1

Credit Co-operatives: A Miracle Solution for Poverty Reduction in Rural China?

Paper submitted to the 2nd

EURICSE Conference on Co-operative Finance and Sustainable Development, 9-10 June 2011, Trento, Italy

Li Zhao & Xuchu Xu1

(Draft, please do not quote without the authors’ permission)

Abstract: Credit co-operatives, albeit highly pervasive in many countries, are poorly understood financial entities in China, both in terms of concept and practice. Although the Raiffeisen model of credit co-operatives was first established in the 1920s in China, the understanding of adopting the co-operative model in the Chinese financial sector remains in a mist nowadays. This paper aims to examine the credit co-operative role in poverty reduction and financial inclusion by focusing on a new type of rural financial institutions, rural mutual co-operatives, as the only co-operative financial institutions recognized by the state regulatory agency. By making a distinction between the co-operative model and the commercial model, and between the true co-operative model and the co-operative institutions in name only, we find that rural mutual co-operatives have certain institutional advantages which make them an ideal way of providing financial services to China’s rural poor. That is why such co-operative institutions are burgeoning in the field. This observation is in contrast to the widely-believed prediction that it is hardly probable for true credit co-operatives to establish themselves in modern China due to excessive government intervention and China’s peculiar political culture and social context. Moreover, these credit co-operatives have the potential to combine social and economic dimensions of poverty outreach and financial sustainability, which makes them a sustainable driver of poverty reduction. However, historical experiences during different reform periods demonstrate the necessity of certain conditions for achieving such combination. Through our empirical study two conditions turn out to be important, namely the cooperation between credit co-operatives and agricultural co-operatives, and local embeddedness with good social connectedness. Key Words: Credit co-operative; Rural mutual co-operative (RMC); Outreach; Sustainability; China

I. Introduction

This paper aims to examine the role of credit co-operatives in China in poverty

reduction and financial inclusion. Although attractive at first glance as such topic is believed (cf. such co-operative role examined by Birchall 2003, 2004; Biddy and Shaw, 2005), it seems rather awkward and paradoxical to discuss it in the

Chinese context. There are mainly two arguments for that: - First, financial co-operatives or co-operative financial institutions (CFIs) in

China, according to both Chinese government (the China Banking Regulatory Commission, CBRC) and scholars (Zhang, 2000; He, 2001; Yue, 2002; Turvey & Kong, 2008), refer to rural credit co-operatives (RCCs).

The RCCs, set up in the 1950s, are the core financial institutions in rural China and still play a large role in China’s rural banking market. However,

it is widely agreed among scholars that they are co-operatives in name only (Watson, 1998; Xie, 2003: Gale & Collender, 2006; Ong, 2009). Consequently, it seems that there exist no real CFIs in China. In this case,

such discussion in the present paper would appear absurd and unreasonable.

- Second, as China has become one of the fastest-growing economies in the world, China’s record of poverty reduction during the past three decades is also enviable and incontestable.2 According to the World Bank (2009), the

1 Li Zhao is doctoral researcher at HIVA-Research Institute for Work and Society, as well as at the Centre for Global Governance Studies, Catholic University of Leuven in Belgium. Xuchu Xu is professor at School of Humanities in Hangzhou Dianzi University in China, as well as China Academy for Rural Development in Zhejiang University. The corresponding author can be reached at li.zhao@hiva.kuleuven.be (Address: Parkstraat 47-5300, B-3000 Leuven). 2 It is wide-acknowledged that a decline in the number of poor of this magnitude over such a short period is without historical precedent

2

incidence, depth and severity of poverty in China have declined

dramatically. Between 1981 and 2004, the fraction of the population consuming less than a dollar per day fell from 65% to 10%, and there are

indications that poverty has continued to decline up to 2007. So to what extent does research still make sense to discuss poverty reduction in China?

