Globalaffairs

Issue 2 /April-May 2007
Manuel Silva Martinez

China´s real GDP growth reached 10.5% in 2006. China grows, China accumulates foreign reserves, China is the trading partner supplying large department stores in developed countries while leading its commercial diplomacy with the developing world. All these remark fall within common sense in today’s economic debate – and are exactly what Beijing wants to show the world. But, a few kilometres away from the airports, the skyscrapers and the neon lights stands a countryside that is hardly leaving behind decades of collectivization, and that observes the rise of the Kingdom of the Middle from behind the window-shopping, without feeling concerned.

150 million Chinese live on less than a dollar a day; but most poor people concentrate in the countryside. Peasants, two thirds of the 1.3 billion Chinese population, have an average disposable income of around 360 euros per year, three times less than their fellow urban residents. As for qualitative aspects, rural areas also lack of sufficient health and education facilities.

No one can however say that the Chinese economic policy has not paid attention to the countryside. Mao Zedong found himself faced to a mainly rural country, and the very first regulations after the People’s Republic was founded in 1949 were focused on increasing agricultural output and nurturing an industrial network allowing for a better life quality and the fixation of the population in order to reduce rural exodus in a context of booming birth rates. His successors, Deng Xiaoping, Jiang Zemin and now Hu Jintao, prolonged this reforming spirit. Between 1981 and 2000, these reforms helped around 400 million people nationwide come out of the state of poverty.

However, since the opening policy in the late 1970s, while growth in the countryside has been constant, that in the cities has been exponential. Income disparity, measured by the Gini index, has rocketed from 28% in 1981 up to 41% in 2005. A trend that Beijing has however not paid attention to until recent times.

The fact is that the Chinese rural population has remained fairly silent as its welfare comparatively deteriorated. However, more recently, the Hong Kong press, very sharp to the system, has been reporting a growing number of protests. While private economy builds up the cities´ prosperity, corruption and sluggishness among the officials keeps on impoverishing the rural classes, reviving the phantoms of old times´ bureaucracy rather than the will for opulence of the commercial opening era. There is little doubt on the existing correlation between how far peasants feel from the loudly proclaimed economic miracle and the number of riots (“mass incidents”, according to official terminology) they take part to – between 20 and 25.000 last year.

It is no easy task to enumerate the factors that have lead to such a disparity in the growth rates of rural and urban milieus. No doubt political factors have played an important role; no doubt every economic development is a series of political elections, and, in this case, the countryside has been the loser. In that sense, China’s development path relatively close to the one followed by some of its Asian neighbours. There are also economic factors to that. The bulky public investments have

There are also economic factors. The bulky investments of the Government have served more to sustain an unproductive network of companies rather than to increase rural activities´ productivity. The factor we want to pay attention to in this article is even more perceivable: the countryside lacks of financial institution to canalize savings and invest them into productive, profitable activities.

According to a 2004 World Bank research paper, ther is a strong correlation between the development of financial intermediation and poverty alleviation. Even more so, financial development reduces extreme poverty and income inequalities between the rich and the poor. China stands just at the opposite: the lack of rural financial development increases these disparities, turning poverty into a structural setback.

While big banks and efficient and privately managed medium-size banks (the so-called joint stock commercial banks) devote all their efforts in securing their urban markets, the rural world lacks of an efficient and adapted banking network able to serve its clients´ needs. Rural areas are only serviced by big State-owned banks that have inherited deficient management systems and high default rates.

The countryside is also served by over 33,000 rural credit cooperatives, with no scale to offer sophisticated and adapted products to their clients, and whose relation with the local authorities often blurs the exactness of their credit rating systems. The Chinese countryside is home to two thirds of the Chinese population but only hosts a sixth of the country´s bank branches. Due to poverty and difficulty of the population to access banking services, it only represented in 2005 15% of the system´s loans and deposits. It is also significant that rural inhabitants get ten times less loans per capita compared to their urban neighbours. In sum, the industrious capacity of the rural world is often limited to its own economic capacity, with little chances to finance its aspirations of prosperity externally.

