of COFCO at the core, Wuliming Model was successfully launched in this area, which marked a new agricultural financial product connecting finance and agricultural industrial chain in a real sense in the history of COFCO. In practice, the farmer buys a share of the cooperative with his land, and the cooperative uses the land contractual management right as the hypothecation to get a loan from Longjiang Bank by taking advantage of the trust product related to land transferring right introduced by COFCO Trust Corporation; Longjiang Bank helps the cooperative and COFCO to reach the cooperation in supply order. This is done as follows: COFCO collectively purchases the corn of Wuliming, and Longjiang Bank deducts the principal and interest of cooperative’s loan from the corn income paid by COFCO. This model implements closed circulation of the credit capital, which integrates the farmer, the cooperative and agricultural production enterprise into a whole modern agriculture industrial chain. Based on Wuliming Model, Longjiang Bank has been innovating its financial products persistently. At present, it has five models and 17 products related to agricultural supply chain financing. These five models are: agricultural materials company plus farmer, company plus cooperative, cooperative plus farmer, purchase and storage company plus farmer, and core enterprise plus medium and small-sized supplier, which match the four links in agricultural industrial chain: production and sales of agricultural materials, agricultural product planting and breeding, storage and processing, and the production of branded food, and promote the coordinated operation of every link. The products include: planting loan, breeding loan, agricultural material loan, grain trade loan, agricultural production loan for borrowers with large scale land operation, agricultural machinery loan, Jinyi loan for private enterprisers with no legal personality, persons engaged in individual business of industry and farmers related to agriculture, Golden Land loan for state-owned enterprises who have the operation right, use right and profit right of the state-owned land in Heilongjiang province, the Jinqiaotong loan only used to purchase merchandise from contracted producer for the agricultural distributors who have signed agreement with the producer and the bank, Rongtongcang loan for agricultural entrepreneurs engaged in trade, production and processing, etc. The key point of the innovation of Wuliming Model lies in the trust cooperation between Longjiang Bank and COFCO. Based on the land use right trust plan developed with the support from industrial chain, they hypothecate the land trust right to the bank, which not only avoid the legal and policy risks, but also realize the effective extension of mortgage system. What’s more, the “bank + cooperative + farmer + dragon-head enterprise” cooperative model has solved the problem of high transaction cost when the bank directly issues loans to farmers. Meanwhile, the participated entities bear their responsibility respectively, defusing the high risk of agricultural credit.

In recent years, according to the requirement of The Guidance for Promoting Rural Credit System Construction enacted by People’s Bank of China, each branch of it has explored to set up a credit evaluation system for farmers referring to the local situation, and active progress has been made. Thus, a batch of work methods and models with special characteristics appear. Among these, Lishui city has effectively advanced the rural credit system construction by making unified planning, unified standards and unified action and taking the evaluation of rural credit grade as the breakthrough point, following the principle of “government leadership, People’s Bank of China dominated, multi-party involved and the mutual benefit”. Thus, Lishui city has become the first prefecture-level city with all of its administrative villages accomplishing household credit grade evaluation nationwide. As the pilot county of financial reform of People’s Bank of China, Lishui city of Zhejiang province is representative in the construction of rural credit system and the innovation of agricultural loan products and services, and its practice is called the “Model of Zhejiang Lishui”. 1. Construction of rural credit system. Conduct “tripartite joint evaluation” to assets evaluation, credit grade evaluation and the credit amount assessment to build a credit grade evaluation system; make “tripartite joint movement” in credit loan, mortgage loan and joint guarantee loan to build an evaluation result operation system s; implement the “tripartite joint” of government, bank and farmer to build an tripartite collaboration interaction system. 2. Construction of mortgage guarantee system. Actively innovates the model of mortgage guarantee combining local reality. Focusing on the forest ownership mortgage, farmer’s house mortgage and the movable property mortgage, explore and promote a diversified mortgage guarantee model of “two cards, two certificates and mortgage with various objects”. 3. Construction of financial service system. According to the goal of building a rural financial service system with “multi levels, wide coverage and sustainable development”, perfect the operation and management mechanism and the layout of service outlets, to satisfy the diversified demands of farmer loans. After various efforts, the credit assessment of farmers of more than 15 thousand villages from 3453 administrative villages in Lishui City has been finished completely; 380.3 thousand farmer credit information files has been built, and 91% of the farmers has been evaluated; 330 thousand credit households, 697 credit villages and 20 credit towns has been evaluated, which effectively consolidates the foundation of agricultural work supported by finance.

3.6 A typical example of rural financial payment system reform:

Shouguang City of Shandong Province

It will help actively promote the upgrading and innovation of rural financial service and stimulate rural consumption to improve rural payment service environment, to smooth the channel of rural final payment and to accelerate capital circulation. In 2009, People’s Bank of China organized work to improve rural payment service environment by means of pilot counties. According to the local 55

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas economic level, the branches of People’s Bank of China in every province (autonomous region, municipality directly under the Central Government, city specifically designated in the state plan) divided the counties into three categories: relatively high, ordinary and relatively low, and chose one or two counties as the pilot county to improve the rural payment service environment. During the exploration of suitable methods, it has used the experience of promoting work in all areas by drawing upon the experience gained on key points and explored a lot of experience and construction models with different features, which steadily drive for the improvement of the rural payment service environment nationwide. As the famous town of vegetables in China, Shouguang City of Shandong province has fully engaged in the construction of rural payment service environment since 2009. It has gradually formed the Shouguang Model of “agriculture, rural areas and farmers and the medium-small enterprises development supported by the county’s financial innovation based on the principles of “central bank driving, government support, bank innovation, market leading and the society participation. This model is of great significance in demonstration and popularization. 1. Emphasis on the improvement of the payment tools in Shouguang vegetable wholesale market Firstly, the county has proposed the trading portfolio of “special POS + online banking”. Vegetable buyers can use the Golden Spike debit card and sweep the card directly on the POS in the electronic final payment center of the market to transfer money to the bank account of the electronic final payment center of the vegetable wholesale market. When the seller collects his money, the vegetable wholesale market will directly transfer the payable capital to the seller’s Golden Spike debit card in time using the paying agent function for single transaction of the online banking. Secondly, the county has introduced the Co-Branded Card— Golden Spike Agri-products Logistics Park Card with the function of final payment within the market and the function of banking card. One side of this card has a magnetic stripe, which records the bank saving status of the client; the other side has an IC chip, which records the transaction status of the client within the market. The “magnetic stripe” and the “IC chip” transfer money through “a circle saving (withdrawal) machine”. This model of final payment is the first in national large scale wholesale markets, and has replaced the traditional model of cash transaction that had lasted for more than twenty years in the whole vegetable transaction. 2. Innovation of the final payment method for farmers who hold a multi-function card Since 2009, People’s Bank of China has been actively driving Shandong branch of Agricultural Bank of China and the government of the Shouguang city to co-conduct the pilot work of “Huinong Card”. The Agricultural Bank of China’s Huinong Card not only has the common functions as a banking card, but also has the function of small loans for farmers, undertaking the subsidies of every policy that supports agriculture and benefits farmers. As for the situation of lack of outlets in rural areas, the Agricultural Bank of China has cooperated with the government of the town, and set up financial service stations supporting agriculture, rural areas and farmers at the village committee, at the supermarket providing agricultural materials service and at the village clinic of every village. Thus, every station is equipped with a telephone for bank transfers, and every household has been issued Huinong Card. 3. Introducing farmers’ self-service terminals and innovating the payment model of “farmers’ card (bankbook) plus self-service terminal”. Shouguang Rural Commercial Bank initiated the pilot work to develop the “farmers’ self-service terminal” in Shandong province, and installed these terminals in the appointed farmer’s houses. This

3.7 Commentary

3.7.1 Financialization of resources assets such as farmland

On the whole, the financialization of resources assets has widened agricultural financing channels, and achieved good effects in solving loan difficulties of new business entities and farmers. However, since its scale is small and it is in the pilot stage, some problems in system and mechanism need to be improved and perfected. 1. Barriers of the property right and financialization of farmland. Now, the land contractual management rights obtained by the means of family contract and other means all belong to the usufructuary right acknowledged by Property Law. Both of these are usufructuary right, but they are different in system design. As for farmland financialization, it is stipulated in current laws as Rural Land Contract Law, Property Law, Management of the Transfer of Rural Land Contractual Management Right, and Explanation of Suitable Laws for the Cognizance of the Case of Rural Land Contract Dispute by Supreme People's Court. Among these, based on different situations, different systems have been designed: first, as for the contractual right obtained from other ways, there is no limit to the identity of the subject of the right. Market entities can get these kinds of contractual rights by bidding, auction and public negotiation or other market transactions. The right can be used by the subject following market rulers, including the guarantee right designed by this kind of land contractual right. Second, for the contractual right obtained by means of family contract, only the contractual right regarding arable and mortgage the Property Law forbids is just. Under the legislative guidance of relaxing the limitation on mortgage range as far as possible in Property Right, this kind of land contractual rights set up on the farmland of other use can be mortgaged. On the basis of further strengthening the land contractual right, farmers’ right of disposition of 57

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas their land contractual rights should be put into practice. Taking the land contractual right as mortgage is a kind of right of disposition executed by farmers, which shouldn’t be over limited by laws. The experience of the farmland finance reform everywhere shows that, no matter it is the Chongqing Model that breaks present laws, or the Jilin Model that adopts a detour path of alienation mortgage, at least there is no suitable juridical status for them under the present system. Therefore, there is no choice but to revise the present laws and rebuilding the mortgage system of land contractual management right. 2. The parties in the farmland mortgage relationship. As to the relationship of land contractual right, the implementation of mortgage might cause bad effects to the parties. Since the land contractual right is not completely marketed, it is reasonable to make necessary limits on the qualification of the parties. Firstly, the entities who has accepted the mortgage of farmland and given the loans should be the financial institutions. However, this limitation seems too rigid. In practice, in the Chongqing Model, the entities who has accepted the mortgage of farmland and given the loans are the banks, the guarantee companies and other non-banking financial institutions; in the Jilin Model, the person who has accepted the guarantee and given the loans is the property financing company (which is the financial platform directed by local government). Secondly, the farmland mortgager does not have to have a stable non-agricultural occupation or stable income, and does not have to be proved by the institution issues the loan, but should report to relevant departments of the government. 3. Setting regulations for farmland mortgage right. As for the alteration in property right caused by legal acts, the Property Law adopts the model of “contract + announcement”. Therefore, the use of farmland mortgage should follow these rules. In terms of the positive law, according to the mortgage setting for the land contractual monument right obtained by other contractual means in the Property Law of China, besides covenanting formal mortgage contract, the mortgage should be registered, and the mortgage right is set up by the time of registration. Accordingly, when setting mortgage right for the land obtained by family contract, the same plan should be adopted, which means the registration is needed. What’s more, the registration is the requirement for the mortgage right to be valid. Chongqing Model has adopted the same practice. 4. The implementation rules of land mortgage right. At present, the farmland is not completely marketed. Farmland mortgage, as a means of farmland transfer, is developed under the rules of no change of land property right, no change of land contractual right and no change of the use of the land. After the farmland is totally marketed, the implementation rules of land mortgage right should be rebuilt according to the general implementation rules of mortgage right.