Therefore, on the one hand, CFIs in China, albeit highly pervasive in many

countries,3 are poorly understood financial entities, both in terms of concept and practice. Although the Raiffeisen model of credit co-operatives was first established in the 1920s in China, the understanding of adopting the co-

operative model in the Chinese financial sector remains in a mist nowadays. RCCs are for a long time believed to be the only CFIs in China, and become the

must-mentioned rural financial institutions among scholars (both widely mentioned in the literature on China’s financial reform, and specifically discussed in the study focusing on RCCs). On the contrary, other real member-owned,

democratically-controlled CFIs in China barely receive attention and seldom become a focus of interest in the extant literature. On the other hand, although

there is no doubt that China’s economic growth contributes greatly to poverty reduction and social welfare advancement, it is believed that the official statistics

underestimate rural poverty and overstate the speed of poverty reduction (Park & Wang, 2001). Consequently, the uncertainties remain in our understanding of the size of, and trends in, its poverty incidence (Riskin, 2004). Therefore, the

task of poverty reduction continues and in some respects has become more demanding (World Bank, 2009). With the rural crisis originated from the 1990s,

rural population has become the most vulnerable population, and rural communities have become the most vulnerable ones. Vulnerability to poverty is widespread in China, especially in rural areas. To many, the fundamental cause

of the poverty trap is the financial constraints or credit constraints that prohibit the acquisition of those resources to poverty-escaping scale (Turvey & Kong,

2008). Capital markets in the rural sector often appear to be underdeveloped (Stiglitz, 1990). Most studies on China’s financial reform (Park, Ren & Wang, 2003; Brandt, Park & Wang, 2003; Jia & Guo, 2008), on China’s rural finance

and banking (Tam, 1988; He, 1999), and on microcredit or microfinance in China (Zhu, Jiang & von Braun, 1997; CGAP, 1998; He, 2008; Turvey & Kong, 2008),

point out the significant challenge in the access to formal financial services by the poor in disadvantaged rural areas. Moreover, recently, under the shock of the financial crisis, the speed of poverty alleviation nationwide was decreased,

trapping many poor people into poverty (again).4

Since microfinance programs were firstly introduced into China in 1994,5 they have achieved a mixed record of success (Park, Ren & Wang, 2003), and not yet produced the significant results as those in other countries like Bangladesh or

Indonesia. On the one hand, government-run microfinance in China, while larger

(World Bank, 2009: 6). To put this in perspective, the absolute number of poor (using the same standard) in the developing world as a whole declined from 1.5 to 1.1 billion over the same period; in other words, but for China there would have been no decline in the numbers of poor in the developing world over the last two decades of the 20th century (ibidem). 3 Broadly speaking, there exist two popular models worldwide: the continental European (Raiffeissen) model, and the Anglo-Saxon (credit union) model. Specific features of CFIs in different countries are associated with their historical roots, and the mechanisms through which they were introduced in developing countries (Cuevas & Fischer, 2006: 51). 4 Fan Xiaojian, “The financial crisis has spread to poverty-stricken regions in China”, http://news.xinhuanet.com/misc/2009-03/05/content_10950615.htm (accessed 05-03-2009). 5

See Du (2008) for an extensive discussion concerning the current situation of microcredit in China and its prospects in the near future.

3

in scale, does not pursue self-sustainability and thus has been a failure. On the

other hand, NGOs-involved public interest microfinance institutions remain confined to small-scale projects and are typically external-funded. They have

little prospect of widespread replication or expansion due to their problem of not being recognized as financial institutions (Park, Ren & Wang, 2003). Therefore, it is believed that Grameen-type lending in China has limited impact and

application (Turvey & Kong, 2008: 13). In comparison with specialized targeted-to-the-poor microfinance institutions, in many cases, co-operative financial

institutions (CFIs) serve larger numbers of poor people without relying on donor support as the former do. In fact, existing literature widely supports the notion that CFIs serve many poor people. Even though middle-income clients are also

among their membership, such feature nevertheless allows them to reach the poor without necessarily compromising their sustainability (Cuevas & Fisher,

2006; Nair & Kloeppinger-Todd, 2007). In China, a few attempts have been made to reform existing CFIs but with very

limited impact (Park, Ren & Wang, 2003). Nominally rural credit co-operatives (RCCs) are the most important and, for a long time, the only CFIs in China.

