«
Rural Finance and Credit Infrastructure in China
China’s rural economy has made enormous progress over the last twenty-five years. But rural
finance and institutional reforms are still lagging behind, thus creating the risk of slowing down
further rural development.
In October 2003, the OECD, together with the Chinese Government, invited industry experts to take
stock of the achievements China has made in agricultural finance and credit infrastructure. They
also discussed how China could best address future challenges in this area. Over 60 participants
including Chinese policy makers and experts, representatives from the World Bank, FAO, the
European Bank for Reconstruction and Development, the Asian Development Bank and PlaNet
Finance came together to share their views and experience.
Rural Finance and Credit Infrastructure in China outlines the main issues discussed, from the
reasons for improving China’s rural finance to finding a suitable institutional framework. It also
considers the role that the Chinese government should play within the reform process, now and in
the future.
This book is aimed at anyone interested in agricultural and financial growth in China from
academics and policy makers to students.
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the world.
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Workshop provided a unique venue for an overview of rural finance reforms by Chinese policy
makers; the latest results of research and surveys undertaken by Chinese and international experts; and
the results of reforms in other emerging and transition countries relevant to China.
These proceedings are produced under the auspices of the Centre for Co-operation with
Non-Members of the OECD as part of its programme of co-operation with China. This work is
published under the responsibility of the Secretary-General of the OECD.

Stefan Tangermann
Director
Directorate for Food, Agriculture and Fisheries
William Witherell
Director
Directorate for Financial and Enterprise Affairs 4

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The organisation of the Workshop and the preparation of these proceedings were carried out by
Andrzej Kwiecinski, Stephanie Küch and Anita Lari from the OECD’s Directorate for Food,
Agriculture and Fisheries in close co-operation with Akira Konishi, Jaimie Ellis and Marjanna
Bergman from the OECD’s Directorate for Financial and Enterprise Affairs. Na Li prepared and
organised the Workshop on behalf of the Chinese Ministry of Agriculture. The Workshop benefited
from financial support provided by the Japanese government. Special thanks are extended to all those
who provided papers and contributed to the success of the discussions. The papers were edited by
Andrzej Kwiecinski, Xiande Li and Michèle Patterson. Anita Lari assembled and formatted the final
publication. 5

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The rural financial sector in China lags behind the development of the real sector, remains
structurally weak, and slows down rural development. This is partly due to the slow process of reform
in rural finance institutions, but it can also be attributed to more general problems in the country such
as the continued channelling of financial resources to state owned enterprises (SOEs), as well as the
growing financial fragility and management challenges facing Chinese banks.
Since the reforms started at the end of the 1970s, consolidated data on rural savings and loans
indicate a net transfer of financial resources from agriculture to industry. While it is difficult to
determine the extent to which this reflects the response of rational investors moving funds from low to
high return sectors or results from institutional deficiencies in the financial and fiscal system, it is clear
that both agriculture and rural industries face important credit constraints.
Access to credit is particularly difficult for small-scale farmers. According to a recent national
survey of rural families, only 16% of farmers have recourse to formal or informal credit. This is partly
due to the lack of collateral (the land belongs to collectives) and the high transaction costs involved in
obtaining formal credit, but also to the closing of many local branches of financial institutions and the
failure of new ones to emerge. As a result, more than 70% of loans are obtained through informal
channels while less than 30% are from financial institutions.
The main objective of the :RUNVKRSRQ5XUDO)LQDQFHDQG&UHGLW,QIUDVWUXFWXUHLQ&KLQD held in
Paris on 13-14 October 2003 was to identify problems and to suggest policies and approaches to