3.7.2 Supply chain finance

Agricultural industrialization is the trend of modern agricultural development, therefore it is a general trend to introduce the supply chain finance into agricultural industrialization is. However, in practice, there still exist some barriers and restraints for promoting the supply chain finance at present. Firstly, the degree of agricultural industrialization is not high, and the room for developing supply chain finance is limited. Due to the low interdependency of the members in the industrial chain and their loose connection, it is difficult for the bank to control the risks of the whole industrial chain in loans. Therefore, in the procedures of issuing loans, the bank should pay more attention to credit status and repayment sources of individual enterprise, and set higher requirements to the loan mortgage. This method exercise control over the supply of larger loans to some extent, and increase the operation cost 58

3.7.3 Loans jointly guaranteed by specialized cooperatives

1. Loans jointly guaranteed by specialized cooperatives. This model is an innovative financial product exclusive for farmer specialized cooperatives introduced by Beijing branch of the Agricultural Bank of China. (1) As to the mortgage guarantee, this model doesn’t need the cooperatives to provide mortgage or pledge, or guarantee company to provide guarantee; (2) In terms of term and amount of the loan, the loans jointly guaranteed by specialized cooperatives is flexible in its use, which means the cooperatives can confirm the use time and amount of the loan on their own within the term of contract. What’s more, the cooperatives can be applied for loans at any time, and the loans should be issued whenever they are applied. The interest is calculated according to the use time and should be repaid when the loan is issued. This kind of loans can basically meet the current liquid capital demands of the cooperatives. The requirements for this kind of loan are as follows: (1) The farmer specialized cooperative should be a demonstration cooperative at the administrative district or county level or above. In addition, one member of the joint guarantee cooperatives should be a demonstration cooperative at the city level or above, with good operation, good financial situation, and comparatively perfect inner management system. (2) There should be at least two cooperatives with strong capital strength to comprise a joint guarantee group with the specialized cooperatives, and they are willing to take the guarantee responsibility for the group members. (3) The farmer specialized cooperatives that participate in the joint guarantee should buy agricultural insurance for the agricultural production materials they have bought, the sales, the processing, the transport and the storage of the agri-products. (4) The banks should grant credit to qualified cooperatives. According to the Management of Joint Guaranteed Liquid Capital Loan of Farmer Specialized Cooperatives Issued by Beijing Branch of the Agricultural Bank of China, this model is only suitable to the revolving, seasonal and temporary liquid capital demands with the term of less than one year. 2. Loans joint guaranteed by cooperative members. The innovation in this model is 59

3.7.4 The model of loans jointly guaranteed by the government and the banks

While Tiandong County is actively promoting and widening the credit and agricultural insurance, it is also vigorously exploring new cooperation pattern of “credit plus insurance” jointly guaranteed by the government and the bank to support, help and benefit agriculture. It takes the action of the combination, which not only effectively reduces the credit risk, but also increases the risk guarantee capacity of agriculture. In Tiandong County, Kangshi Sunshine Company receives an annual loan amount from 1 million to 1.5 million yuan with the joint guarantee of government and bank, and all the bananas planted by this company are insured. Although this company has suffered some disaster loss in recent years, its business scale has increased steadily. Obviously, the loans and the policy-oriented insurance contribute a great share for this achievement. Driven by the joint development system of agricultural credit and policy-oriented agricultural insurance, the combined l service model for finance to support agriculture is worth to be promoted and learned.

4.1 Agricultural financial service system of developed economies: organizations and functions

Establishing a multi-layered and multi-function agricultural financial system that includes policy-oriented financial institutions, cooperative financial institutions, commercial financial institutions and private financing is a common practice for developed economies to promote agricultural development. However, the function of different financial institutions differs from country to country. In the United States, for instance, government plays a fundamental role in promoting the financial system for family farms, commercial financial institutions are the major financing channels of family farms, and cooperative finance works as an important complementary channel in the financial system of family farms, whereas in Netherland and Japan, cooperative finance acts as the major channel.

4.1.1 Policy-oriented financial institutions play a major role in building a complete and diversified agricultural financial system.

There has been evident policy support for the agricultural financing of main developed economies since the first half of 20th century. Agricultural policy-oriented financial system is independent of commercial banks in the general sense of common market, and it has significant impact on agricultural development. 1. The United States Private institutions and individuals provided almost all the agricultural credits in the early 1900s of the United States; thereby such credits were shorter-term and limited in quantity. The US government started to make a range of farm credit laws since 1916. Farm Credit System (FCS) was established and led by the government. The nature of FCS is agricultural cooperative finance based on farmer private economy which includes four types of organizations: federal land banks, federal medium-term credit banks, cooperative banks and production credit associations. FCS does not accept deposits and raises funds by selling government bonds. The first 80% of the capital stock of Federal Land Bank came from government grants. Federal Land Bank system, already the major provider of long-term credits to farmers, consists of federal land banks from 12 agricultural credit zones and their affiliated cooperatives. To get a loan from Federal Land Banks, the farmer must subscribe a certain number of shares of these cooperatives and become a member of the federal bank cooperative. Federal Land Bank provides long-term loans to farmers for purchasing lands, farm machinery and livestock. Medium-term Credit Bank offers medium and short-term mortgage loans for non-fixed farm assets purchase to farmers via production credit associations. Cooperative Bank provides loans and counseling services to agricultural cooperatives. These loans consist of short-term and seasonal working capital loans, infrastructure construction loans and farm products export loans. These loans

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas can also be provided to farmer members through agricultural cooperatives (Zhang, 2009). As a rural credit institution directly under the government, FSA consists Farmers Home Administration (FHA), Commodity Credit Corporation, Small Business Administration (SBA), and Rural Electrification Administration. These agencies jointly exercise FSA’s functions. Commodity Credit Corporation, founded in 1933, is a company affiliated to Stabilization and Protection Administration Department of Agriculture. Its main functions are to manage and implement price and income support programs, to provide policy-oriented financial services such as mortgage loans that provide price support to farm products, and provide financial services to farm products export. SBA collaborates with FHA in providing credits to small farms. FHA will offer financial support to small farm borrowers if they apply a small amount of loan amount and their economic condition is not good. As the economic condition of small farm borrowers improves, SBA will satisfy their increasing credit demands. FSA and RMA affiliated to the United States Department of Agriculture (USDA) are mainly responsible for the management and guidance of financial services required by agricultural businesses. FAS focuses on agricultural credits and RMA focuses on agricultural insurance. 2. Canada Farm credit in Canada can be traced back as early as to 1927 when government founded The Canadian Farm Loan Board (FLB) to offer long-term mortgage loans to farmers. In order to advance agriculture modernization, Canadian government began to implement the government secured loan system in 1944 and passed the Farm Improvement Loans Act with the purpose of expanding credit support to agricultural producers and cooperatives through federal government guarantee. The federal government increased its intervention in agricultural financing and passed the Farm Credit Act in 1959. Hence, the Farm Credit Canada (FCC) was founded and became the policy-oriented financial institution of the federal government. Farm Credit Canada mainly uses the Consolidated Revenue Fund of the federal government to provide farmers with long-term loans that private sectors are unwilling to provide (Coleman, 1998). FCC is the largest long-term farm loan lender who focuses its business on agriculture in Canada, covering all kinds of clients engaged in agriculture from family farms to agricultural enterprises. Compared with provincial and regional policy-oriented financial institutions, FCC plays a critical leading role in the agricultural financial operation of Canada. As a royal corporation, FCC is one of the most important institutions in Canadian agricultural financial system and reports to the Congress through Agriculture and Agri-food Canada. FCC is also a major channel through which the federal government invests fund in agricultural development. It’s worth noting that both Canada and America have set up special department to manage agricultural finance under Ministry of Agriculture. Provincial governments echo the federal government and set up agricultural financial departments too. Agricultural financial departments at different levels collaborate to offer guidance and supervision in promoting the integration of finance and agriculture. 4. Japan Japan is a typical country that accomplishes the catching-up strategy through policy-oriented financial system in the world. After the Second World War, Japanese government began to set up one policy-oriented financial institution in almost every industry in order to accelerate economic development. Commercial financing and policy-oriented financing were separated from each other and the policy-oriented financial institution system of “two banks and nine corporations” was formed, which includes Development Bank of Japan, Export-Import Bank of Japan, National Life Finance

Public Sector Private Sector

Fiscal investment and Government general Financial Ordinary financial

financing accounting institution of JA institutions;

· JA bank Banks; Lending ·Agricultural Credit Corporation

Japan policy-oriented finance Credit Union

corporation (Business ·JA

department of Agriculture,

Forestry, and Fisheries) Guarantee Debt

Entrust with financial institutions, Agricultural

Credit Union, banks, etc.

Corporation Funds Agricultural modernization Individual bank financing Individual bank financing

Figure 4-1 Agricultural Financial System of Japan

4.1.2 Diversified agricultural policy-oriented financing methods well-matched

with the functions of institutions

Considering the diversified fund demands of policy-oriented financing and the demander’s ability, diversified methods are adopted by various countries in their policy-oriented financing activities, and the support offered by fiscal funds varies across countries. In terms of policy-oriented agricultural financing, the service methods are well-matched with the functions of institutions. 1. The United States. The United States has established a comprehensive policy-oriented financial system in agriculture, including long-term, medium and short-term loans, financial leasing, insurance, etc. To meet various financial demands in agricultural production, there are differences in the preferential level of loans and interest, which reflects the government’s policy inclination to different business (for detailed information please refer to table 4-1).

