Wu xiliang

Problems and Countermeasures of Rural Mutual CreditCooperatives in Ch ina

Wu XILIANG1

Introduc tion

Even though China’s rural financial markets have undergone great reform in recent yearsand banks and financial institutions cover every township, today China’s rural mutualcredit co-operatives (RMCC) remain underdeveloped in contrast with other financialinstitutions. This paper presents the problems in RMCCs and gives some countermeasuresto address these problems.

The Structure of China’s Rural Banking Market

In China, the current, longstanding government measures used to manage the bankingmarket in the rural areas are the same as the measures used in urban areas. However,commercial banks cannot know the rural areas completely, and it is difficult for farmersto get loans from commercial banks (Guangwen, 2009).

There are several types of financial institutions such as: the Rural Credit Cooperative(RCC), Agriculture Bank of China (ABC), Agriculture Development Bank of China (CADN)and China Post Bank; furthermore, there are new types of rural financial organizationssuch as: village and township banks, lending companies and rural mutual creditcooperatives. The RCC is the basic part of the rural financial system, but it is beingreformed into three types: rural credit cooperatives, rural commercial banks and ruralcooperative banks. Until the end of 2010, there were 85 rural commercial banks, 223rural cooperative banks, and 2,646 rural credit cooperatives at the county-level in China.The reform is on-going, but it is a commercial mode led by government and the RCC isbecoming more and more distant from farmers (Guangwen, 2009). The Agriculture Bankof China (ABC) and the Agriculture Development Bank of China (ADBC) are the key pillars,and the other new types of rural financial institutions are complementary. TheAgriculture Development Bank is a policy bank. Though the China Post Bank has obtainedremarkable results with the reform, it receives more deposits from farmers and givesfewer loans to farmers, which is described as a financial funnel or water pump in therural areas.

In recent years, the new types of rural financial institutions such as: village and townshipbanks, lending companies, and rural mutual credit cooperatives (RMCC), have been

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encouraged to develop in rural areas. According to the China Banking RegulatoryCommission’s (CBRC) 2010 Annual Report, there are a total of 395 new types of ruralfinancial institutions including 349 village and township banks, 9 lending companies and37 rural mutual credit cooperatives. At the same time, there are unregistered civilfinancial institutions, which mainly include Rotating Savings & Credit Association(ROSCA), private loans, private funds, and illegal banks in the rural areas of China, thenumber of which cannot be calculated. These unregistered civil financial institutionsplay some role in resolving funding difficulties, but they cannot be registered. Based onthe work of Cindy Marks (2010), we provide a table to illustrate the rural financialstructure here.

RMCC

The Temporary Regulation of Rural Mutual Credit Cooperatives (TGRMCC) was pro -mulgated and implemented in January 12, 2007; however, Bai Xin RMCC was establishedas a productive cooperative in Li Shu County, Ji Ling Province, in July 2004, and it wasregistered as a RMCC after the promulgation of the TGRMCC in 2007. The stockholdersof RMCC were farmers or small enterprises. In 2006, CBRC began 7 RMCC experimentsin 5 provinces. In March 9, 2007, Bai Xin RMCC was registered as the first village-levelRMCC in China, and Xingle RMCC in Yurun Township Ledu county, Qinghai province wasregistered as the first township-level RMCC. In 2008, the experimental regional scaleexpanded from 5 provinces to 31 provinces. Up until the end of 2010, there were 37 RMCCs,which received permits from the national financial regulator, China Bank RegulatoryCommission (CBRC). As a result of the strict access rules, many civil rural financialcooperatives cannot obtain registration from the CBRC and local government. The RMCCcan be divided into three kinds:

� The RMCCs, which obtained approval from CBRC and have business and financiallicenses. As stated above, until the end of 2010, there were only 37 RMCCs givenpermits by the national CBRC in China, but there were more than 600 thousandadministrative villages, which were communities in need of financial services in ruralChina.

� Government departments had propelled RMCCs as a form of poverty relief in villagesaffected by poverty since 2006, which was a financial experiment employed bygovernments to relieve poverty. For example, some RMCCs in the impoverishedvillages of Si Chuan Province were established with the support of the Ministry ofFinance and the Leading Group Office of Poverty Alleviation and Development,affiliated to the State Council. Until the end of 2008, there were 4,165 RMCCsestablished in impoverished villages.

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� The RMCCs were also propelled by NGOs: for instance, Oxfam Hong Kong establishedthe community development fund in Yunnan province and Guizhou province (see theEcological Association established community development funds in Inner Mongolia).

� The RMCCs received acceptance from local governments and had business licensesor registration as juridical associations in the local civil administrative departments.For example, the Fengyang county government in An Hui province gave support toestablish several local RMCCs. The Yancheng government in Jiangsu province alsopropelled this kind of RMCC.

