Rural Credit Cooperatives in China

This paper focuses on China's Rural Credit Co-operatives (RCCs), a key vehicle identified for microfinance delivery, status of their reforms and importance of a regulatory and supervisory strategy.

It discusses the:

• Failure of four nationalized banks, ten commercial banks and NGOs in China to create microfinance access;
• Problems in RCCs that led to pilot reforms in 2003 to:
  • Clarify ownership structure and strengthen corporate governance;
  • Transfer administrative responsibilities to provincial governments and resolve historic financial burdens.
• Pilot outcomes:
  • Transformation of RCCs into agricultural commercial banks, agricultural co-operative banks and country level consolidated structures,;
  • Liquidation of RCCs with serious financial problems;
  • Formation of Provisional RCC Unions;
  • Provision of financial incentives;
  • Liberalization of interest rates.
• Problems in the reform process:
  • Wrong incentive structures due to the Government's top-down approach;
  • Lack of participation by farmer-owners in restructured RCCs;
  • Lack of progress in interest rate liberalization;
  • Poor corporate governance and human resource development;
  • Continued capital outflow from rural areas;
  • Incomplete supervision and regulatory framework.

The paper states that for efficient supervision and regulation of RCCs, China needs to:

• Draw upon the experiences from other countries;
• Integrate the experiences of last three years of reforms;
• Encourage high participation among key stakeholders at the China Banking Regulatory Commission's Rural Cooperative Finance department;
• Aim towards an internal working strategy paper for RCC regulation and supervision.