x Competition on financial markets is a precondition for inducing innovation and stimulation of
efficiency on these markets.
x The government needs to establish an adequate legal framework as well as law enforcement
mechanisms. As soon as this is accomplished, the government needs to follow consistent policies
and avoid discretionary actions.
x If state interventions affecting credit allocation and its cost are undertaken, they should be
targeted and limited in scope and time. Credit programmes supported by the government
(HJ guarantees, subsidies) are just one option and not necessarily the most effective policy
instrument for achieving economic growth and/or reducing rural poverty.
x Rural Credit Co-operatives (RCCs) should be self-sustainable institutions, capable of constant
innovation to withstand competition of commercial banks. The process of clarification of
ownership rights within RCCs needs to be completed.
x While full-fledged private land ownership rights are not likely in China in the near future, farmers
should be able to use long-term land use rights as collateral.
x In many transition economies, non-bank loans such as processor and trade credit have proven to
be a successful means for extending the frontier of credit available to rural households. The
challenge for public policy is to secure transparency of such transactions and to prevent the
danger of monopolisation.
x Micro-finance institutions can be a practical instrument for addressing the needs of low-income
rural borrowers. While subsidies might be needed to reduce the transaction costs of setting-up
such institutions, once established they should function on a commercial basis and should be
integrated as much as necessary into the overall financial system and supervision.
x The emergence of informal/illegal lending is of growing importance for small-scale farmers and
small businesses in rural areas that lack collateral and are virtually excluded from the formal
financial sector. Their rapid development highlights the need for reforms in the formal sector.

9

x A flexible legal framework and deregulated interest rates for lending and deposits should allow
informal institutions to operate legally and to gradually evolve into formal institutions.

small farmers’ access to loans. However, no substantial progress with regard to a rural finance
management system and the clarification of property rights in rural financial institutions has been
achieved. The author discusses several proposals for further reforms, such as a clear distinction
between government policy and commercial finance, the transfer of all government policy measures to
one bank fully responsible for the implementation of government-supported loans for agriculture and
rural areas, the reorganisation and integration of all financial institutions within county areas, and the
continued liberalisation of interest rates.
7KRPSVRQexamines the main problems facing the financial system in China. He suggests that
the effectiveness of the reform largely depends on how well it performs three basic tasks: mobilising
national savings, allocating credit in an efficient way and encouraging efficient resource utilisation.
China has done very well with respect to the first task. But the reform has been less effective in
allocating credit in an efficient way. More than 90% of funds go to SOEs while dynamic sectors such
as agriculture, small and medium enterprises and the private sector have been on hold. Likewise, the

10

reform has not encouraged efficient resource utilisation in the real economy. The author identifies
main problems of credit misallocation and weak balance sheets in the banking system. He also
highlights specific measures that need to be taken to improve the operation of banks as effective
market-based credit intermediaries.
6HVVLRQ,, explores 3ULYDWH DQG FRRSHUDWLYH EDQNLQJ IRU &KLQD¶V UXUDO DUHDV. 0D analyses
constraints in the supply of and demand for rural finance in China. The author observes that supply
constraints are much more important and that they mainly result from an insufficient network of
official financial institutions. Constraints on the demand side are of secondary importance and are
determined by the low degree of commercialisation of economic activities in rural China. The author
suggests that if complex financial constraints are to be removed, it is necessary to proceed from both
the demand and the supply side.
9DQ(PSHOand 6PLWdiscuss the preconditions for the development of an effective rural banking
system in China, concluding that RCCs are the backbone of Chinese rural finance and that there is no
real alternative solution for providing broad access to financial services in rural China, than to

of various economic agents in rural China brought into operation by the economic transformation of

11

Chinese agriculture and the rural economy. However, since the early 1980s when reform of the
Chinese finance system began, there has been no substantial improvement in this respect. The author
suggests ways on how to build a diversified structure, but warns that it is not a panacea for resolving
all of the problems concerning the provision of funds for rural areas.
6NHHV and%DUQHWWdiscuss the crop insurance issue and observe that without considerable
government subsidies it is very difficult to insure farm-level crop yields from losses caused by natural
risks. They present an alternative form of insurance that makes payments based not on measures of
individual farm yields, but on either area yields or some weather events. This form of insurance is
referred to as “index” insurance, since payments are triggered by realizations of a pre-specified index
measure rather than by realised farm yields. According to the authors, the index insurance provides an
effective market-based risk-sharing alternative for agriculture.
6ODQJHQ analyses the main features and pre-conditions for successful contract farming and
outlines other inter-linked trade/credit arrangements between agribusiness and farmers. He observes
that major changes in consumption habits together with the appearance of fast-food outlets and
supermarkets provide a main impetus for the rapid expansion of contract farming. The author notes
that in many countries state-administered support services have mostly failed and small farmers are
facing an environment that is increasingly dominated by private enterprises and international
competition. This raises the pressure on farm households to diversify into new agricultural
commodities and ventures and imposes on them a need to establish input/output linkages with
agribusiness enterprises.
/ODQWRand)XNXLhighlight the importance of micro-finance and provide an overview of some
innovations in micro-finance institutions (MFIs) in south-east Asian economies. They conclude that
innovations help reduce the MFIs’ transaction costs and risks and make it possible for poor households
to smooth investment and consumption fluctuations. The authors stress the critical role of government
in ensuring the proper functioning of markets, in effective regulation of supervision of financial
institutions to protect depositors, in supporting institutional innovation as opposed to product and