Of course there were many unregistered financial organizations, such as the RotatingSavings & Credit Association (ROSCA), private loans, private funds and others, so thequantity of the third kind of RMCC is often unclear, and they did not receive a permitfrom CBRC or local governments. In 2009, there were 16 RMCCs and 148 village andtownship banks. In 2010, there were 37 RMCCs and 349 Village and township banks. Sothe quantity of the registered RMCCs was few and RMCCs developed slower than othernew-type rural financial institutions.

Problems

Low Management Level of RMCCs and Shortage of the Cooperation Spirit.

Most of the managers of the RMCC have a low level of education and no financialprofessional knowledge nor enough risk awareness. Consequently, the RMCCs are ledby the elites in rural areas. In some RMCCs, the directors of the village or the presidentsof the Village Communist Party take the post of the directors of RMCCs. So the RMCCshave the same problems of low cooperative governance as the problems of FSCs. Themore important issue is the cooperative spirit of the organization. To be a director orpresident of a cooperative, one has to devote more time, energy and money to thecooperative than other members, especially in the beginning phase of the cooperatives.

High Cost to Register and Operate a RMCC

The law of RMCC gives a serious limit to the RMCC. It is not easy to get permission fromthe China Banking Regulatory Commission (CSRC) to register a RMCC. Even though somecooperatives get permission, the operation costs are very high. It cost RMB 76,000 forBai Xin RMCC to get permission, and its director Jiang Bailing has to spend energy andresources in unproductive activities. Shao Chunlin (2010) used two cases to demonstratethe high cost of registering. When the RMCCs are operating in rural areas secretly andillegally, there is a high level of institutional efficiency; meanwhile after RMCCs accesslegitimate status, its institutional efficiency decreases. It is the government’s excessiveregulation that increases RMCCs operating costs and causes the social welfare loss.



Lack of Funds and Monotony of Business

The funds of RMCCs are limited to the funds and stocks of members. It is not easy to getwholesale loans from commercial banks because the RMCCs are always small-scale.Since the Baixing RMCC was established, there were only two loans valued RMCC200,000. Until February 2010, Banxing RMCC was still repaying the loan. At the sametime, the business of RMCC was of monotonous. Before the establishment of most ofthe RMCCs, they were a productive co-operative. After registering the RMCCs, they hadto stop production because the temporary regulations of RMCCs limited their businessscale. The scale of RMCCs was small, and they had high operation cost. It is a benefit forthe grassroots cooperative to have financial, productive, sales business, but the FSCs arelimited to productive and sales business while the RMCCs are limited to financialbusiness.

Countermeasures to the Problems of RMCCs

As far as the problems in RMCCs, here we provide some countermeasures.

Look for the Cooperative Spirit in RMCCs

There is no cooperative spirit in RMCCs as in other FSCs, while the cooperative spirit isnecessary for the management level of the RMCCs and FSCs. It is doubtful whether thereis a cooperative spirit in Chinese society and culture (Cao, 2000). Most cooperation isbuilt in rural areas based on blood and relative relations among farmers; Fei Xiaotong(1985) described this relation as the Diversity-Orderly Structure (Graphic 1). Chinesepeople take themselves as the center in their history, and then look at their home, familyand the society last. So Chinese people could not trust other neighbors and could notcooperate with strangers. Yet cooperatives need cooperation and the trust betweenneighbors and strangers.

The cooperatives and cooperative spirit came from western countries. There were twokinds of cooperative: the cooperative from man and the cooperative from God. Chinahad 100 years history of the cooperatives, but the cooperatives in the past 50 years havebeen built on communism, which was of man and controlled by man. So the fate of thecooperatives have been seriously affected and decided upon by man and man’s politics.The directors of cooperatives should have a broad spirit of love and equity. The broadlove and equity spirit is from the God in Christianity. The cooperative spirit is from thebelief of the civil society—not from man’s political organization. In Chinese culture, themain past civil belief of Confucianism could not foster a spirit of broad love and equityin cooperatives. The political party could not intervene in the affairs of the civilcooperatives as before either. The cooperative spirit of RMCCs and FSCs came from the



civil belief of Christianity. Current RMCCs and FSCs are built on blood and relativerelations, which make the directors of cooperatives use their relatives to manage theco-operatives.

Involvement with FSCs

The Temporary Regulation of the RMCC dictates that the RMCC cannot have productive orsales business. The law of the FSCs formulates that it cannot have the credit business either.It is difficult for the FSCs to get sufficient funding to develop their productive and salebusiness. As far as the views of Wang Shuguang (2009), there are three ways to solve theseproblems. The first is to have some means of guaranteeing FSC member security; thesecond is to use the commercial guarantee corporation, with the government providingsupport and guarantee fees; the third is that the FSC could develop its own credit businessfor members. Now, in the Tong Zhou region of Beijing city, experimental RMCCs are chosenfrom the FSCs and members of the experimental RMCCs are also the members of the FSCs.In China, the Chinese Communist Party leads the government. The party uses its politicalpower to direct the RMCC. In the party’s No. 1 Document, the quantified FSCs couldestablish the RMCCs. The document guides the government to follow party orders to makethe FSCs establish the RMCC. So in the future, it is possible for more FSCs to get permissionto be credit businesses. At the same time, the cooperatives with financial, productive andsales business expect to be legitimized.