The reform of the banking sector has been one of the key preoccupations of the new Five-Year Plan for the Reform of the Financial Sector (2007-2012), announced by the Party in November 2006. Its leitmotiv: the promotion of a “new socialist countryside” The task, however, seems difficult to achieve: the rural world still lays behind in investment levels, branches density, business development and depth, management and personnel quality, according to Tang Shuangning, Vice-President of the China Banking Regulatory Commission, the Chinese banking regulator. According to Tang, between 1,500 and 2,000 million euros will be needed to modernize the countryside from today until 2020, an impossible task without an appropriate banking system able to canalize both public and private investments.

In that sense, China wants to promote a series of action lines, among which microfinance. Indeed, this kind of financial activity seems adequate in order to reduce poverty and bring financial services the as large a part of the population as possible, in particular those that due to poverty stand aside tradicional banking channels.

Microfinance are based on very simple principles. They assume the concession of small low interest credits to a portion of the population that can hardly collateralize them. After several decades of existence, they have proven their effectiveness. For instance, it is more efficient to finance an activity through a loan than through a subsidy . Indeed, the rationality in the use of the amount borrowed increases when the borrower faces the responsibility and risk of repayment. Besides, these credits are usually used to finance mature, barely innovative businesses - buying basic production commodities and means (machine, animal, seeds) - which eases the management and growth of this kind of institutions. In that sense too, this kind of financial activities seems to achive its social objective of reducing extreme poverty and achieving a sustainable development in the long run. According to microfinance specialists, a 100 euro loan can totally alter a familiy´s life; take at the community level, it can radically transform it and increase welfare.

This model has been effective in several markets very similar to the Chinese countryside. Microcredit institutions have worked well in Latin-American countries where some portions of the population were kept aside from banks due to geographic marginalization and poverty. Maybe closer to China, and a better known example, is the role of microfinance institutions in India or in Bangladesh, promoted in the latter case since 1976 by Grameen Bank. Its founder, Muhammad Yunus, has been recently awarded the Nobel Prize for Economics for this initiative. All these example feature similarities with China, like the small size of agricltural exploitations, difficult geographic condition and distance to urban centers, strong informal human networks (clans, families…). Still, the development of microfinance in China has been delayed: in 1994, the United Nations Development Program (UNDP) began this activity in partnership with the China Internacional Center for Economic and Technical Exchange (CICETE) by establishing Rural Development Associations in the southern province of Yunnan. As at today, the UNDP has granted 16 million euro to around 300,000 Chinese. Microfinance in China is still at an early stage.

Since recent times, the political debate has given more importance to the countryside, ecology and sustainable development. The reform of the rural banking sector, accelerated by the measures adopted during the V Plenary Session of the X People´s National Congress of March 2007, combines interventionist and normative regulations with guidelines aimed at promoting and optimizing the market mechanisms regulating the rural economy. This combination of interventionism and liberalism is intended to bring to the rural areas those factors that have built the cities´ prosperity and secure a harmonious development through public redistribution.

Among the interventionist measures announced so far are a 15% increase in the funds guaranteeing minimal living conditions for peasants, free education for children up to 15, and an 87% increase in health budget. Some time before, at the end of 2005, Hu also reformed the old-fashioned rural tax system, whose abuses and inequalities had been in several occasions a cause of riots.

Hu has also introduced improvements in market mechanisms regulating the rural economy. As Adam Smith would say, China wants the invisible hand of the market to act after decades of the visible hand of the Government allocating ressources. An essential measure is the recently passed law protecting private property. This law allows the peasants to own their soil. The Government fears that, without further control, speculators might acquire the peasants´ lands, and that the peasants would inflate the rural exodus flows going to the cities. In order to avoid this, the Government is also promoting the creation of cooperatives able to safeguard the interests of the peasants and by the same way increase productivity by having the means of production put together. This mixture of empowerment and supra-individual structures should make the country progress towards building a “new socialist countryside”.
Another focus of the Government is the modernization of rural finance.