However, it is widely agreed among Chinese scholars that they are not true CFIs. 6 Besides, they have a series of pressing problems such as unclear

ownership and ineffective corporate governance structure, serious operation losses and low asset quality, out-of-date service means and weak risk-taking capacity, limited autonomy/heavy government intervention and monopoly in the

local financial market (Watson, 1998; Liu et al, 2005; Zhou & Lin, 2005). Despite the various experiments throughout the 1980s, there was little real change in the

position of the RCC (Watson, 1998). Since 1996 the People’s Bank of China (PBC) and the Central Government have launched a series of reforms to improve the RCCs’ performance. These reforms aimed to restore the co-operative nature of

the RCCs, to focus RCC credit on agriculture and rural development, and to make them commercially viable CFIs. However, the commercialization of the rural

economy and a more competitive environment “was encouraging a commercialization of the RCC away from its co-operative roots” (Watson, 1998: 30). Consequently most observers counted this reform period “as a failure”

(Shen et al., 2010: 307). Since the early 2000s, a new period of financial reform started, characterized by the continuation of RCC reforms and the emergence of

new-type CFIs. The 2003 State Council document (Guofa No.15/2003) suggests that RCCs in regions where RCCs fulfilled certain criteria could develop into commercial shareholding banks, and those in relatively populous or heavily

agricultural regions could merge into county-level RCC unions (RCCUs). Afterwards many RCCs transform into rural commercial banks and rural co-

operative banks, thus becoming de facto demutualized. Recently, new type rural financial institutions have gained increasing attention

among scholars (He, 2004, 2010; Jiang, 2008, 2009; Sun, 2008). These three new-type rural financial institutions (RFIs) in China refer to village and township

banks (VTBs), rural mutual co-operatives (RMCs) and lending companies (LCs), introduced by the CBRC in 2007. Since then various microfinance practices and financial innovations are burgeoning in rural China. By the end of 2010, a total of

395 new-type RFIs were registered nationwide, including 349 VTBs, 37 RMCs and 9 LCs. It is important to mention that VTBs and LCs are commercial financial

6 A more accurate definition of RCCs is proposed by Xie (2003: 438) as “small scale and locally based quasi state banks in rural China”.

4

institutions, and only RMCs are meant to be CFIs. While many scholars predict

that it would be difficult for true CFIs to establish themselves in China due to China’s peculiar political culture and social context, we are nevertheless

interested to see whether the co-operative model can serve as the best way to provide financial services to China’s rural poor. Therefore, the paper focuses RMCs and assesses this idea through comparing RMCs with other institutions. We

presume that a better understanding of this issue is of great necessity, but to date there exist very few studies particularly focusing on it in China.7

Against this background, the study aims to fill this gap by presenting an analytical approach for understanding credit co-operative initiatives in China as

an important model of social enterprises. This is especially pertinent nowadays when a new co-operative movement has been witnessed and is regarded as

engendering the most dynamic organizations in rural China (Zhao & Develtere, 2010). Internationally, the new co-operative development in China is widely unknown, not to mention the situation concerning financial co-operatives. The

peculiar history of co-operative movement in China may explain this knowledge gap. Through this analysis the study aims to answer the following questions: (1)

Which advantages does the co-operative model have compared with commercial financial institutions in fighting against poverty and financial exclusion? (2) Is it

possible to combine poverty outreach and financial sustainability of financial co-operatives in China, so to make them a sustainable driver of poverty reduction? (3) If so, under which conditions?

To focus our research, the financial co-operatives examined in this study refer to

RMCs, as the only CFIs recognized by the CBRC, the state regulatory agency. The empirical evidence presented in the paper is based largely on primary data collected from fieldwork in rural Zhejiang province during the autumn of 2010

through in-depth interviews with the management team and local officials responsible for RMCs’ development. Besides, secondary data from Chinese-

language literature is also used. Zhejiang was chosen partly because it was the pioneering province in China where co-operative institutions were most vibrant (Xu & Huang, 2009). Zhejiang established its local co-operative regulation as the

first one in China even before the promulgation of a national co-operative law. This demonstrates that the co-operative development in Zhejiang is well-

advanced compared with that in the other areas in China. The rest of the paper is organized as follows. The next section, which presents

briefly theoretical debates concerning two aspects of financial co-operatives (poverty outreach and financial sustainability) as social enterprises, is followed

by a historical overview of CFIs’ development in rural China. Afterwards we analyze (in section III) the legal context specifying RMCs, with a comparison with regulations of commercial financial institutions existing in rural China. Fieldwork

findings are discussed in section IV together with an analysis of the rationale underpinning the relationship between sustainability and outreach. The last

section (V) draws conclusions by answering the questions raised and looking for explanations for them.

