Rural Financial Markets in China

Rural Financial Markets in China, edited by Christopher Findlay, Andrew Watson, Cheng Enjiang and Zhu Gang, xiii + 153 pp. Canberra: Asia Pacific Press, 2003. Aus$30.00 (paperback). How to reform the rural financial sector in China is one of the most pressing issues confronting policy-makers in the agriculture and rural development sectors. A better understanding of the system's evolution, current structure and major challenges will facilitate its reform. This book provides comprehensive reviews and analyses of the rural financial markets by addressing a wide range of issues, including institutional arrangements and financial policies, intergovernmental fiscal relations, the management of policy and commercial loans, the development of rural credit cooperatives, the collapse of the rural credit foundations, and the emergence of informal finance and micro-finance. Zheng Yaodong and Ma Zhongfu in Chapters 1 and 3 discuss the institutional structure of rural finance and its evolution since the establishment of the PRC in 1949. The development of the formal rural financial sector is divided into various stages and the division of responsibility between different rural financial institutions in the different stages is discussed. Policy changes in interest rate determination, deposit mobilization and prioritized loans to various borrowers, such as individual farmers for agricultural production, state-owned marketing bureaus for agricultural produce purchases, and township enterprises, are also a focus of these chapters. The channels and the amount of the flow of funds from rural to urban areas are also described in Chapter 1. What we can learn from these two chapters is that China's rural financial reform is mainly driven by short-term interests without any clear long-term direction, and fundamental reforms of the institutional arrangements as well as of financial policies are required for a sustainable development of the rural financial system. Intergovernmental fiscal relations and budget deficits at the local levels are the main factors determining lending decisions, and government interventions are common. This is taken up in Chapter 2 by Zhu Gang, who points out that the policy shifts on the allocation of taxing and spending powers between levels of government in the past two decades have favored the central government rather than the local governments. He argues that the local governments, especially the county governments, are increasingly encountering severe budget deficits due to their inability to generate enough fiscal revenues to finance public goods provision and social services, and also due to a lack of budgetary transfers from the upper authorities, who have assigned them greater responsibilities without providing the financial capacity to fulfill these. Compounding this, there are inequalities in tax revenue between rural and urban areas and between the eastern and western regions. Zhu concludes that two reforms are needed. One is to reform the local taxation systems to ensure that local governments in rural areas can provide public services that meet residents' needs, and the other is to establish a better transfer payment system to ensure that residents in underdeveloped areas can access such public services as elementary education and basic health care (p. 34). China's financial system had been under the direct control of the governments until the mid-1990s and had served such policy objectives as subsidizing state-owned enterprises and grain market bureaus. To facilitate the transformation of state-owned specialist banks into commercial banks, the central government launched reforms to create a two-tier banking system to enhance competition in the late 1980s, and separated policy operations from the state-owned specialist banks in the mid-1990s. Cheng Enjiang and Cheng Yuk-shing in Chapter 4 focus on these banking reforms and their impacts on banks' performance. They argue that the reforms have achieved only limited success because the banks still have a proportion of loans which they are obliged to provide and because their accumulated bad debts and financial losses have not yet been cleaned up by the state (p. …