Are China's Financial Reforms Leaving the Poor Behind?

This paper examines the distributional consequences of financial reform and bank performance for the provision of credit in rural areas of China. The paper:

• Describes and analyzes the changes in the degree of financial intermediation by rural financial institutions in rich and poor areas;
• Studies the changes in financial intermediation and financial performance over time using a unique data set from surveys of rural financial institutions.

It then analyzes the relationship between bank governance and loan repayment performance and finds that:

• The non-performing loans problem is closely tied to institutional practices, or bank governance. While banks with greater repayment problems are reforming faster, the richer areas tend to have better governance;
• Localities with higher stocks of non-performing loans are more aggressive in carrying out governance reform;
• Governance reform in poorer regions may be responsive to the pressures of non-performing loans since these regions have highest stock of non-performing loans.

The paper concludes that if inter-bank markets are liberalized without interest rate liberalization, the effects could be quite negative for poor areas. However, more open entry and pricing policies could be helpful.