Promote Cooperation with the Other Financial Banks

Traditional official rural credit cooperatives (RCC), post banks, village and township banksand new types of financial institutions dominate the rural financial markets. In the ruralareas, it is difficult for the RCC and VTB to deal with scattered farmers. The transactioncosts – including the information cost and supervision cost – between them is very high.But the RMCCs live among the farmers and have the advantage of dealing directly withthe farmers. So if the RMCC takes the duty of loaning wholesale, it could have enoughfunds and lower its loaning risk. Here we provide a graph of the fund connectingmechanism of RCC, VTB, SLC and RMCC (Shuguang, 2008).

Conclusion

There is a large financial demand by farmers in the rural areas of China. Local governmentgives traditional financial supply. Even the Rural Credit Cooperative came from farmers inearlier times and it was transformed into an official commercial bank. The TemporaryRegulation of RMCC was developed in 2007, but there are many problems, including: lowmanagement levels, fund shortages, business monotony and high registration-operationfees. To solve these problems, we have to consider some other counter measures such as:establishing cooperative values in the culture of local places; involving RMCCs with otherkinds of cooperatives and with other financial institutions in the rural areas of China.




Table 1: Financial institutions in China’s Rural Banking Market

Graphic 1: Diversity-orderly Structure of the Chinese Society

Source: China Banking Regulatory Commission Annual Report 2010; ABC and ADBC websites.


Note1 College of Politics and Manage Science, Henan Normal University, Xinxiang, Henan, 453002, China


Graphic 2: The Link of Professional Cooperation and Cooperative Cooperation

Graphic 3: The Fund Connecting Mechanism of RCC, VTB, SLC and RMCC


Bibliography

CAO, J. (2000). China Along the Yellow River: A Scholar’s Observations and Reflections on Rural Society,Shanghai, Shanghai Literary and Publishing House.

XIAOTONG, F. (1985). Rural China, Beijing, Sanlian Press.MARKS, C. (2010). “Rural Banking in China”, Asia Focus, Federal Reserve Bank Of San Francisco, may.GUANGWEN, H. (2009). “Dilemma and Countermeasure of the development of Rural Credit Cooperatives”,

China Co-Operation Economy, No 12.SHUGUANG, W. (2008). “An Investigation of the First Rural Cooperation Fund”, The Chinese Banker, No 7.SHUGUANG, W. (2009). “How to Break through the Bottleneck of the Cooperative Finance”, Management and

Administration on Rural Co-operative, No 11, p.12-13.SHUGUANG, W. (2010). “Rural Mutual Credit Cooperation: Operation Mechanism, Industry Baseand

Government Function”, Management and Administration on Rural Co-Operative, No 08.

Summary

The main object of this paper is to show the current problems of rural mutual credit cooperatives(RMCC), which is drawing on the analysis on the structure of China’s rural banking market. The mainproblems are: the management level is low and there is less cooperation spirit in RMCCs; RMCCs areshort of funds and their business is of monotony; the cost is high to register and to operate a RMCC.Furthermore, we give some countermeasures to solve these problems: to look for cooperation spiritin RMCCs; to involve with Farmers’ Specialized Cooperatives; to promote the cooperation with otherfinancial banks.

Resumen

El principal objetivo de este trabajo es mostrar los problemas actuales de las cooperativas rurales decrédito mutuo (RMCC, por sus siglas en inglés) haciendo uso del análisis de la estructura del mercadobancario rural en China. Los principales problemas son: el nivel de gestión es bajo y hay menos espíritucooperativo en las RMCC; las RMCC tienen escasez de fondos y sus negocios son monótonos; escostoso registrar y operar una RMCC. Además, se proponen algunas medidas correctivas para resolverestos problemas: suscitar el espíritu cooperativo en las RMCC; relacionarse con cooperativasespecializadas en agricultura; fomentar la cooperación con otras instituciones financieras.

Résumé

L'objet principal de ce texte est de montrer les problèmes actuels des coopératives de crédit mutuelrurales (RMCC), en s'appuyant sur l'analyse de la structure du marché chinois des services bancairesen milieu rural. Les principaux problèmes sont les suivants : le niveau de gestion est faible et il y amoins d’esprit de collaboration dans les RMCC; les RMCC manquent de fonds et leur entreprisefonctionne dans la monotonie; les coûts pour inscrire et exploiter une RMCC sont élevés. En outre,nous donnons quelques mesures de prévention pour résoudre ces problèmes : pour susciter un espritde coopération dans les RMCC; pour faire participer les coopératives d‘agriculteurs spécialisés et pourpromouvoir la coopération avec d'autres institutions financières.



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