Redesigning Agricultural Credit Delivery in China

Calum Turvey notes that the rural credit financial delivery system in China is a blend of capitalistic, market-oriented finance and social responsibility. Under current reforms, many Rural Credit Cooperatives are converting to joint stock Rural Commercial Banks and, in the process of maximizing shareholder value, are in many instances reducing lending to farm households. Recent reforms now permit village and township banks, branches of city banks, micro-credit companies, and lending-only companies to make loans in rural areas.

But, Turvey tells us, increasing the overall supply of credit to rural areas does not necessarily imply an increase in the supply of credit to production agriculture or agriculturally-related businesses. Indeed, there are many townships throughout China that still have no or limited access to formal credit. 

Despite financial innovations and reforms in China, therefore, the country still faces an ever-widening gap in urban-rural incomes. Deepening the financial markets has not resulted in the requisite spillover effects to reverse income inequality that economic theory predicts.

What is more, the problems of income, capital, and productive inequality are directly related to China’s broader goals of urbanization, increased commercialization of agriculture, and the development and streamlining of agricultural supply and value chains to meet domestic and global food demand. And the credit challenges facing China are daunting—with credit demand required at the intensive margin to increase productivity per unit of land, and at the extensive margin to meet the demands of farm size expansion and agribusiness development.

Turvey frames the problem facing China this way: With about 250 million farm households representing about 750 million persons, the amount of capital required to achieve wins in all of these policy goals is substantially greater than the amount that China’s commercialized credit system is able, or indeed willing, to provide.

In that context, Turvey’s memorandum explores whether the genesis of rural credit as currently taking place in China is healthy for agriculture and rural lending. An uncoordinated system of costly rural credit delivery, he predicts, will likely be unattractive to many financial institutions and thus may prove to be a hindrance to the development of the formal financial sector as a whole. Meanwhile, uncoordinated agricultural lending can lead to technical and allocation inefficiencies that can only exacerbate the problems that current Chinese policy is attempting to resolve.

Turvey proposes a few ideas that would, in effect, mean redesigning China’s agricultural credit system wholesale. For one, he calls on China to consider a nationally coordinated approach to delivery of agricultural credit, as is found with the American Farm Credit System or Canadian Farm Credit Corporation and government-supported credit elsewhere. While acknowledging the very real political and economic sensitivities and difficulties, his memo argues for a new enterprise for sourcing, coordinating, and distributing agricultural credit, drawing in part off the experience of the “Nong Ben Ju”—a program from the Republican era of China’s mid-1930s.

Ultimately, what Turvey’s memorandum recommends is that the current network of Rural Credit Cooperatives and other agricultural financial institutions across China be nested under a single umbrella. This, he says, is not to suggest that the nature of these institutions should change in terms of structure and governance nor that the cooperative standard or the bank standard be altered from its present course. But the Chinese system, he concludes, must not be so rigid that it prevents innovations that are effective in one region from reaching other areas. And the rules that bind financial institutions at the provincial level need to be relaxed so that the same set of regulations holds for all.

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