programmes.
)XNXL and/ODQWRprovide an overview of rural finance and micro-finance development in
transition countries in South-East and East Asia. They focus on the institutional evolution and the
inter-relation between policies and institutions and identify the diverse effects that formal and
semi-formal financial institutions have to reach out to the poor in rural areas as well as the small
economic players in the countryside. The authors discuss several policy implications such as the
adoption of a market-based policy framework, the removal of restrictions preventing micro-finance
institutions to operate, the establishment of legal and regulatory framework for micro-finance, and the
improvement in governance of indigenous financial systems.
3DLUDXOW examines the stages of transformation from informal micro-finance institutions toward
formal banking institutions. The author observes that this type of transformation takes a long time as it
took one hundred years in Taiwan. It began in 1895 when the Chinese Imperial government
relinquished sovereignty over the island and then ceded it to Japan. It ended in 1995 when Small and
Medium Business Banks no longer had to manage ROSCA-based funds. The author stresses that both
the Japanese colonial government and, later, the Chinese government have relied on similar strategies
in dealing with ROSCA-based forms of finance: by regulating them, by rarely banning them, and by
allowing certain types of micro-finance institutions to absorb them.
Five additional papers submitted to the Workshop are annexed to these Proceedings. These
papers provide valuable information on the development of and reform in the Chinese financial sector.
&KHQ )DQ presents the results from a farm level survey focusing on mechanisms affecting credit
demand and supply in rural areas. &KHQ /LDQJELDR describes pilot experiments in the Jiangsu
province to transform RCCs into local rural commercial banks. /Lexamines the main challenges faced
by agricultural insurance in China. /XR analyses factors which weaken the provision of rural financial
services and explores ways to improve the supply of such services. 2X\DQJ discusses the policy
options for liberalising interest rates and the possible effects on farmers’ incomes and rural
development. 13


is among the most pressing issues on China’s reform agenda today, with this workshop the
co-operation between the Ministry of Agriculture and OECD therefore moved to a broader view on
conditions for rural development rather than looking at the development of agriculture and agricultural
policies alone.
This brings me to the topic of today’s workshop on rural finance and credit infrastructure.
Evidence shows that reduced access to finance is an impediment to the development of agriculture as
well as creation of off-farm employment and thus enlarged opportunities for income generation in
rural areas of many developing and transition economies. Establishing a comprehensive and efficient
rural credit system providing finance for both the dynamic, commercial sector of the rural economy
(agricultural and non-agricultural) and the sector of small-scale farming, which lacks collateral and is
isolated from markets, is one of the major challenges especially for countries like China with vast rural
areas and a still dominant role of agriculture for large parts of the population.
The main objective of this workshop therefore is to identify bottlenecks and to suggest policies
and approaches to develop a well-functioning and sustainable agricultural and rural finance system,
which would address the diverse needs of the rural and agriculture sectors. Doing so we will be able to
draw on the experiences of different types of countries, LH OECD member countries, emerging
economies in East and South East Asia as well as transition countries in Central and Eastern Europe,
and on that basis discuss the current situation, reform challenges and prospects of China’s rural
financial sector. We are happy that we can welcome such a broad array of experts here today,

16

providing us with in depth knowledge on reforms in different countries and all the different forms of
rural financing arrangements both traditional and innovative.
So, on behalf of OECD let me again express my pleasure to welcome all the Chinese experts and
policy makers, together with experts from OECD member and non-member countries, and from the
OECD Secretariat. I am looking forward very much to fruitful discussions leading once more to
mutual benefits for all participants like during our previous workshops.
Thank you.