Table 4-1 Agricultural Policy-oriented Financial System of USA

Policy-oriented Main Financing Financing Organizations financial Clients financing period purpose institutions methods Farms, agricultural long-term Federal Land producers, and Real estate real estate 5-40 years Bank other purchase mortgage agriculture-relate d borrowers Agricultural Medium-term Government- Credit Federal Agricultural Agricultural credit, sponsored system(financial Medium-term 5 years production and producer financial enterprises cooperative Bank management leasing institutions) Equipment 20 years Purchase of loans, or production Cooperative operating medium means, Cooperatives Finance loans, and short supporting farm commodity term products sales loans loans and export Federal Secondary market facilitating farmers’ real estate and rural housing Government-sponsored agricultural loans, providing guarantee service for secured mortgage loans in enterprises mortgage loan secondary market enterprise Limited to Low-cost Loans for farm farmers unable to subsidized Long and purchase and Departments directly under Farmers Home get loans from loans; medium construction, federal government Administration other normal secured loans term operation cost, channels (i.e. (since 1972) farm house 64

2. Canada FCC provides diversified loan services to agricultural businesses and farmers, including initial financing, loans for cash flow optimization and fixed assets loans. FCC also offers a variety of insurance services, including life insurance and accident insurance, insurance for critical production personnel, and payment protection insurance. In addition, FCC is active in venture capital program. It has reached collaboration agreement with many regional financial institutions or federal government departments to promote the development of specific fields. For instance,, FCC has collaborated with Western Economic Diversification Canada to propose the “Financing Program for Agricultural Value-added Processing Enterprises in Western Canada” to offer long-term debt capital to western small and medium-sized enterprises. These loans can be used in commercial R&D or marketing development programs to promote the development of high value-added agricultural food industry and get access to international market, hence booming local rural economy. For another example, the Agriculture and Agri-Food Canada has entrusted FCC to manage the National Bio-ethanol Program to which the government has provided 140 million Canadian dollars to encourage farmers to increase

4.1.3 Powerful policy-oriented financial system: co-existence of strength and pressures of transformation

America: According to the government policy, agricultural policy-oriented financial institutions provide long-term and low-interest loans which are not available from commercial financial institution and other private financial institutions to disaster victim relief, new agri-zone construction, price support, and farm products purchase (Chou et al. 2008). America agricultural credit system has set up an organization network covering the whole country, and provides loans of almost 200 billion dollars, which account for over one third of the agricultural credit funds. Besides, commercial banks are also major providers of agricultural credits and offer about 50% of agricultural loans. Canada: Grain production in the Prairie Provinces of Canada was significantly impacted in 1980s, and FCC, as the lender of last resort, carried out a Special Farm Assistance Program providing 0.4 billion Canadian dollars to protect the income of marginalized producers. This event prompted the transformation of Canada agricultural credit policy from development mode to mixed marketization mode. The federal government decided that FCC would not act as the lender of last resort but provide appropriate mortgage loans on a break-even basis in 1988. Thus, the interest rate differentials between FCC and private lending institutions narrowed gradually. The Farm Credit Act passed in 1993 further expanded FCC’s service scope to the mixed marketization mode and its business was gradually 66

4.2 Operation system and mechanism analysis of agricultural finance in major countries

It’s a common practice for developed economies to make use of fiscal support, cooperation among credit cooperatives and agricultural insurance to support agricultural financing, among which, the integration of fiscal means and financial means is worth learning.

4.2.1 Fiscal support to agricultural financing by governments of developed economies

Public finance is the most important system to support agricultural financing in developed economies. The government’s public finance funds or provides most of the funds to set up national policy-oriented financial institutions. For instance, in America, the establishment of Federal Land Banks and Cooperative Bank were funded by government initially; operating fund of Farm Products Credit Corporation was fully funded by national treasury; capital fund of JFFFC was financed by the fiscal investment and financing programs of government. The loan coverage and interest preferential terms of these institutions are closely related to government policies; they aim not at economic interest, and are adjusted in accord with different historic development phases, development situation, and external environment.

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas 1. Credit Subsidy In general, fund providers need special incentives to satisfy the credit demands of the majority of farmers. Such incentives mainly refer to the transfer of operation cost, such as government subsidy, tax deduction and exemption, and so on. To be specific, the credits to borrowers are flexible. Subsidies of certain amount can offset the cost in loan application, monitoring, and recovery. In other words, loan cost can be reduced by decreasing risk premium. A variety of subsidy methods can be used to expand the demand and supply of agricultural financial products. One of them is to provide subsidies, directly or indirectly, to financial institutions. Direct subsidies are usually offered to financial institutions by interest rate subsidy so as to decrease loan interest rates of farmers and the lending cost of financial institutions, thus assisting financial institutions in improving its lending capability. This is one of the most common farm credit support method in the past. Indirect subsidies include tax deduction and exemption, preferential terms in services and goods so as to lower lending cost. Another kind of subsidy is targeted at other supporting institutions in the system, so as to guide them in offering support to agricultural finance through government policies and administration rules. For instance, subsidies to financial service institutions (including the credit administration and collateral registration administration sectors) and capital investment and laws reform in market trade guarantee and intellectual property right protection, can increase borrowers’ credibility, decrease lenders’ lending risk, and increase the market demand on investment loans. In addition, subsidies to training programs on financial knowledge and production technology can help farmers to participate more effectively in the value chain and help financial institutions to expand their source of clients. However, subsidies to agricultural finance have many drawbacks too, which are mainly reflected on the distortion of production and market activities caused by government subsidies. For example, subsidies can result in the overuse of fertilizer and pesticide and crowd out the market share of private sectors. In the case of lack of resources, subsidies can generate unfair selection of beneficiaries and financial institutions’ dependence on subsidies. And in particular, subsidy mechanism is difficult to cancel once formed. Another special kind of subsidy is direct funding from governments, international organizations, and foundations to promote agricultural investment. In history, direct funding from governments and international agricultural R&D organizations was the core impetus behind the success of green revolution in agriculture and fight against worldwide hungry (Pingali & Kelley, 2007; Evenson & Gollin, 2007). Grants to non-governmental organizations and service sectors are important in expanding farm input supply and improving small farmers’ participation in value chain. A few questions in direct funding are worthy noticing in actual implementation. The first is whether market failures exist and whether the direct funding can solve problems practically, which require an analysis to the reasons why private sectors fail to function in the market and an evaluation of whether direct funding is the best solution to market barriers. The second is it’s necessary to carry out a detailed economic assessment of funding programs and a cost-benefit comparison of solving market failures. The third is whether the pattern of the funding program is appropriate, whether the allocation of amount of assistance to individuals and enterprises is appropriate, and whether program implementation scheme is feasible (Meyer, 2011). Credit support is a major component of agricultural funds in each country. Finance of each country compensates banks to provide low-interest or subsidized loans to agriculture. America

Case 4-1 Guaranteed loan management of US Small Business Administration (SBA) As a policy-oriented financial organization, SBA mainly provides medium and long-term guaranteed loans to small businesses. SBA never guarantees the full amount of any loans but a portion of the value to ensure that lenders, mainly commercial banks, take some risks as well. The guarantee rate of SBA was 90% of loan amount in 1990s. However, commercial banks would not pay close attention to SBA’s guaranteed loans since it found out the guarantee ratio was so high. Hence, SBA lowered the ceiling of guarantee ratio: no more than 85% for loans up to 150 thousand dollars, no more than 75% for loans exceeding 150 thousand dollars, and 50% for a maximum loan of 2 million dollars. Recently, SBA has adjusted its guarantee ratio in order to stimulate the tightened small business credit market. The ceiling of guarantee ratio was temporally increased to 90% by the Recovery and Reinvestment Act passed in 2009. This Act was renewed by the Small Business Jobs Act passed in 2010 and meanwhile a permanent improvement clause was issued, lifting the credit ceiling from 2 million to 5 million dollars. In addition to guarantee whose ratio can be flexibly adjusted, SBA has also stipulated that lenders are not allowed to require guarantee for the portion of the loans that was not guaranteed by SBA.

4.2.2 Cooperation among credit cooperatives: models and risk control

1. United States

The United States has set up a comprehensive management system different from commercial banks for agricultural cooperative financial institutions, and the system includes an independent regulatory authority (National Credit Union Administration), industry self-discipline association, financing clearing center, and mutual insurance corporations. There are open unions and stable clearing system in the US credit cooperative system. Credit cooperatives at grassroots level can join in any credit cooperative union across US on their own will. Credit cooperative unions provide services to their members through computer technology, fund clearing, investment agency and others. In addition, America Credit Cooperative Association provides members with non-operating services, including coordinating public relations, vocational education, publishing industry journals, policy research and analysis, promotion and interview, etc. Financing clearing centers play an important role in transferring credit cooperative funds and dealing with off-site billing. Another important part for supporting credit cooperative system development is an effective insurance mechanism, which includes a voluntary social insurance company as well as the credit cooperative deposit insurance fund, a mandatory and binding insurance fund organized by regulatory authorities. Credit cooperatives who participate in this insurance fund deposit part of its deposits each year into this fund, which is mainly used for

2. Germany

Germany cooperatives have a long and prosperous history in credit cooperation. In risk control, there are many aspects that are worth learning. Firstly, the government doesn’t intervene directly and allow industry associations to play their roles. There is an industry self-discipline organization in Germany cooperative bank system, the National Credit Cooperative League with members of cooperative banks at grassroots level, regional central cooperative banks, DG Bank, and some professional cooperative financial corporations. This organization provides institutional guarantee from multiple aspects for the standardized development of cooperative banking system. In particular, it has promoted the establishment of credit guarantee systems for cooperative banks, such as Hermes Insurance System, which provide guarantee to short-term micro loans of small and medium-size enterprises. Secondly, deposit insurance organizations of cooperative finance indirectly provide protection to lenders by supporting member institutions. Thirdly, voluntary insurance principle is implemented and preferential policy on tax is offered to the insurance fund.

3. Japan

The development of Japan’s cooperative finance is also reflected in the complete cooperative financial organization system and sound credit insurance system. Firstly, Deposit Insurance Organization of Agriculture, Forestry, and Fisheries Cooperative has set up a deposit insurance system funded by central finance, central bank, Norinchukin Bank, and JA at county level. Secondly, temporary fund transfer and mutual assistance system were established. Thirdly, agriculture disaster compensation system was set up. Fourthly, agriculture credit guarantee insurance system (loan guarantee system) was implemented.

Besides market factors, the government also encourages private investment in agricultural finance, which can be realized through the following ways: tax deduction, exemption or subsidy, issuing government debt, stipulating loose and preferential rules and policies, and using investment guidance funds to motivate private sectors. In addition, the government has strengthened its protection to intellectual property rights of agricultural technology inventions, which makes agricultural R&D more profitable and thus attracting more private funds to agricultural R&D so as to push modern agriculture development. Besides stipulating related public policies, the government’s support also lies in collaboration with private sectors in value chain finance and other farm investments.

Case 4-2 American Federal Agricultural Mortgage Corporation Federal Agricultural Mortgage Corporation (Farmer Mac) is a joint stock company and a government sponsored enterprise (GSE). A new regulation was added to American Agricultural Credit Act on the basis of its 1971 version and the Farmer Mac was established with the approval from the Congress in 1987 with the aiming to strengthen the supply of long-term loans for agriculture. Farmer Mac provides a secondary financial market for farm mortgage loans, rural facility loans, and loans guaranteed by USDA for promoting agriculture and rural development in order to increase fund liquidity and lending ability. Market behaviors of Farmer Mac include the purchase of loans from lenders and the purchase of debts that provides guarantee for loans. In general, Farmer Mac is a secondary market for agricultural financial products. It integrates huge amount of loan products, reduces risks and increases fund liquidity, and promotes the prosperity of agricultural financial market.