II. Mapping Credit co-operatives in China

7 Very few exceptions may be found in He (2004; 2010), and Jiang (2008, 2009).

5

China has a relatively long tradition of co-operatives. It can be said that the co-

operative movement in China started with rural credits. In the 1920s, all the conditions which created a need for rural co-operative credit organizations, and

which have furnished the elements for the growth of the movement were to be found in China: huge population overcrowding the land, great predominance of agriculture in the economy of the country, abject poverty of the masses of the

people, poor credit organizations with very high interest rates (Mallory, 1931). According to a study by Malone & Tayler (1923), the provision of credit to the

average farmer was a fundamental need. Most small and middle class farmers had a shortage of capital, and rather than borrowing capital at exorbitant rates of interest they preferred to follow inferior farm practices. Profits from farming are

small and, therefore, make it impossible to pay high rates on loans for productive purposes (Hsu, 1929). From the beginning of the 20th century, reformers and

philanthropists started to introduce the Western co-operative system into China. Most of them came back from the West to search for a way of helping the poor and saving the nation. 8 The church-sponsored China International Famine Relief

Commission (founded in 1921) established the first credit societies in China in 1923, promoting the Raiffeisen system and principles with the purpose to lessen

the aftermath of famine.9 Before the outbreak of the anti-Japanese war (in 1937) there were many progressive intellectuals and scholars, both in China and abroad,

who had written numerous articles and books proposing the establishment of rural co-operative credit societies and disseminating the liberal democratic co-operative model from the West.10

During the New Democratic Revolution in China (1919-1949), the practices of

establishing co-operatives and credit societies were driven mostly by the forces of nationalism and a quest for a “third way”. Afterwards, co-operative movements in China have always risen and fallen with the turns of the economic

and political cycles. During the period of centrally planned economy in China, People’s Communes were established in a compulsory way under the

government’s command. When RCCs were established in the 1950s, they were meant to be grassroots co-operatives owned and controlled by farmers. But after the collectivization movement in 1959, they were made subordinate arms of the

communes. The farmers lost their control and key decisions were made by the communes (Ong, 2006: 182). Such development has restricted the growth of a

genuine financial co-operative movement. Before examining what has happened after the reform and opening-up, it is of

necessity to mention the fact that the problems of farmers’ difficulties in obtaining capital and poverty outreach by RCCs have to do with the three

principal features of rural credit markets: (1) scarce collateral (largely due to a

8 According to Lai (1989), there were two channels by which the European co-operative system was introduced into China: the most direct way through Japan and the indirect route through Western Europe. 9 The first such society organized in China was regarded as the Feng Ren Co-operative Credit Society of Nanking in September 1923. This society consisted for the most part of vegetable growers, and was organized under the direction of the Department of Agricultural Economics of the College of Agriculture and Forestry of the University of Nanking, financed by the China International Famine Relief Commission, which appropriated 5000 USD for ten experimental co-operative credit societies, the Feng Ren being one of the ten (Hsu, 1929). And according to Mallory (1931), it was probably because of civil strife that China first adopted the Raiffeisen model of rural co-operative credits after other oriental countries such as India (in 1900) and Japan (in 1909). Hanwell (1937), by examining the problem of local government (the "quadrilateral" landlord-usurer-merchant-official), points out that with the high interest rates, it is not surprising that so much effort has been made to promote credit co-operatives. 10 Concerning the promoters of credit co-operatives in China, there were, for example, Chinese intellectuals like Xue Xianzhou’s experiment on co-operative banking at Fudan University, and Yu shude’s experiment on rural credit co-operatives in Hebei; Western scholars like British social activist missionary John Bernard Tayler and British economist Richard Henry Tawney, as well as Italian agricultural expert Carlo Dragoni.