credit co-operatives, compose a relatively complete financial system serving Chinese agriculture and
the needs of those living in the countryside. Secondly, the functions of rural financial institutions have
been constantly enhanced, and various tools and instruments of financial services have been created.
In particular, micro-finance loans for peasant households and co-insured loans help farmers to obtain
loans on easier terms and have been highly praised by farmers in particular and society in general.
Thirdly, the capital quality and operational performance of rural financial institutions have improved.
With the deepening of reform and improved internal management, self-development and
responsibility, financial institutions are gradually improving the quality of their capital and
management practices, creating a firm foundation for the sustainable development of rural finance.
We realise that although China has made progress in reforming the rural financial system in
recent years, there are still problems in meeting the increasing demand for capital and credit in the
countryside, and providing support for the stable development of Chinese agriculture. In particular, as
China undertakes complex reforms to develop the market economy, there has been no substantial
progress with regard to the rural finance management and property rights systems. Many questions
need further analysis and more studies. As the OECD and its members have much experience with the
reform and development of rural finance, I think that that experience can be used as a reference in

18

China, particularly in view of the good communication and close cooperation that exists between
China and OECD countries.
Faced with economic globalisation and the important task of accelerating its modernisation
process, Chinese agriculture in the 21
st
century is facing new opportunities and challenges.
Market-oriented reforms of the rural financial system is a general trend which will be beneficial to
both China and world agriculture. We hope this workshop will provide useful information to support
reforms of the rural financial system in China.
I would like to thank the OECD and the Japanese Embassy for sponsoring this workshop and I
hope that our joint efforts will further promote communication and cooperation on Chinese rural

expertise in various fields. It also offers opportunities where participants from different countries with
various backgrounds can exchange their views and experience using the accumulated knowledge
offered by the OECD Secretariat, which itself is international in composition. Through such activities,
participants can surely gain lessons and information useful for their respective work as policymakers,
scholars or businesspersons. This in turn will, in the long run, promote economic activities in the right
direction and foster co-operation between countries for global economic development. In this regard,
OECD is worthy of its name of “Organisation for Economic Co-operation and Development.”
Asia is one of the world’s economic development centres and its importance in the world
economy has been steadily growing. The theme of this workshop is one that all countries had or will
have to tackle. This particular theme is also an ambitious one from the perspective that it will open a
new frontier in Asia.
Today, we have prominent experts attending this workshop as well as many interesting items on
the agenda. I hope that we will have constructive discussions and that each participant will gain useful
insights from this workshop. I would also like to draw your attention to the relationships which will
surely develop among the participants during this conference and which will be a great asset for our
future co-operative works.
In closing, I once again express our gratitude to the OECD Secretariat and wish all of you a great
two-day conference.

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The use of government budget channels for rural investment mainly consists of investment in
such areas as agricultural production, agricultural science and technology, the spread of technology,
agricultural ecology and environmental protection, together with investment in related areas such as
water conservancy, meteorology and forestry. Of the twelve “Green Box” policy measures permitted
by the World Trade Organisation (WTO), China uses six (government payment for general services,
public stockholding for food security purpose, domestic food aid, payment for relief from natural
disasters, payment under environmental programmes and payment under regional assistance
programmes). On the 1996–1998 base calculation period, annual average “Amber Box” expenditure
was 29.7 billion Yuan, 1.23% of the total agricultural output value. When compared with the 8.5%
(174 billion Yuan) permitted through WTO negotiations, there is still a 144.3 billion Yuan gap in
China’s “Amber Box” support.

24

In recent years, an important source for the Chinese government’s investment to support rural
development has been the public debt. Between 1998 and 2001, total increase in investment in rural
areas financed from this source was 144.6 billion Yuan, representing 28.35% of the total public debt
increase of 510 billion Yuan. These funds were mainly used for infrastructure projects such as water
conservancy, forestry, agriculture and meteorology, and for ecological and environmental construction
projects in key areas. In the distribution of projects and provision of capital, the focus was on areas of
central and western China. By industry, provision was as follows. Between 1998 and 2001, the state
provided 104.1 billion Yuan for water conservancy projects, accounting for 72% of the total, and
27 billion Yuan for forestry projects, more than the total investment in forestry for the twenty years
prior to reform and opening up policy.
Investment in rural development also includes investment in education, medical treatment and
health. In all, investment in compulsory education in rural China has increased continuously, rising
from 48.6 billion Yuan in 1994 to 92 billion Yuan in 2000 with expenditure for compulsory rural
education rising from 28.7 billion Yuan in 1994 to 59.8 billion Yuan in 2000. However, such

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The Agricultural Development Bank of China (ADBC), the Agricultural Bank of China (ABC)
and Rural Credit Co-operatives (RCCs) are the three main financial institutions serving Chinese