4.2.4 Development mechanism that promotes value chain finance

Agricultural value chain integrates agricultural production means, and agricultural products production, processing, storage, transportation and sales into a whole. Value chain finance provides stable fund support and financial services to agricultural business (Song, 2012). Agricultural value chain came out in 1950 in America and developed worldwide later, playing an important role in world farm products industrialization and marketization. Agricultural value chain is highly developed in developed economies such as America and the Netherlands, and is mainly provided by private sectors with the support from governments. Operating models of agricultural value chain mainly include: (1) producer-driven value chain. For example, producer association composed of small farmers can help small farmers enter new market, get higher market price, and stable their market position. (2) Buyer-driven value chain, which is formed when processors, exporters, retailers, traders, and wholesalers contract with farmers. Contract farming is the most common buyers-driven value chain. (3) Coordinator-driven value chain. For example, governments, non-profit organizations and non-governmental organizations provide support to small farmers and agri-businesses and help them get into the commercial value chain to reduce poverty and promote local economic development. (4) Integrated value chain, the earliest and typical internal vertically integrated value chain, such as supermarket value chain (Miller and Jones, 2010). Some innovative agricultural value chains have shown up in China, including leading enterprise–driven value chain, farmer plus enterprise-driven value chain, farming and animal husbandry integrated value chain, 71

Case 4-3 Canada Agriculture and Food Value Chain Roundtable Meeting ，AVAC Canada Ministry of Agriculture and Ministry of Industry has jointly set up the agricultural products value chain roundtable meeting mechanism. Though equal discussion and negotiation with industry representatives, this mechanism supports farm products food industry with policy guidance and system incentive, and assists administration sectors to stipulate sound regulations. There are value chain promotion schemes at provincial level, which bridges the federal government and private enterprises. For instance, the value chain scheme of Alberta province not only complements with the promotion programs of Federal Ministry of Agriculture, but also cooperates with private sectors, including providing large sum of funds to Alberta Value Added Corporation (AVAC) to facilitate its popularization in agricultural chain and modernization.

Case 4-4 Farm Credit Canada (FCC) FCC cooperates with other regional financial institutions to provide all-round financial services and products to participants at each link of agricultural production. Its representative programs include: Crop Input Financing Program: In this program, FCC allies with crop input suppliers. Farmers can withdraw the fund at any time in accordance with the approved loan amount, or arrange a fund withdraw timetable according to their cash flow. Specific loans can also get approval through suppliers. Retail Financing: For instance, FCC works with the United Farmers of Alberta (UFA) and its 95,000 members to provide financing for them to purchase production equipment, and carry out construction program and various innovative programs. UFA has over 30 agricultural input stores across Alberta; their clients can receive financing from FCC when buying farm inputs with loan ceilings ranging from 4,500 Canadian dollars to 35,000 Canadian dollars; the loan ceiling for large equipment can be increased to 200,000 Canadian dollars, and only telephone approval is needed. Clients can apply for their credit lines in advance, which will be valid for one year, to avoid provisional application when they have demands (Bai and Xu, 2006). These two kinds of financial services extend financing to value chain participants and make financing more flexible and pertinent. Simplified operating procedures also push the flow of funds in the chain and increase the vigor of market transactions.

Case 4-5 Flower Industry Value Chain Finance Development of the Netherlands Agricultural economy accounts for 10% of the economy of the Netherlands, but agricultural trade accounts for nearly half of the national trade. Net export value of farm products each year maintains around 13 billion US dollars, taking up 10% of world’s farm products market trade. The export quantity of flowers ranks No. 1 in the world. Flower products exported by the Netherland in 2008 accounted for about 60% of world’s flower trade value, which was about 6 billion Euros. There are about 11,000 flower production enterprises in the Netherlands, most of which are farmer family enterprises. Flower industry in the Netherlands has formed a highly developed and complete industry chain, which includes the whole breeding, production, procurement, processing, storage, transportation, and sales process of flower products. Advanced technologies and equipment and fine facilities are used in each link in order to increase its scientific content and added additional value. In addition, the flower industry interacts actively with other industries and forms a comprehensive agricultural complex. It’s worth mentioning that auction market plays an important role in the agricultural value chain of the Netherlands. Transactions in auction market are highly efficient, which can facilitate the improvement of farm products quality and standardization level. The auction process is open, fair and competitive; therefore sound prices can be formed, so as to protect farmers’ interest and adjust market supply and demand, thus optimizing the resource allocation. The Netherlands government has stipulated criterion for the whole production chain and every producer must take responsibility for its role in the chain management. In recently years, the Netherlands has spent 45 million US dollars to fund over 60 industry chains and value chain pilot programs. The experience of the Netherlands indicates that close cooperation among chain members is critical to the success of enterprise value chain.

Developed economies usually offer great support to agricultural insurance in order to guarantee agricultural production and development since agriculture faces great risks and more uncertain factors, and is easily affected by disasters or world market prices; therefore its losses are hard to assess. In order to guarantee agricultural production and development with insurance, developed economies always provide great support to agricultural insurance. Their major practices include: stipulating and perfecting laws and regulations, providing preferential policies to financial institutions engaged in agricultural insurance, government finance covering premium deduction & exemption or subsidies, government bearing most of the risk loss. In addition, by encouraging agricultural insurance organizations to participate in credit guarantee system building (including the implementation of farm loan insurance system and deposit insurance system for credit cooperatives), the government has not only effectively spread the risks of agricultural loans from financial institutions, but also guaranteed the interest of each participant of agricultural finance.

4.2.6 Establishment of agricultural development funds (ADF)

As one of the forms by which governments provide financial support to agriculture, agricultural development funds features strong leading effect, large-scale capital, and obvious policy implications. ADF usually develops a variety of development programs with varied industry focus, collects applications widely, and then allocates funds after assessment, aiming to provide fund support to agricultural development from every perspective. For instance, ADF managed by USDA has set up dozens of rural development programs to support agriculture development with loans or direct grants. These programs mainly cover housing and community facility construction, resources utilization and processing, and commercial cooperation, etc. ADF offers support in a variety of forms, including direct loans or guaranteed loans, subsidies, technological support, and materials for research popularization.

Case 4-6 Canadian Adaptation and Rural Development Fund Canadian Adaptation and Rural Development Fund (CARDF) was set up by Canadian government in 1995. CARDF invests 60 million Canadian dollars each year with the aim at promoting long-term economic development, employment, agricultural development and rural development. CARDF was set up to assist Canadian agriculture in facing new structural challenges and market shocks. The support of CARDF is focused on 6 aspects: research and innovation programs, human resource construction, seizing market opportunities, environment sustainable development, food quality and safety, and rural development. Through these programs, CARDF has effectively promoted a virtuous circle and sound development of Canadian agriculture and food industry. It also encourages innovative thinking on the premise that food safety is given priority and environmental resources sustainability is achieved. CARDF not only funds national programs but also regional programs led by provincial governments and industry committees. This feature strengthens the communication and cooperation among industries and regions. About 60% of CARDF’s funds are invested in national programs, covering many aspects of agriculture production and management. Federal Ministry of Agriculture and Food and industry associations jointly manage programs funded by CARDF. About 40% of CARDF’s funds are invested in regional programs, which are approved and operated by local CARDF. To ensure these programs conform to CARDF’s goals, CARDF adopts standard assessment criteria and management to all programs. Representative national programs include Young Farmers’ Forum, farm economic management programs, and farm debt dispute mediation service, etc. 73

4.2.7 Professional risk management and budget management, and assessment of the progress towards policy goals

In general, risk-benefit ratio of policy-oriented financing is higher than commercial financing. Therefore, risk management must be strengthened to achieve the sustainability of policy-oriented financing programs or institutions. Supervision requirements are set for capital adequacy ratio or capital ratio to avoid the excessive expansion and risk-taking of policy-oriented financial institutions. For instance, European Investment Bank is a policy-oriented financial institution engaged in long-term credits. This bank is prudential in management and focuses on stable development. The stockholders of European Investment Bank are 27 member nations, but this bank does not pay dividends to its stockholders and keeps all the profits as reserve. Continuous profits have provided the Bank with huge amount of reserve. Equity fund of the bank increased from 38.1 billion Euros in 2009 to 40.2 billion Euros in 2010. The capital adequacy ratio reached 27.2% at the end of 2010 in spite of challenges such as economic recession and growing default risks. Policy-oriented financial activities cover a wide range of areas in America. Hundreds of credit programs are managed by dozens of organizations to serve public goals of the federal government. This broad and scattered policy-oriented financial system inevitably will encounter many challenges in management. In response to this, America includes all the credit programs into the scope of budget management. The Federal Credit Reform Act stipulated the current budget record method for credit programs in 1990. The government has adopted the method of recording the net present value of future expenditure and income. If one direct loan is 1000 US dollars, and later repayment, interest, and default recovered totals 900 dollars, the subsidy for this program is 10%. This can be applied to guaranteed loans as well. If a guaranteed loan is 1000 US dollars, and the net expense and default cost is 100 dollars, the subsidy ratio for this program is also 10%. A 1000-dollar direct loan or a 1000-dollar guaranteed loan is required to provide a 100-dollar budget to get support. This kind of budget constraints can limit the policy-oriented finance to a certain scale, thus avoiding the risks caused by over-expansion. From the experiences of developed economies such as America, European Union and Japan, organizers of policy-oriented financing or supervisors of policy-oriented financial intermediaries will define the policy goals of programs or intermediaries, and then set up a series of ratio indexes and quantified criteria to assess the process towards policy goals.

The aim of policy-oriented finance is to accelerate the development of specific regions or fields with government funding, and enable them the capability to get commercial financing and adapt to commercial financial system. By then, policy-oriented financial intermediaries or programs can complete their mission transfer to a new field or withdraw from the social financial system, and provide a wider space for the development of commercial finance. Therefore, a nation or region will adjust its supporting field, capital scale and financing method according to the demands of social and economic development, and the development status of specific field or region. For instance, as Japan’s economy and social development reached a relatively high level in 1990s, its capital supply and demand pattern changed from shortage to surplus; policy-oriented financial institutions expanded excessively, deeply penetrated into fields that should be operated by commercial finance and competed with commercial institutions. When economy bubble broken down, policy-oriented financial institutions in Japan, accumulated large sum of non-performing assets like these commercial financial institutions did and became the “black hole” of government finance. To solve these problems, Japanese policy-oriented financial institutions carried out two large-scale reforms in 1999 and 2008. The old “two banks and nine corporations” were either privatized or merged into one policy-oriented financial institution– Japan Finance Corporation, and the business scale was also narrowed. For another example, direct loans and guaranteed loans are the major methods with which America develops policy-oriented finance. The credit outstanding of these two methods basically increased in the same pace from 1970s to 1990s. However, the credit outstanding of guaranteed loans had grown obviously faster than that of direct loans since 1990s. At present, the ratio of the credit outstanding of direct loans to guaranteed loans is about 3:7. Guaranteed loans have become the major method of American policy-oriented program financing. Compared with direct loans, guaranteed loans have a more notable amplification effect for government budget. The increase of the share of guaranteed loans has evidently enhanced the leverage ratio of America policy-oriented financial system. From 1992 to 2011 fiscal year, American policy-oriented financial business scale continued to expand with an annual growth of 6%, among which, student loan program was the fastest-growing program with an annual growth of 12%; small business credit program grew at 9% annually, while the growth rates of loans for veteran’s housing and USDA’s credit program were relatively low, being 2% and 1% respectively. These differentiated growth rates indicate that the support focus of American policy-oriented finance is gradually being transferred to small businesses and education field.