6

lack of physical assets and poorly-developed property rights), (2)

underdeveloped complementary institutions (such as poorly-developed communication system and transaction costs, and the absence of insurance

market), as well as (3) covariant risk (particularly weather fluctuations and changes in commodity prices that affect agriculture) and segmented markets (which means a lender's loan portfolio is concentrated on one particular group of

individuals or in one geographic area thus limiting capital flow across regions or groups). These features distinguished by Besley (1994) in developing countries

can truly be observed in China.11 And that is why the incumbent RFIs are not willing to provide loans to household farmers (thus a market failure). Consequently, intervention was regarded as important by Chinese governments.

The same may hold true concerning poverty reduction programs, as it is regarded that China’s poverty headcount (the main official poverty statistics) is

“highly politicized” (Park & Wang, 2001: 385).12 However, it was widely believed that such government-initiated programs are hardly probable successful in a long run (therefore a government failure). In what follows we will briefly examine the

problems mentioned above, particularly, how they have been addressed in new era, under new reforms, and by new players of financial institutions.

New era, old problems?

With People’s Communes was dismantled in the early 1980s, the RCCs was run by the state as the grassroots level financial administration in the rural sector.

Since 1984, when the state decided to revive the RCCs as a CFIs, the RCCs have started to go through several reforms and institutional changes. 13 However,

progress has been “slow and insignificant” (Tam, 1988: 71). This is partly because there was no such plan from the state to make banks and their branches to compete with each other (Shen et al., 2010: 320). Briefly speaking, the RCCs’

deposit reserve requirements, entire operations and lending interest rates were directly and indirectly controlled by the Agricultural Bank of China (ABC).

Therefore, RCCs continued as the rural branch of the state banking system (Tam, 1988). Before a new period of reforms started, according to Xie (2003), major challenges RCCs faced included ownership and governance structure (co-

operatives or commercial shareholding banks), historical burdens and nonperforming loans (NPLs).14

New reforms, old problems?

Since the mid-1990s, a competitive banking system was gradually introduced in rural China as the reform and opening-up process accelerated (Watson, 1998; Oi,

1999; Shen et al., 2010). Financial reforms resulted in the transformation of four national banks into state-owned commercial banks that, mainly driven by the rationale of economic efficiency, gradually retreated from the rural areas

(particularly the ABC). The reform of rural credit co-operatives had a similar

11 Concerning this point, some scholars conclude that the rural financial market in China carries the traditional paradigm similar to that in many developing countries. This includes: institutional credit is subsidized; formal credit programms are highly centralized and heavily dependent on governemtal budget; the cheap credits with earmarked utilization are extended to stimulate investments in agricultural production; private lending is strictly regulated and often considered illegal; credit rationing is prevalent and the rural credit market is fragmented (Cheng & Xu, 2004; cf. Guo & Jia, 2009). 12 This is because “government leaders are quite sensitive to perceptions that they have failed to eradicate widespread poverty, which could undermine the government’s legitimacy in light of its socialist ideology” (Park & Wang, 2001: 385). 13 For a historical review of RCC reforms and development, see Watson (1998). 14 One important reason to the buildup of NPLs during the 1990s was due to the strong influence of local officials over lending decisions by the RCCs.

7

effect. In an attempt to restructure the formal rural financial system, the state

separated the RCCs from the ABC in 1996. From then on the government has taken numerous steps to reform the RCC’s banking system in order to recast the

RCCs as true CFIs. However, most observers counted this effort as a failure (Shen et al., 2010: 307). It is widely agreed among scholars that they are co-operatives in name only (Watson, 1998; Xie, 2003: Gale & Collender, 2006; Ong,

2009). In fact, RCCs are regarded as “small scale and locally based quasi state banks in rural China” (Xie, 2003: 438), or put simply, “local branches of a state-

owned bank” (Ong, 2009: 253). Their ownership was unclear and members did not necessarily have any say in management (Gale & Collender, 2006). They are “hardly meeting the credit demands of the very constituencies they are supposed

to serve” (Ong, 2009: 177). Since they were the core financial institutions in rural China and played a large role in China’s rural banking market, a great gap

in financial services was left behind in rural areas, and poor households were increasingly excluded from credit access. 15 In contrary to a widely-believed notion that co-operative can serve as an effective tool to fight poverty and foster

social cohesion (cf. Birchall 2003, 2004; Biddy and Shaw, 2005), it seems that RCCs are unable to take up this task to build up a financial-inclusive rural society.

