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Redesigning Agricultural Credit Delivery in China

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Redesigning Agricultural Credit Delivery in China Paulson Policy Memorandum Redesigning Agricultural Credit Delivery in China Calum G. Turvey April 2016 Paulson Policy Memorandum About the Author Calum G. Turvey Calum G. Turvey is the W. I. Myers Professor of Agricultural Finance at Cornell University, teaching in the Charles H. Dyson School of Applied Economics and Management. He also serves as the Editor of Agricultural Finance Review. Turvey received his PhD from Purdue University in 1988 and then joined the faculty of Agricultural Economics and Business at the University of Guelph, teaching there until 2002. In 2002 he joined the faculty of the Department of Agricultural, Food and Resource Economics as professor and director of the Food Policy Institute and Chair from 2003-2005. In 2005 he moved to the Department of Applied Economics and Management at Cornell, assuming the Myers chair. He conducts research in the areas of agricultural finance, risk management, and agricultural policy. The author is grateful to Holly H. Fu, Shandong University of Finance and Economics, for walking him through the evolution of credit and Nong Ben Ju. Any errors, omissions, and all opinions expressed in this paper are entirely the responsibility of the author. Cover Photo: Reuters/Sheng Li Paulson Policy Memorandum Introduction he rural credit financial delivery the designations by RCCs of credit system in China is a blend of worthy villages, the use of tax laws Tcapitalistic, market-oriented to encourage joint stock village and finance and social responsibility. Under commercial banks to establish branch current reforms, many Rural Credit offices in poverty zones, establishing a Cooperatives (RCCs) are converting to regulatory framework for mobile and joint stock Rural Commercial Banks Internet financial services, and, in what (RCBs) and, in the process of maximizing might be the most significant structural shareholder value, are in many instances change in China’s agricultural economy reducing lending to farm households. in recent years, the promulgation of laws to relax restrictions on transacting Recent reforms now permit village and land use rights and issuing mortgages township banks, branches of city banks, against land use rights.1 micro-credit companies and lending- only companies to make loans in rural Yet despite these financial innovations areas. But increasing the overall supply of and reforms, China still faces an ever- credit to rural areas does not necessarily widening gap in urban-rural incomes. imply an increase in Deepening the the supply of credit to There are many townships throughout financial markets has production agriculture China that still have no or limited not resulted in the or agriculturally related access to formal credit. requisite spillover businesses. Indeed, effects to reverse there are many townships throughout income inequality that economic China that still have no or limited access theory predicts. to formal credit. Moreover, the problems of income, To be sure, China is actively seeking capital, and productive inequality are changes to its institutional structures, directly related to China’s broader and at the highest levels has appointed goals of urbanization, increased offices for financial inclusion to commercialization of agriculture, and promote policies and programs aimed the development and streamlining of at improving the breadth and depth agricultural supply and value chains to of financial services to farmers, value meet domestic and global food demand. chains, and agriculturally related businesses. These include direct The credit challenges facing China are support to transform mutual self-help daunting, with credit demand required groups to RCC supported cooperatives, at the intensive margin to increase Redesigning Agricultural Credit Delivery in China 1 Paulson Policy Memorandum productivity per unit of land and at the of the formal financial sector as a extensive margin to meet the demands whole. In terms of social responsibility, of farm size expansion and agribusiness uncoordinated agricultural lending development. With about 250 million can lead to technical and allocation farm households representing about inefficiencies that can only exacerbate 750 million persons, the amount of the problems that policy is attempting capital required to achieve wins in all to resolve. of these policy goals is substantially greater than the amount that China’s Should China consider a nationally commercialized credit system is able, or coordinated approach to delivery of indeed willing, to provide. agricultural credit as is found with the American Farm Credit System or This memorandum explores whether Canadian Farm Credit Corporation the genesis of rural credit as described (FCC) and government supported credit above is healthy for agriculture and elsewhere? While acknowledging rural lending. On the merits of economic the very real political and economic efficiency, the answer is probably sensitivities and difficulties, this memo yes. But an uncoordinated system of argues for a new government-sponsored costly rural credit delivery will likely enterprise for sourcing, coordinating, and be unattractive to many financial distributing agricultural credit, drawing in institutions and thus may prove to part off the experience of the Nong Ben be a hindrance to the development Ju—a program from the mid-1930s. Redesigning Agricultural Credit Delivery in China 2 Paulson Policy Memorandum What Was The Nong Ben Ju? nitiated in 1936, Nong Ben Ju was a 1933 and one of the four largest banks program of agricultural development of the Republican period), and the Idesigned to coordinate agricultural issuance of bonds secured by the assets activities at the micro and macro levels, of system banks. Initial capital would including the provision of agricultural be provided to rural savings and loans, credit.2 Administered through the cooperatives, and pawnshops. Agricultural Credit Administration, it was to be the culmination of many years of To maintain liquidity and credit reserves, effort to bring agriculture, agricultural allowances were made for rediscounting development, and agricultural and remortgaging farm loans. In reconstruction into the financial system. addition, the Farm Credit Bank would promote a network of granaries and Nong Ben Ju included elements of other storage facilities that would be the German-based Raiffesen system able to make loans to farmers secured toward agricultural on future harvest. cooperation and the American Farm For various reasons, Credit System. But not least of which in many respects, the war with Japan Nong Ben Ju went that began in 1937, further in the sense Nong Ben Ju did not that it aimed not come to fruition. just to promote Debate ensued access to credit and as to whether to support financial such an entity institutions for Photo: Flickr/Hong Meen Chee should include agriculture, but also to promote and commercial bank interests in making direct Chinese agricultural policy with a loans to non-agricultural enterprises very visible hand. or whether it should follow the American Farm Credit Administration In terms of farm credit, Nong Ben Ju was and restrict credit activities to farms, designed around a tripartite funding agriculturally related businesses, and program, including direct transfers from rural development. the government, capital contributions from the four policy banks of the era Regardless of intent, by 1948 there backed by commercial paper (including was still no active legislation on an the Farmers Bank of China, founded in agricultural credit system in China, Redesigning Agricultural Credit Delivery in China 3 Paulson Policy Memorandum although it was quite clear that a to make agricultural loans. The effort system similar in design to the American also focused on specializing meso-level cooperative system was held in favor financial institutions and organizations, during the Republican period. For as well as unifying banks, credit example, the Committee for Planning on cooperatives, and savings and loans at Agricultural Credit of the Farmers Bank the micro level. of China sought to coordinate basic agricultural agencies and institutions. With this brief history, it is evident that the competing objectives of a robust This included unifying the agricultural and efficient financial sector on the one credit system by centralizing the hand, and ensuring farm households upper echelons of the system with welfare, commercializing agriculture, the authority to issue (and secure) and promoting rural development on bonds to supplement deposit capital the other, are not new to China. Redesigning Agricultural Credit Delivery in China 4 Paulson Policy Memorandum A New System of Agricultural Finance in China istorical experiences in Western The cooperatives structure, however, has agricultural finance suggest that been changing rapidly in recent years Hit is often necessary to establish as they convert to banks, though these a publicly supported and regulated conversions are primarily for purposes of financial system for agriculture that governance and access to capital. In most operate in parallel and in tandem cases, the RCBs are not withdrawing with a competitive banking system. entirely from rural lending but shoring up Examples are numerous, including the capital to increase lending. Landschaft in Germany, the Credite Agricole in France, the Farm Credit The rural credit cooperative system in Administration in the United States, any contemporary Chinese province and the FCC in Canada.3 is managed by the provincial
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