4.3 Conclusions and Lessons

4.3.1 Conclusions

As mentioned above, though the development of agricultural financial institutions and systems

4.3.2 Lessons

1. The government should play a fundamental driven role in the agricultural financial system

Governments should concentrate on building a multidimensional and multifunctional agricultural financial system, make policy-oriented finance, commercial finance and cooperative finance complement and promote each other, and jointly support the development of agricultural entities. Governments should further strengthen the policy-oriented financial function of agricultural development banks, encourage these banks to further strengthen their policy-oriented business and provide policy-oriented support funds to new business entities. Governments should increase their guidance and support to financial institutions and create sound a policy environment for farm finance through tax preference, fiscal subsidy, guarantee offer, and regulation stipulation. In addition, it’s worth learning from Canada and America who set up agricultural financial administrative departments under the Ministry of Agriculture and agricultural financial institutions at provincial level as well. Agricultural financial administration at central level and provincial level collaborate in performing their guidance and supervision function, so as to promote the combination of

2. The commercial finance should play a dominant role

From the experience of developed economies in modern agricultural development, commercial finance should strengthen its role in China’s agricultural financial system. Firstly, China should continue to deepen it reform in RCCs, stabilize the legal person status at county or city level, and guide RCCs in improving corporate governance structure and allocating resources according to market-oriented principle. RCCs, as community commercial financial institutions, should provide services at county level to agriculture, rural areas and farmers. RCCs will become the major supporter to future new business entities. Secondly, new rural financial institutions such as village and town banks, loan companies, and rural fund mutual cooperatives which are independent and flexible in operation, should be encouraged to develop special loan products for small family farms. Thirdly, commercial banks should be encouraged to stick to the path of offering multidimensional financial support and providing small credits, jointly-guaranteed loans, and guaranteed loans to moderate-scale businesses, with the focus on regional advantages and featured agricultural industries.

3. The supportive function of cooperative finance for farm households, family farms, and cooperatives should be fully exploited

Since rural China features vast territory and scattered land, cooperative financial institutions can break through the barriers that traditional financial institutions faced when providing financial services to scattered farmers and effectively fill the gap left by policy-oriented finance and commercial finance. There is a lack of certain-scale true cooperative financial organizations supported by government in agricultural financing since the commercialized reform of RCCs in China. Learning from American experience, local governments might consider setting up cooperative financial organizations similar to land banks to provide financial services to family farms. In the meanwhile, it is important to guide those active financial organizations, including rural fund mutual cooperatives, poverty alleviation mutual assistance organizations, and other non-government organizations in rural areas to satisfy the temporary credit demands of their members based on production and credit cooperation, and bring the important role of cooperative finance to small farm borrowers into full play.

Chapter 5 Construction of Modern Agriculture Financial Support System and Supporting Measures

The construction of modern agriculture financial support system is in essence to handle the relationship between government and market. Therefore, the boundaries that separate the applicable fields for commercial finance, cooperative finance, policy-oriented finance and public finance and the ways in which financial services of these types of finance can be conducted should be explicitly defined. On this basis, agricultural financial institutions can be perfected and optimized, and supporting reform measures can be adopted. Thus, an orderly and cooperative modern agricultural financial support system that satisfies the capital demands of agricultural entities can be constructed. 5.1 Modes of agricultural financing and functions

Specifically, for fields in which market mechanism functions effectively, their social capital demands can be satisfied by commercial financial system; for fields in which price mechanism has serious defects, the resources can be allocated by public finance; for fields in which neither market mechanism nor government functions, solutions will be proposed through cooperation between government and market in the form of cooperative finance and policy-oriented finance, so as to solve the problem of absence or lack of commercial finance and public finance, and realize the integration of economic effectiveness and social rationality in resource allocation. In view of this theoretical perspective, some assessment criteria can be adopted to define respective fields to which policy-oriented finance, cooperative finance and commercial finance focuses or can be applied, thus forming a financing channel distribution spectrum covering all fields of the society. Specific assessment criteria include: competiveness, product and service features, ability to cover costs by charges, risk tolerance, and externality factors. 1. Competitiveness. It reflects the market competition intensity in a field, including the number of competitors and their ability to deliver services. Fields in which there are a large number of competitors and the service capability of these competitors is strong can be regulated by market mechanism. Commercial finance can provide financial services in these fields. For low-profit, high-risk and low-cost fields with a lack of supply competitors and the demander are able to conduct mutual fund cooperation, cooperative finance can be applied. For fields with a lack of supply competitors and the demander are unable to conduct mutual fund cooperation, public finance can be involved. For fields with a lack of competitors and these competitors are unable to provide effective services, policy-oriented finance can play its role. 2. Product and service features. Commercial finance can provide services in fields whose product and service features are obviously private (competitiveness and exclusiveness); public finance can provide services in fields whose product and service features are public (non-competitiveness and non-exclusiveness); cooperative finance and policy-oriented finance can provide services in fields whose product and service features are quasi-public (non-competitiveness and exclusiveness). 3. The ability to cover costs by charges. Commercial finance can provide products and services in fields that can realize social average return by offering products and services to obtain income and cover the costs; cooperative finance can provide products and services in fields that may have some surplus after the costs are covered by the income obtained from offering products and services;

Operational index

Public finance……Policy-oriented finance……Cooperative finance……Commercial Finance

Fig5-1 Full-coverage Financing Spectrum In light of their course of development and practice, commercial finance and public finance in developed countries have formed a relatively stable and clear service system and scope of application, but the scope of application and degree of government intervention of policy-oriented finance is controversial or difficult to settle, especially in developing economies. The requirements for the fields

Table 5-1 Assessment criteria for applicable fields of commercial finance, cooperative finance, policy-oriented finance and public finance

Competitiveness Product and The Risk Externality Operating and ability to service ability to tolerance provide efficient features cover services costs by charges Commercial Strong Private Strong Strong Strong Strong finance Cooperative Relatively strong Quasi-public Relatively Average Average Average finance (neutral to strong private) Policy-oriented Weak Quasi-public Relatively Weak Strong Average finance (neutral to weak public) Public finance Weak Public None Weak Strong Weak

5.2 Goals and ideas for finance to support modern agricultural development

5.2.1 Development goals

On the basis that the applicable fields of commercial finance, cooperative finance, policy-oriented finance and public finance can be basically defined, according to the requirement of ensuing the sufficiency, convenience, and sustainability of agricultural financial supply, focus should be made on the perfection of a multi-level agricultural financial system with rational division of labor, complementary functions, moderate competition and sustainability under the guidance of

5.2.2 Construction ideas

Given the five principles mentioned above, the main idea for the construction of agricultural financial support system is to promote the high-efficiency development of agricultural financial business guaranteed by mechanism construction and concentrated on institution construction and product and service innovation on the basis of following the boundaries of applicable fields for public finance, policy-oriented finance, cooperative finance, and commercial finance, and under the principle of controllable risks, diversified services, sustainable finance, simplified rules and differentiated policies. The focus of mechanism construction lies first in the construction of a risk-sharing mechanism and interest compensation mechanism among agricultural financial institutions (or tools), government finance, service objects (enterprises and natural persons) and other interest-related subjects; that is to say, government should compensate for the losses suffered by financial institutions when they are developing low-income or high-risk policy-oriented business in a reasonable form, so as to make sure these financial institutions have stable earnings estimates and strengthen the supply capacity of agricultural financial business. Secondly, based on the principle of simplified rules, to simplify the approval procedures for compensation mechanism, cut the costs of the transaction between policy-oriented institutions and government, and the transaction between commercial entities and policy-oriented financial institutions, and enhance the availability of policy support. Thirdly, in the construction of policy-oriented financial institutions of the external policy environment, to fully focus on the particularity of policy finance, and offer certain disparate treatment to monetary policy, financial regulation policy, fiscal and tax policies. Fourthly, to promote the division and cooperation mechanism among the cooperative finance, commercial financial institutions and policy-oriented financial institutions. In the aspect of institution construction, first on the basis of integrating the current financial institutions, to further enhance the capital financing strength, risk management capacity and business development of the policy-oriented financial institutions. For the field which is severely lack of market supply, to increase policy-oriented services business, and promote the construction of new-typed agricultural financial institutions and the innovation of the product service, according to the principle of diversified services. Secondly, the cooperative financial institutions should focus on improving the laws and regulations, and exploring the internal and external risk management system. Thirdly, improving the grass-roots financial system, especially to foster the localization, grass-roots financial system auto-operated by marketization, such as all kinds of microfinance institutions, internet financial organizations. As for business innovation, the first is to strengthen financial innovation products and

5.3 Content of the construction of modern agriculture financial support system

Currently, the service fields and business scope covered by Chinese agricultural financial system are: agricultural infrastructure construction, working capital in agricultural production, working capital in agricultural enterprises, etc. Learning from international experience, there are mainly three options for developing agricultural financial business, namely commercial finance, cooperative finance, and policy-oriented finance. Considering the international experience in agricultural financial development and practical problems encountered by modern agriculture demonstration areas, the focus of agricultural financial system should be made on the match of implementation model of agricultural financial business with its business scope and the optimization of this match, and the construction of financial institutions providing relevant services according to the features of agricultural financial business.

5.3.1 Commercial financial institutions

1. Strengthening the support for policy-oriented agricultural financial business. Besides Agricultural Development Bank of China, Agricultural Bank of China, China Development Bank, Postal Savings Bank and Rural Credit Cooperative and other financial institutions have also developed commercial agricultural financial business widely, among which some are policy-oriented and this kind of institutions have the experience and strength to develop policy-oriented financial business. Therefore, appropriate preferential policies can be given to these institutions where possible through shareholding reform and business integration, so as to help them strengthen their agricultural policy-oriented financial business. 2. Reconstruction of rural microfinance institutions. The capital needed to conduct agricultural production or address problems encountered in daily life is relatively small; therefore, it is impossible to try to arrange a large-scale financial institution to satisfy farm households’ capital needs. As a result, the construction or reconstruction of rural microfinance institutions can be considered. This institutions need not to be large-scale as long as they can satisfy the capital needs of local farm households. These microfinance institutions can have diversified capital resources and its operation model can be diversified as well; while the finance can promote their development by tax reduction or exemption, offering interest subsidies for part of the loans and other measures. 3. Exploitation of potentials in advantageous fields. Rural Credit Cooperative is now and will still be the major force of supply in agricultural financial market, but it should further widened its channel to make fully use of its advantages, such as matchmaking with new-type rural financial 82

5.3.2 Policy-oriented agricultural finance

There are at least seven implementation ways for policy-oriented finance within the agricultural financial system frame: policy-oriented loan, policy-oriented guarantee, policy-oriented subsidy, special guiding fund, policy-oriented investment, policy-oriented insurance, and bidding and tendering. These seven ways have their own merits and demerits and applicable fields, and their effects are significantly related to relevant policy-oriented financial institutions. 1. Reform and optimization of current policy-oriented financial institutions