According to Turvey & Kong (2008), such “China’s co-operative banking system” has not fully endorsed either the self-help group model or the notion of trust as a

form of capital. Thus in China, the very poor are credit-constrained from the microcredit market. Moreover, the study by Huang, Rozelle and Wang (2006) reveals that in almost the entire reform era capital was flowing from agriculture

to industry and from rural to urban sector, capital in which financial shifts through the formal banking system is included. Therefore, China has been

extracting large volumes of capital from low-return sectors to high-return sectors, partly due to the lack of a strong intervention into the sector and of an effective rural lobby. This phenomenon corresponds surprisingly to the situation in the

1930s, when a continuous drain of capital flew from rural districts to the cities (Hsu, 1937).

After 2000, the state has experimented with a series of reforms to introduce various property rights to the RCCs.16 However it was not until 2003 that it

began a major reform of RCCs. In 2003, the state allowed experimental reform to be carried out in eight provinces and cities, expanded further to the

nationwide in 2004 (Guofa No.15/2003). During the process RCCs have been reorganized, with stronger ones (mostly in economically-developed regions, with a relatively healthy financial status) being restructured as provincial rural

commercial banks17 or rural co-operative banks (RCBs), and most others (mainly in less-developed areas) being merged into county-or-provincial-level unions.

They were given more latitude to offer higher interest rates on deposits to compete with other RFIs and adjust interest rates on loans within a band around rates set by the People’s Bank of China (PBC).

However, It was still not clear whether RCCs have been transformed into real co-

operatives (i.e. RCBs) in which members have influence over the institution’s

15 Because RCCs were often more inclined to fund projects with lower risk and higher capital returns, the lack of lending in rural areas was exacerbated, and the targeted smallholder farmers were left behind (Jia & Guo, 2008: 294). 16 For more information, see Ong (2006). 17 The criteria for becoming rural commercial banks are more stringent than for the RCB model, including a higher capital adequacy and lower NPL ratios. This new rural commercial banks have completed their demutualization process and are no longer co-operatives, even in name.

8

management. Since member households very rarely take part in member

representative meetings, the manager holds an informational advantage that gives them enormous power over the credit organizations, resulting in insider

control (Ong, 2009: 253). It is widely agreed that RCCs were still subject to China’s Communist Party (CCP) and government directives. One survey found that the members’ representative meetings are often made up of township and

village cadres (village heads, village Party secretaries and township officials), instead of the farmer members. As a result, the members’ representative

meeting often becomes a rubber stamp, whereas the real authority lies with the head of the board of directors (Ong, 2006: 385). Board members included representatives of the CCP and government, and board members and managers

must have the approval of the CBRC, the state bank regulatory. By evaluating the institutional design of the post-reform RCCs, Ong (2009) shows that the

reforms have failed to eliminate the entrenched Party involvement in the financial organizations, which is “fundamentally inconsistent with effective corporate governance structure” (Ong, 2009: 277). Park, Brandt and Giles (2003:

493) consider “government policy concern on control over financial resources” as the reason why the competitor (RCFs) of RCCs were regulated out of existence.

RFIs have adopted many trappings of commercial banks, but they were still effectively controlled by the government, and lending decisions often reflect

policy initiatives and development strategies (Gale & Collender, 2006). Therefore, while rural financial institutions have resembled commercial banks, the rural financial market was not driven by market forces and many barriers to

intermediation of funds remained (Gale & Collender, 2006).

With the increased competition and commercialization, a general unwillingness of the traditional financial institutions (including RCCs, RCBs and rural commercial banks) to provide loans in the lack of collateral was still prevalent. Considering

sustainability and profitability, they usually prefer to choose as principal clients those farmers who were in the middle class in terms of income. Farmers with

lower income had great difficulty in obtaining loans (Turvey & Kong, 2008: 11). Around 2006, the share of microcredit to farmers by the RCCs stagnated around 30 percent, which can, according to Jia and Guo (2008: 295), lead to further

marginalization of small-scale farmers. Moreover, one survey indicated that guanxi was also a requirement to obtain a loan (Ong, 2004).

New players, old problems?