There are three types of rural financial institutions: the formal (rural banks and credit cooperatives), semi-formal (NGOs) and informal ones (e.g. local agents acting under no supervision from the Government: money lenders, shopkeepers…), Nowadays, due to an insufficient number of formal institutions, rural inhabitants fulfil their financing needs through informal structures in over 50% of the cases. The Government is trying to rationalize this market, promoting formal structures, controlling informal ones and limiting the action of NGOs, most of them foreigners and that due to legal restrictions have only been able to conduct consulting tasks towards local institutions. This latter strategy has a clear historical background that has much to do with the fundamental trauma of the Chinese authorities regarding foreigners getting involved in the management of the country.

On the formal institutions´ side, the Government´s plan implies the transformation into commercial banks of the Agricultural Bank of China, the Agricultural Development Bank of China and the rural credit cooperatives, as well as the creation of a Postal Bank that should inherit the still existing postal deposits system. It should take five to ten years for these institutions to be modernized. In this plan, the Agricultural Development Bank of China should be in charge of granting microcredits to the poor.

This plan has already materialized into concrete measures: on February 27th, 2007, the first village banks were created in the provinces of Sichuan, Qinghai and Jilin after the legal requirements to incorporate such institutions were relaxed at the end of 2006. The Asian Development Bank has encouraged China to keep on creating such institutions on the base of the benefits they will presumably bring to the rural areas. On March 2nd, 2007, the People´s Bank of China the country´s central bank, allocated 500 million euros in funds to refinance rural cooperatives. Finally, the Postal Bank we mentionned before has been operating since March 19th, 2007, and has over 37,000 branches throughout the country - one of the country´s largest networks.

Besides the promotion of formal financial channels, the Central Government has tried to mobilize local entrepreneurs in order for them to grant microcredits to their fellow neighbours. At the end of 2005 several pilot projects were established in the provinces of Shanxi, Guizhou, Sichuan, Shaanxi and Inner Mongolia in which wealthy local businessmen granted loans collateralized by third parties. This type of experiments fulfils the gaps of the formal structures and is based on an excellent market knowledge of all parties involved. They seem quite sucessful so far: the two first projects in the province of Shaanxi have granted around 6 million euro in loans with zero default during their first year of life.

Therefore, according to Bai Chengyu, President of the China Association for Microfinance, microfinance in China will experience after 10 years of existence a real revolution, turning from experiments into large scale projects thanks to the Government´s support. According to experts, the involvement of the private sector will guarantee financial stability in the long run through the improvement of management mechanisms.

The sucess of this set of initiatives could eventually alleviate the traditional delay in the Chinese countryside’s development, consolidated after China´s trade opening, and take some sectors of the population out of the state of poverty. Should this happen, the revolution would have a worldwide reach: China is still home to 18% of the world´s poor.

Manuel Silva Martínez
Graduate from the Institut d´Études Politiques de Paris (Sciences Po), specialist in Economic Governance and Chinese Economy

Sources:
- China Foundation for Poverty Alleviation (http://www.cfpa.org.cn)
- Asian Development Bank´s Microfinance Programme (http://www.adb.org/Microfinance/)
- World Bank data on China
- National Development and Reform Commission (http://www.ndrc.gov.cn)
- Beck, Thorsten, Asli Demirguc-Kunt, and Ross Levine, 2004,“Finance, Inequality, and Poverty: Cross-Country Evidence,” NBER Working Paper No. 10979 (Cambridge, Massachussetts: MIT Press)

Press articles:

-“China to accelerate rural financial reforms”, Xinhua, July 30, 2006.
-“Beijing Invokes FDR’s New Deal”, Newsweek March 26th, 2007
- “Microfinance in China: Growth and Struggle”, published: May 10, 2006 in Knowledge@Wharton
-China Daily, “China pushes rural banking to stimulate jobs”, 2007-02-19
-Le Monde, « Chine : Une « société harmonieuse » sans les paysans ? », 17/03/2007

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