According to international experience, policy-oriented banks are financial intermediaries providing indirect financing modes, such as offering loans, to the supporting objects of policy-oriented finance. The business of policy-oriented banks should be the business that policy-oriented finance supports and within the areas in which policy-oriented finance operate; fields including agriculture, rural areas and farmers, import and export, regional economic development, small and medium-size business financing, and fields whose economic structure has transformed can establish relevant policy-oriented banks, and for some these fields, there could be more than one bank. The capital sources of policy-oriented banks mainly include: funds offered by the finance to support policy-oriented business (which is the capital fund of the policy-oriented bank), re-lending from Central Bank (which is the important external fund source for policy-oriented banks), preferential loans offered by international development institutions, and large deposits from enterprises. The business scope of policy-oriented banks can vary along with the change of focus of policy-oriented finance. Part of the interest subsidy business conducted by the finance can be handed over to corresponding policy-oriented banks. The Agricultural Development Bank of China (including China Agriculture Industry Development Fund and Modern Seed Industry Development Fund) has owned a group of personnel who understand policy-oriented financial business and has rich financial operation experience and a group of institutions that have been running for many years. Therefore, the reform and optimization can be a fast and efficient channel to construct policy-oriented financial institutions, and help to form a nationwide policy-oriented financial institution system that provides financial services pursuant to new methods in a short time on the basis of current policy-oriented financial institutions by redefining their business scope, defining capital replenishing methods and reorganizing management and operation models. 2. Reform of existing quasi-policy-oriented central or local financial institutions Governments at all levels in China have established investment companies, financing guarantee

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas companies and other institutions, which are run in accordance with the principle of marketization. These institutions are quite familiar with the policy-oriented business in their respective fields, but lack normalized management and operation, and some of them are partly administrative. As a result, during the construction of the principal part of policy-oriented finance, the reform of these institutions can help to set up a batch of agricultural policy-oriented financial institutions. To be more specific, requirements for financial institutions to be engaged in policy-oriented financial business can be stipulated in laws and regulations, similar financial institutions can be integrated and their management and operation models can be reformed, and tasks to conduct various agricultural policy-oriented financial business can be assigned to these financial institutions. ——Policy-oriented financing guarantee institutions. A policy-oriented financing guarantee institution is a policy-oriented financial intermediary that offers financing guarantee to supporting subjects of policy funds. During the investigation, it is found that current policy-oriented financing guarantee institutions are mainly invested or controlled by governments at different levels, and their objectives vary. Policy-oriented financing guarantee institutions mainly accept applications of supporting subjects from policy-oriented finance, and provide them with credit guarantee when they apply for loans from commercial banks or other commercial financial intermediaries. Policy-oriented financing guarantee institutions can develop business in fields including agriculture, rural areas, and farmers, regional economic development, small and medium-size business financing, and affordable housing, and fields whose economic structure has been transformed. ——Venture capital funds (companies) . A venture capital fund (company) is a fund or company found individually or collaboratively by the government with part of the policy-related investment funds. Normally, it is owned or partly owned by governments at all levels and relevant government departments; other capital funds can buy shares upon approval from relevant regulatory agencies. The major purpose of this kind of institution is to support the development of high-tech and high-growth small and medium-sized enterprises in a particular region or filed. When the supporting subjects are confronted with financing difficulties, they can apply for money to the venture capital fund (company), who will evaluate the application based on its business scope and determine whether to invest or not. The result of this kind of financing is the venture capital fund (company) will own the equity-like asset of the supporting subject. Venture capital funds (companies) can develop business in fields including the high-tech agricultural development areas of the “Three Rural Issues”, small and medium-size business financing, and policy-oriented finance, and fields whose economic structure has been transformed. ——Entrusted policy investment management institutions. One of the most important functions of government is to arrange constructive funds for relevant enterprises and fields with the authorization from national laws and regulations, so that financial investment business can be conducted. However, as there is a lack of regulation in the investment business conducted directly by the finance and the efficiency of the use of funds is not very high, financial sectors can entrust an entrusted policy investment management institution at relevant level to conduct necessary investment activities. Entrusted policy investment management institutions can develop business in fields including agriculture, rural areas and farmers, regional economic development, small and medium-size business financing and major natural disaster reconstruction financing, and fields whose economic structure has been transformed, ——Policy-oriented insurance companies. A policy-oriented insurance company conducts

5.3.3 Cooperative finance

Cooperative finance has shown a trend of diversified development in China. According to the initiators, it can be classified as: internal credit cooperation of farmers' specialized cooperatives; rural fund mutual cooperatives that have obtained financial licenses under the framework of CBRC; community cooperative financial organizations promoted by local governments; village-level fund mutual cooperatives in poor villages promoted by poverty alleviation department; cooperative financial organizations started by supply and marketing cooperatives; internet-based new-typed cooperative finance, such as P2P. While cooperative finance in agriculture develops, it has several problems: Firstly, there are relatively high risks in cooperative finance since it is composed of different forms of originations or institutions and the true may be mingled with the false. For example, some cooperative financial organizations may absorb social capital in the name of farmer cooperation and misbehave themselves driven by the pursuit of profits; hence considerable market and ethical risks accumulate; as most of the business personnel of cooperative financial organizations have low service quality and little

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas management experience, and governance structure is imperfect, there exits some operational risks. Secondly, the quantity and quality of cooperative financial institutions are uneven, and their status varies a lot. Some cooperative financial institutions grow fast, while some stop examine and approve; some set high requirements, while some has low threshold; some are legal persons (but their status varies), while some are not. Thirdly, the regulation efficiency is low while the regulation cost is high. On the one hand, CBRC does not delegate the review and approval authority of fund mutual cooperatives; on the other hand, it is neither in favor of nor opposed to the development of rural fund mutual cooperatives: the deep-seated problem is that CBRC’s regulatory capacity cannot adapt to the widely developed community cooperative financial organizations. Fourthly, some local government has intervened cooperative finance excessively. In that sense, cooperative finance in China is not a matter of development but a matter of how to develop. Only by solving the above four problems can China’s cooperative finance develop better. In order to construct true cooperative finance, the reform and innovation need to be implemented as followed: 1. While developing cooperative finance, government should know what it should do and what it shouldn’t do. Government should strengthen its support for cooperative finance in making laws, building rules and regulations, and training and guiding; meanwhile it should be wary of excessive intervention of local governments, relax control over the entry system, help to obtain status of a legal person with free registration, and increase policy support to make sure cooperative finance can develop healthily and orderly. 2. The internal governance system of cooperative finance is to be constructed and perfected, including democratic management system, information disclosure system, and the distribution system of the surplus return. Keep the homogeneity of the members in the system, and be wary of the excessive participation of corporate fund and the distortion of governance structure and variation of organization that is likely to happen. 3. The mode of regulation is to be innovated so as to reduce regulatory cost. Industry regulation or a third party regulatory system may be introduced to address the regulatory problems of personal inadequacy, heavy workloads and high cost facing county-level regulatory administrations, meanwhile solve the low efficiency drawback resulted from unprofessional regulation. 4. The control and prevention of internal and external risks are to be strengthened, which include the implementation of credit guarantee system, credit guarantee or warranty for loans so as to ensure the capital adequacy ratio and loan loss reserve adequacy ratio, and matchmaking with policy-oriented agricultural insurance to integrate financial cooperation and industry cooperation, and cooperate with external financial institutions to develop wholesale loan business of large scale banks so as to differentiate its business and reduce and control financial risks. 5. The mutual-aid and cooperative insurance is to be speeded up and improved. Vigorously support the development of mutual cooperation insurance organization in the field of agricultural insurance. Compared with the commercial insurance companies, mutual system and cooperative system of agricultural insurance organizations have the obvious advantages in the protection of farmers' interests, disaster prevention and mitigation, and the reasonable disposal of company’s surplus, meanwhile the central government has repeatedly encouraged to develop the mutual cooperation fund of insurance in rural areas. Therefore, to develop agricultural mutual cooperation insurance should be

Rural financial system is an important component of the whole economic system, and the performance of its functions cannot be separated from the synchronous perfection of supporting systems. Only in this way will finance plays its role in promoting modern agricultural development. There are mainly three supporting reform measures related to rural financial system: perfection of rural social security system, moderate rural land reform, and further improvement of rural financial system.

5.4.1 Perfection of existing agricultural financial system

Deposit insurance system: It is a marketized risk compensation mechanism, and its effective operation can develop the insurance capacity of deposit-taking financial institutions. Rural financial institutions that buy deposit insurance and pay insurance premium will benefit from the protection of their depositors’ interest, and help to form an effective risk elimination and market exit mechanism for rural financial institutions. The limited compensation mechanism can also help depositors the raise their risk awareness, and help market play its role in restraining rural agricultural institutions. Agricultural futures market and agricultural insurance market: The development of agricultural order-based documentary agricultural insurance is encouraged. Commercial insurance companies are also encouraged to further explore the rural insurance market. Relevant credit market, insurance market and futures market can be further perfected, and a rural financial market system with complete functions, specialization and cooperation, and moderate competition can be built. Guarantee mechanism: A joint-stock guarantee fund or guarantee company funded by government with equity participation from farmers and rural enterprises can be funded to drive the development of various guarantee institutions. The scope of valid collateral can be extended by including inventory collateral, account receivable collateral and other movable property collateral and rights pledge. Priority right to be repaid of secure claims should be protected. Agricultural credit insurance should be explored and developed, and the guaranteeing function of insurance in rural credit should be performed. Policy support for the development of agricultural finance: More credit investment from financial institutions can be drawn to agriculture and rural areas by financial subsidy, guarantee or tax reduction or exemption and other measures. Tax policies that support rural financial institution development should be implemented, and financial institutions should be guided to conduct business in rural areas. Adapting to the features of rural financial organizations, strengthening and improving financial regulations: Rural financial organizations are widely distributed with different sizes and forms, so we need to adapt to these features and strengthen and improve financial regulation. Differentiated policies should be implemented to financial institutions of different types. What’s more, we should strive to explore the coordination of monetary policy, fiscal taxation policy, market access policy, and regulatory policy, and build an incentive effective, risk controllable, and coordinated policy support system.

Land is the most important means of production for famers and the most important resource in rural areas; finance is the source of rural funds and the blood in rural economy; social security is the fundamental way to settle farmers’ troubles back at home and get them off the land. The three reforms are preconditions of each other and interact on each other. Only by considering them as a whole and advancing in a coordinated way can we get twice the result with half the effort. Therefore, appropriate fiscal incentive and compensation policy can be made to encourage a comprehensive pilot reform in rural social security, land circulation, and rural finance. First, fiscal incentive and compensation policy for promoting land circulation, famers’ participation in social security and famers’ house construction or purchase should be made. Second, tax reduction or exemption can be offered to famers who start business, obtain jobs or live in small towns. The land scale management, farmers' urbanization, and asset diversification can be advanced and farmers’ mortgage loan capability and consumption-investment level can be raised by tax policies, so as to create the conditions for financial institutions to provide rural financial services. Third, on the basis of pilot experience, the land contractual management rights of qualified farmers who have participated in urban social security and the spare farm house and house site of farmers who have access to basic social security and own two or more houses can be included into the scope of loan collateral, so as to greatly improve famers’ mortgage loan capability, and fundamentally solve the problems in getting loans for farmers.

