By Cheng Yu

Research Report Vol.21 No.4, 2019

The 19th National Congress of the Communist Party of China made a major decision to pursue a rural revitalization strategy. In pursing that strategy, General Secretary Xi Jinping has made it clear that we must prioritize the development of agriculture and rural areas, which essentially requires adequate financial input. However, the current unbalanced urban-rural development has generally left rural areas behind. Instead of attracting financial input, a completely market-oriented way of allocating financial resources will only divert funds from underdeveloped rural areas. In order to promote rural revitalization, it is necessary to deepen the supply-side reform of rural finance, systematically reverse the flow of financial resources from rural to urban areas, and put in place policy mechanisms that will direct financial resources to support rural development.

I. Unbalanced Allocation of Financial Resource between Urban and Rural Areas Remains Prominent

China’s urban-rural dual economic structure has for a long time led to the unbalanced allocation of financial resources between urban and rural areas, a prominent issue that notably leaves rural areas behind in terms of financialdevelopment. The longstanding outflow of highly liquid rural funds, as profit-seeking as they are, further worsens the situation. Experts estimate that up to RMB 6625.689 billion flew out of rural areas from 1978 to 2012 via rural credit cooperatives, rural commercial banks, and branches of the Agricultural Bank of China and the Postal Savings Bank of China.

Starting with the reform of rural credit cooperatives in 2004, China has continued to promote the reform of the rural financial system. As a result, rural financing is gradually changing for the better. First, China’s rural credit cooperatives have significantly improved their asset quality and become better service providers for rural development thanks to the “money for mechanism” reform of rural credit cooperatives. As of the end of 2016, China’s whole rural credit cooperative system[]① saw a decrease from 21.04% in 2007 to 3.79% in terms of the non-performing loan ratio and an increase from -0.1% to 12.13% in terms of the capital adequacy ratio. Second, China has expanded the scale and service coverage of new rural financial institutions such as village and township banks, microfinance companies, and rural mutual cooperatives and put in place a diversified rural financial service framework. The Agricultural Bank of China and the Postal Savings Bank of China have restructured their rural microfinance department, which, together with subsidy policies for financial service outlets in underdeveloped regions, has contributed to the full coverage of inclusive financial services in rural areas. In 2009, there were 2,945 villages/towns nationwide with no local financial institutions. At the end of 2016, that number dropped to 1296. The number of rural financial service outlets reached 83,750, an increase of 7,854 compared with that of 2012. By the end of 2018, there were 1,427 rural commercial banks, 812 rural credit cooperatives, 30 rural cooperative banks, 1616 village and township banks, 13 microfinance companies, and 45 rural mutual cooperatives nationwide. Third, China has put in place effective incentives and restrictions to better guide financial institutions in the service of rural areas. On the one hand, county-level financial institutions are assessed regularly against restrictions on agriculture-related loans and “local deposits for local loans” requirements. On the other hand, they are rewarded with incentives for increased agriculture-related loans, targeted operational subsidies and requirement reserve ratio (RRR) reductions exclusive for rural financial institutions, agriculture-supporting re-loans, and other favorable policies. China has also encouraged innovative mortgage and security practices in rural areas, significantly increasing the total amount of rural credit loans. As of the end of December 2017, China’s total agriculture-related loan balance reached RMB 30.95 trillion, four times that of 2007.

However, crucial institutional factors that have been holding back financial resources from rural areas for a long time remain unchanged and China still has a long way to go before fully unleashing the potential of rural financial demand. The allocation of deposits and loans in urban and rural areas remain reversed and it is still difficult for policy-led ‘blood transfusion’ to make up for ‘blood loss’ in terms of rural finance. A study of the loan and deposit ratio of county-level financial institutions in 2016 finds that only in village and township banks the ratio exceeded 70%. For rural credit cooperatives and rural commercial banks, the ratio was about 62%, while for the Agricultural Bank and the Postal Savings Bank the ratio was only 49% and 23% respectively (see Figure 1)[]②. From 2013 to 2016, the net outflow of county deposits was RMB 1,436.827 billion per year while that of deposits combined reached RMB 5,743.708 billion (see table below)[]③. At the same time, the growth rate of agriculture-related loans continued to decline. Since 2014, the balance growth rate of agriculture-related loans had remained lower than that of all other loans. The proportion of loans granted to rural households increased slowly. As of the end of 2017, only 26.17% of all agriculture-related loans were granted to rural households. (see Figure 2). Although government policies prioritize financial services for agriculture, rural areas, and farmers, credit loans were actually decreasing in these areas, thus seriously impeding China’s efforts to lengthen the short stave of financial input in agriculture and rural areas. II. Current Financial System finds it Challenging to Support Rural Revitalization

Despite great efforts to promote rural financial reform and innovation in the past decade, the structural contradiction between rural financial supply and demand is still outstanding. Challenges facing financial institutions in lending make borrowing a difficult task for rural shareholders. Policies aimed to guide financial resources back to rural areas are confronted with systemic obstacles.

1. Contradiction between the need for financial repression and the inadequacy of effective demand

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