Chapter 6 Conclusions and Policy Suggestions 6.1 Main conclusions

6.1.1 On the conception and positioning of agricultural and rural finance

Rural finance refers to the financial services such as various types of loans, deposits, exchanges, investment and financing targeted to the demands of agricultural sectors (including rural areas, agriculture and farmers). Rural finance is not different from urban finance in its essence. Both of them are based on a certain degree of commitment (credit), and adjust the distribution of resources among time, space, and different groups of people through the currency circulation between the creditor and the borrower, so as to optimize the distribution of resources. The function of rural financial organizations is the same with that of urban financial organizations, which is to bring the resources (credit) together and redistribute them (it). Similar to urban financial system, rural financial system also consists of financial institutions (special institutions that offer financial products), financial market (trading market for financial products), financial regulation (to properly handle the relationship among risk, cost, and sustainability with financial policies, maintain market fairness, and adjust capital flow and the total amount of money allocated to different fields with macro-control tools), and sub-systems. Different from the category of rural finance in general sense, the study of modern agricultural financial support in this report focuses on the capital supply and acquisition of capital; that is to say, only financial services related to the production and development of agriculture and rural areas are studied. From the perspective of division of the three industries, they can be called agricultural finance. Judging from this, agricultural financial services cover the field of production in agricultural industry, and they serve all main practitioners of agricultural industry, which covers plantation, forestry, animal husbandry, fishery and other industries horizontally, and tertiary industry, which includes production, agricultural processing, scientific research and consultation, and warehousing and logistics. To be more specific, capital demands mainly come from the following four aspects during the economic operation process: capital fund, working capital, infrastructure construction, and purchase and maintenance of production equipment. The suppliers of agricultural finance include: functional departments of government, various types of financial institutions, and private lenders. Accordingly, the capital sources of agricultural finance include: financial funds (including policy-oriented financial funds), commercial financial funds, and private funds. There are many ways to get these funds, such as project fund, government-funded interest discount, bank loans, and private financing. The demanders of agricultural finance include: government departments (especially local governments), agricultural enterprises, farm households and other rural economic entities. Among these, the demands of government departments are embodied in creating basic condition for the development of agricultural industry, such as agricultural infrastructure construction and agricultural financing services. As part of suggestions, it is necessary to make a summary of the features of agricultural and rural finance involved in this report, which should be one of the foundations upon which suggestions are

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas proposed. It is held in this report that agricultural and rural finance has two features that are quite different from urban finance and industrial finance: 1. Rural financial services are high-quality public goods. There is obvious spillover of benefits in agricultural and rural finance; that is to say rural finance is a product with positive externalities. However, as financial resources are scarce, it is necessary for the government to provide public financial products to promote agricultural development. Government-dominated preferential policies for agricultural and rural finance have ensured the advantages of indirect finance; financial market entry, business scope, low interest rate and foreign exchange control have restricted competition and made sure profits can be obtained; powerful administrative guidance has ensured the full embodiment of government will. Such kind of financial system arrangement is one of the important bases to encourage agricultural investment, moderately integrate funds for agricultural development use, ensure the overall stability of financial market, and drive economic growth. 2. There is serious information asymmetry in agricultural and rural financial services market. Since the basic production units in rural China are farm households and small and micro agricultural businesses, there is serious information asymmetry between scattered individuals and concentrated financial institutions that depend on economies of scale. On the one hand, it is impossible for the bank to collect enough information to identity the credit of large numbers of scattered clients as the cost is too high; therefore, when agricultural loans extend beyond the boundary of valid credit constraints, moral risk may incur, resulting in bank losses. On the other hand, due to the unpredictability of agricultural production, farm households’ lack of valid collateral or guarantee, and the information asymmetry between the household and the bank, the regulatory cost of the bank is quite high. While under the condition that interest rate is non-marketized, it is difficult for commercial credit to afford such a high transaction cost; as a result, formal commercial rural finance keeps shrinking. As the transaction cost for a farm household’s single loan is relatively high, banks gradually lose their enthusiasm. These problems call for government intervention, and need to be addressed by providing rural financial services. Accordingly, the development of agricultural and rural finance cannot be separated from government guidance, and in some phrases, it may be government dominated before it is well developed; after that, it will become market-dominated. To be specific: Firstly, for a long period of time, the agricultural and rural financial system in China will develop and become matured with the support from government. This kind of support is reflected in the government’s input in agricultural production, and its efforts in accelerating the growth of farmers’ income, as well as government’s offering of policy-oriented financial services to agriculture, rural areas and farmers. Secondly, the construction and perfection of China’s agricultural and rural financial system should be conducted from several aspects. An ideal rural financial system balancing fairness and efficiency should include policy-oriented rural finance, mutual-aid financial institutions, microfinance institutions, and commercial financial institutions with respective responsibilities and specialization and cooperation. Thirdly, we should make use of the market, actively cultivate and develop rural mutual-aid cooperative organization, and improve the basic condition for agricultural production and agricultural

6.1.2 China has basically established an agricultural and rural financial system combining policy-oriented finance, commercial finance, and rural cooperative finance.

China launched the reform in agricultural finance in the 1990s. In 1994, the Agricultural Development Bank of China was established and agricultural policy-oriented business was separated from Agricultural Bank of China and Rural Credit Cooperative and exclusively handled by Agricultural Development Bank of China; meanwhile, China accelerated the commercialization of Agricultural Bank of China, conducted commercialization reform of Rural Credit Cooperative, and established county-level rural credit cooperatives. In 1996, according to the Decision on the Reform of Rural Financial System enacted by the State Council, Rural Credit Cooperative separated from Agricultural Bank of China, and county-level rural credit cooperatives and People's Bank of China began to take charge of the business management and financial regulation of Rural Credit Cooperative and the cooperative system was adopted. In 1997, the Central Financial Work Conference defined the basic strategy requiring all state-owned commercial banks contract their braches at county-level and below, develop small and medium-sized financial institutions, and support local economic development. Four major state-owned commercial banks, including Agricultural Bank of China, began to contract their branches at county-level and below. In 2005, China started to explore pilot reform of new-type rural financial intuitions in some areas, allowing the establishment of village and town banks, loan companies, and rural mutual fund cooperatives; meanwhile it loosened the merger and reorganization policy for existing banking financial institutions in rural areas and encouraged commercial banks to set up braches in rural areas. The pilot work for new-type financial institutions was expanded to 31 provinces (autonomous regions and municipalities) in October 2007. Postal Savings Bank of China was formally established at the beginning of 2007 and started its commercial operation. In 2013, Agricultural Bank of China set up the Finance Division of “Agriculture, Rural Areas and Farmers”, and began to conduct business in agricultural fields. At present, China has realized the separation of agricultural policy-oriented financial business and commercial financial business. The system construction of agricultural organizations has been constantly improved, and an agricultural and rural financial system combining cooperative finance, policy-oriented finance and commercial finance has gradually formed.

6.1.3 Formal financial institutions are the major suppliers of agricultural and rural financial services in China, while private loans cannot be neglected.

The agricultural and rural financial organization system in China includes: Rural Credit Cooperative (including Rural Commercial Bank and Rural Cooperative Bank), Agricultural Bank of China, Agricultural Development Bank of China, agricultural credit business of China Development Bank, and other relevant agricultural investment companies. Rural Credit Cooperative (including Rural Commercial Bank and Rural Cooperative Bank), Agricultural Bank of China, and Agricultural Development Bank of China are formal participants of rural finance, but it is Rural Credit Cooperative that have performed a wide range of functions in providing agricultural and rural financial services. 1．Rural Credit Cooperative of China. Rural Credit Cooperative is the most basic level of formal 91

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas rural financial institution in rural finance with the largest number of branches. Its branches has almost covered every town, even all rural areas in China, and it is also the only financial institution among those formal rural financial institutions that has direct business with farm households. Rural Credit Cooperative is the core strength for formal rural financial institutions to provide financial services to rural areas and agricultural economy. 2．Agricultural Bank of China. Reestablished in 1979, Agricultural Bank of China is one of the four largest commercial banks in China. The reestablishment was originally designed to support the production and sales of agricultural products, but in fact its business barely had direct relationship with farm households, and most of its loans were invested in state-owned agricultural operation institutions and rural industrial enterprises. After the year 1997, the bank began to accelerate the separation of its policy-oriented business, and its operation became profit-oriented gradually. However, so far some of the bank’s loans are still policy-oriented (such as loans to supply and marketing cooperatives and some poverty alleviation loans), and its daily operation is inevitably intervened by local authorities. Agricultural Bank of China has gradually shifted from rural to urban areas, and its role in promoting rural economy growth is becoming smaller and smaller. 3．Agricultural Development Bank of China. Agricultural Development Bank of China is a significant measure to realize the separation of rural policy-oriented finance and rural commercial finance during the rural financial system reform. It is a policy-oriented bank that supports the development of agriculture and rural areas on behalf of China. As an agricultural policy-oriented bank in China, Agricultural Development Bank of China has played an irreplaceable role in realizing the separation of rural policy-oriented financial business and rural commercial financial business, deepening rural financial system reform, regulating financial resources allocation, implementing government’s agricultural development policies, channeling funds to agriculture, supporting and protecting agricultural development, promoting overall development and poverty alleviation, especially in realizing its specialization in the supply and management of purchasing funds for grain, cotton, and oil, supporting the circulation system reform of grain and oil, and enhancing the stamina for agricultural development. The business of Agricultural Development Bank of China does not directly involve farm households either. Its major task is to undertake policy-oriented financial business according to the regulations of the state and act for the government to appropriate fiscal funds for assisting agriculture. Apart from formal financial participants, the position and influence of private loans in rural financial market cannot be neglected either. The major form of private financing in rural areas is the debt financing between the capital supplier and demander or the debt financing obtained through private financial intermediaries, mainly including financial service offices, foundations, private banks, various rotating savings and credit association, and other private financial institutions. The gap between system supply and demand of informal rural finance is the source of rural private finance.

6.1.4 Problems of insufficient supply, inconvenience, and poor sustainability exist in the development of China’s agricultural finance

Although great progress has been made in China’s agricultural and rural financial services, many technical flaws and system defects still exist, specifically shown as: 1． The coverage of China’s agricultural financial services is inadequate.

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas Based on the cost-benefit analysis, large-scale commercial banks have been making great effort in revoking and merging branches in rural areas and some county-level branches, and small-scale Rural Credit Cooperative (including Rural Commercial Bank and Rural Cooperative Bank) with weak strength has become the major supplier of formal financial services in rural areas. Financial institutions truly serving agriculture and rural areas are insufficient. Private finance is active, but it lack regulations, and the deposit and loan interest rates are relatively high, presenting relatively large financial risks. In addition, there is still a shortage of such non-banking financial institutions as rural securities, trusts, and insurance, and no financial innovation and electronic product has been made. 2． Financial institutions have a strong inclination of leaving agriculture. Practice indicates that large-scale commercial banks have no competitive advantage in providing financial services in rural areas, and their business is unable to adapt to small-peasant economy or settle problems such as the high risk and huge cost caused by serious information asymmetry. China does not lack large-scale banks, but it lacks small and medium-sized financial institutions that are close to grass roots, especially micro-financing organizations that are rooted in rural areas. Relatively speaking, small-scale legal persons (community financial institutions whose services are provided to the whole county) that are more close to farm households and satisfy the basic needs of rural areas are more suitable for serving locals, but the number of corporate financial institutions at county-level is still insufficient. 3． The operating efficiency of rural finance is low. The rural financial market is underdeveloped, relying mainly on indirect financing, and personal investment channels for farmers are limited. Large number of low efficient and invalid investments, unsmooth transform from savings to investment; on the one hand, rural enterprises and farm households face the difficulty in getting loans generally; on the other hand, there is a serious urbanization of rural capital and some rural financial institutions have large sum of idle capital. 4． There is imbalance between the supply and demand of rural financial services. This is presented outstandingly as the incoordination between rural financial structure and rural economic structure. As secondary and tertiary industries develop, production and operation scope and scale of farm households keep expanding, agricultural enterprises and rural enterprises continue to grow, and the proportion of private economy and share economy adds, new financial demands occur. However, current rural financial services are unable to meet these demands. As stated before, among the leading planting and breeding households investigated, 72.2% said it was difficult for them to get access to financing from formal financial institutions in time, and was more difficult for low income families and small farm households. 6.2 Suggestions on promoting the development of agricultural finance in China’s MADAs

6.2.1 Institutional construction

1. To clearly define the function positioning of major agricultural finance suppliers and avoid absence of government in supporting rural finance. In view of the public goods attribute of agricultural and rural finance and the serious information asymmetry, during the development of agricultural finance, the role of government should be effectively and moderately strengthened.

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas Governments at all levels and relevant functional departments such as agricultural sector, development and reform sector, financial sector, system of People’s Bank of China and regulatory sector, should reposition their functions, which should focus on the prevention of exceeding performance of duty, instead of function absence. 2. To optimize the way of fiscal support to the development of agricultural and rural financial services. Incentive and compensation policies for agricultural financial institutions should be halted and tax exemption policy for agricultural business should be implemented instead (the current business tax is 3%). Meanwhile, agricultural financial institutions should be required to lower their loan interest rates appropriately or reduce direct subsidies to relevant suppliers and demanders, and replace them with discount interest and guiding funds, so as to drive financial funds to invest in agriculture and rural areas and make full use of the leverage effect. 3. To strengthen the support for agricultural finance. Of the future increment of funds used for supporting agricultural development, the proportion for supporting the development of agricultural and rural finance should be increased, such as increasing the support to policy-oriented agricultural insurance. 4. To build and perfect the rural land-based financial system. Rural land finance refers to the financing with rural land (home site) as the credit guarantee (collateral). Essentially, this kind of finance is to perform the property function of lands, restart the funds fixed on lands, and put them into circulation, so as to expand the source of social funds. It is suggested that rural land finance cooperates with current pilot work for rural land contractual management right mortgage, select some regions in which local governments and financial sectors jointly establish land contractual management right settlement institutions, which are responsible for the management of land contractual management rights of farm households who are unable to pay off their loans and returning them to farm households when mortgage term expires, so as to address the problem of realization of land contractual management right mortgage. 5. To strengthen the guiding role of policy-oriented finance. As the only agricultural policy-oriented bank currently, Agricultural Development Bank of China should gradually change into a comprehensive policy-oriented bank. Agricultural Development Bank of China should improve and perfect its policy-oriented financial services, continue to support the construction of grain and oil reserve system, and conduct policy-oriented business such as supply and governance of grain, cotton, oil purchasing funds. As to business development, the bank should adjust and enrich its business scope based on its current situation, actively provide loans for industrialized operation of grain and oil, reposition its role in the market, adjust its credit structure, and shift its focus from supporting agricultural products circulation to agricultural production, thus making it a comprehensive policy-oriented bank supporting rural development. At the same time, Agricultural Development Bank of China should widen its business coverage and enhance its ability to serve agriculture by adding basic-level outlets, and taking over some basic-level outlets of state-owned commercial banks and making them its own braches. What’s more, the bank should start offering poverty alleviation and development project loans, comprehensive agricultural development loans, rural basic construction loans, and technical transformation loans gradually. By issuing agricultural financial bonds and setting up agricultural development funds, it can widen its fundraising channels. 6. To steer commercial banks to develop business of agricultural and rural finance. Various preferential measures and policy orientation can be used to guide commercial banks to expand business

Asian Development Bank: Final term report on the study on the financial support for the modern agricultural development in China , part of program (No. 46082), which is about the People's Republic of China: research on the construction plan and the financial support for the modern agricultural demonstration areas that support agriculture in rural financial market, narrow down the difference between deposit and loan rates in rural financial market, exert its solid strength, and contribute to agricultural and rural economic development. Meanwhile, the commercialization principle should be followed to promote the reform of post savings, develop postal savings banks, and guide the capital of postal savings to support agriculture, rural areas, and farmers. In addition, although Agricultural Bank of China has become a profit-seeking commercial bank, it has obvious advantages with its abundant experience in rural financial business as an agricultural professional bank and relatively large number of branches in rural areas. In contrast, Agricultural Bank of China is less competitive in urban areas. Judging from its self-development, Agricultural Bank of China should continue to moderately adjust its development strategy and continue to make full use of its traditional strengths. 7. To build and perfect the system of laws and regulations for agricultural finance. First of all it is recommended to formulate the Agricultural and Rural Investment Act , and make mandatory provisions requiring all national financial institutions own a certain number of branches or a certain amount of asset, and spend a proportion of funds in supporting rural economic development in proper manners. Secondly, it is suggested to offer a loose policy of deposit reserve to rural financial institutions with good creditworthiness. Lowering deposit reserve ratio can enhance the fund supply capacity of rural financial institutions quickly and effectively. On the basis of current differential deposit reserve ratio policy for rural financial institutions, a more powerful reserve ratio policy can be considered, and all loanable funds increased from this should be used in rural fund supply. In the meantime, as an encouragement, the deposit reserve ratios of financial institutions can be bound with their proportion of agricultural loans. Thirdly, it is suggested to loosen the market entry threshold for agricultural and rural finance. Restrictions on rural financial market access can be relaxed, and diversified financial organizations including non-governmental microcredits and other private financial cooperative organizations can be introduced. We can encourage the establishment of private financial institutions, which can be privately owned banks, cooperative banks, credit unions, or cooperative foundations, thus creating a healthy competition among different arrangement of rural financial system. Moderate competition is sure to improve the efficiency of rural financial services, expand rural financial service supply, satisfy demands for financial services at different levels, and finally realize the “generalized system of preferences and broad coverage” of rural finance.

6.2.2 Mechanism innovation and business innovation

1. To build and Standardize a GEM (growth enterprise market) for agricultural industry. It is suggested that the growth enterprise market for agricultural industry be created and regulated by agricultural sector, and provide direct financing to agricultural entities with certain size within modern agriculture demonstration areas, since there is a bottleneck in current indirect financing in agricultural industry. Specific solution and risk prevention can be learned from the operation experience of second-board market for industrial enterprises and a new three board market for Science and technology enterprises. 2. To develop agricultural futures market. The development of agricultural futures market can effectively optimize the allocation of agricultural resources, and is helpful to the sustainable

6.2.3 Institution building

For many years, China has been paying great attention to financial services that support agricultural and rural development. However, there is a big gap between actual situation and what has been expected. To address the problems in agricultural and rural areas, agricultural sectors should play the main role, and appropriate leading coordinating institutions should be established. The functions of various rural financial institutions should be clearly positioned, and the current rural financial system should be perfected. Meanwhile, innovation of rural financial organizations should be actively promoted, and rural financial organization system should continue to be perfected. 1. To establish an Office of Promoting Agricultural Financial Development. It is suggested that the State Council establish the Office of Promoting Agricultural financial Development, which is administered under the Ministry of Agriculture. Its members should include: Ministry of Agriculture, People’s Bank of China, China Banking Regulatory Commission, China Insurance Regulatory Commission, China Securities Regulatory Commission, Ministry of Finance, and National Development and Reform Commission. Duties of this office include: studying relevant national policies and suggestions to promote the development of agricultural and rural finance, making suggestions in amending and making laws and regulations in accordance with relevant procedures, guiding the work to promote the development of local agricultural and rural finance, following up and investigating the development of agricultural and rural finance, and finding out problems and proposing countermeasures. 2．To perfect the guarantee mechanism and innovate guarantee organizations. A nationwide agricultural industry guarantee fund led by Ministry of Agriculture and Ministry of Finance can be funded to provide guarantee for local governments when they apply for bundling agricultural loans to the headquarters of financial institutions. County-scale agricultural industry guarantee funds or guarantee institutions can be set up to make full use of the information superiority of basic-level

6.2.4 To promoting construction of trustworthy culture for agricultural and rural financial development

1. To enhance the publicity of integrity and establish integrity awareness. A development strategy for developing integrity in rural financial market should be implemented. While focusing on the institutional characteristics of integrity, we cannot ignore its moral and cultural sense at the psychological level of social values, from the perspective of which, integrity is the reflection of the internalization of credit relation as the values of the trader. Firstly, integrity and faithfulness should be included into the main content of promoting cultural and ideological progress, so as to enhance the incentive and constraint functions of social public opinions. With various mass media represented by newspaper, television, broadcast, and network, timely publication of advanced figures with integrity and trustworthiness, advanced units, exemplary deeds in a matter-of-fact matter, disclosure of malicious defaults, loss of credibility, following up of the investigation and settlement of major cases of loss of credibility, disclosure of information about authorities’ credit, promotion of contract spirit, creation of a credit culture and ethical trend full of integrity and trustworthiness, the motivation and restraint force of public opinion can be strengthened. To escort for the construction of social credit. Secondly, the financial credit system should be comprehensively strengthened. On the basis of scientification and legalization, credit assessment and credit rating should be conducted to each region and each industry. An example of good credit and an example of bad credit can be set up and subjected to surveillance by public opinions, and different credit qualification and correspondent awards and punishment should be considered. Thirdly, the corporate culture construction and integrity cultural construction are to be combined. Led by industrial associations, it is suggested to conduct vocational ethics education and corporate cultural construction, centering on integrity and faithfulness, thus developing an “integrity-based” culture that advocates honest behavior, creditable business-founder, and honors integrity and dishonors promise breaking. Lastly, integrity education at different levels should be conducted from the perspectives of ethics and finance. International experiences can be learned to conduct vocational credit education and short-term trainings, especially the in-service credit education targeted on government officials and business managers. In ethic sense, credit education should run through the entire process of moral education. We should conduct study on credit management from both theoretical and practical aspects, so as to provide theoretical and empirical basis for law-making, system construction, policy design,

References

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