In December 2006, the CBRC changed market-entry requirements for rural banking aiming to further improve financial services’ quality, to increase

competition in rural areas, and to encourage private capital to enter into the field. Consequently, three new-type RFIs were granted permission for the establishment, RMCs being one of the three (together with VTBs and LCs). Since

October 2007, the pilot experiments in 6 provinces were further expanded to a total of 31 provinces, autonomous regions and municipalities. By the end of 2010,

a total of 395 new-type RFIs were registered nationwide, including 349 VTBs, 37 RMCs and 9 LCs. They attracted a variety of capital worth more than 15 billion Yuan, absorbed 75.1 billion Yuan in deposits, and provided a total of 60.1 billion

worth of loans. Among the total loans, 33.7% was disbursed to rural households, and 50.4% to rural small businesses (CBRC, 2010; see Table 1). According to a

three-year working plan of the CBRC (Yinjianfa No.72/2009), 899 more new-type rural financial institutions will be expected to be established across China by the

9

end of 2011, with a focus on under-banked rural areas. To secure the

implementation of the plan, the CBRC requires that the sponsors of new-type rural financial institutions should first consider the key counties of the national

poverty alleviation and development program in central and western regions. While banks are accorded with freedom to select the location for new presence, the CBRC will install an incentive mechanism to guide them. 18 According to the

CBRC, they have helped to bring financial services to underserved regions, channeling funds from urban to rural areas and delivering specialized products to

local customers (cf. CAU, 2010). Despite recent progress, there were however still 2312 villages and towns in China without financial institutions by the end of 2010, although 480 less comparing the total number at the end of 2009. 19 As

Table 1 shows, by the end of 2010; the share of loan to farmers (20.3 billion Yuan) accounts for only 33.7% of total loans by new-type financial institutions

(60.1 billion Yuan).20

Table 1 The development of New-type rural financial institutions

Number (unit) Equity (100 ml Yuan)

Deposit (100 ml Yuan)

Loan (100 ml Yuan) Profit (100 ml Yuan)

VTBs RMCs LCs Total To farmers To Small enterprises

Total

2007 19 8 4 31 7.67 3.98

2008 91 10 6 107 41.95 64.6 13.98(40.9%) 18.8(55%) 34.2

2009 148 16 8 172 70 269 66(36.5%) 91(50.3%) 181

2010 349 37 9 395 150* 751 203(33.7%) 303(50.4%) 601 13.6

2011 1027 161 106 1294

* The data at the end of November 2010.

Source: The CBRC yearly report (2007-2010); The CBRC working plan (Yinjianfa No.72/2009).

Although the local authorities in various provinces have indicated great interest in the development of RMCs, in view of economic profitability of the other types of institutions, there is little promise of any permanent promotion for RMCs.

From Table 1 we can see that the CBRC plans to have 161 RMCs by the end of 2011. This number is nevertheless small in comparison with those of VTBs

(1027). Since VTBs are commercial financial institutions, they are also regarded as grass top financial institutions, contrasting with RMCs as grassroots CFIs (emphasis added).21 Different from commercial banks, RMCs are not based on

the expectation of profit from capital invested. Therefore, there exist a great debate over such policy and planning bias. According to a survey among 114

experts on Chinese rural reform (from agriculture-related central and local governments, universities and research institutes), more scholars propose the development of RMCs (60.5%) as a key to improve rural financial system than

VTBs (40.4%).22

To a great extent, the development of RMCs is concomitant with and inspired by that of agricultural co-operatives in China (called farmer’s specialized co-operatives, or FSCs). Nowadays, with the promulgation of a first national co-

operative law in China (in 2007), a new co-operative movement has been

18 “The CBRC called for comprehensive implementation of the General Working Plan for New-Type Rural Financial Institutions: 2009-2011”, availale at the CBRC website: http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID=20090805FF3C70CAEF5E8822FFDDC47D6616D000 (accessed 05-08-2009). 19 From the CBRC website: http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=20110224569EBD21CA34C091FF0EB4133C372E00 (accessed 24-02-2011). 20 At the same time, the share of loan to farmers was 22% of the total agriculture-related loan in total banking institutions. 21 With regard to this one can consult the website of grassroots finance (Caogen Jinrong): http://www.cgjr.org 22 “The 12th Five -Year Plan: rural-urban integration should make historical breakthrough”, Shanghai Securities News (2010-08-05, D12).

10

witnessed and is regarded as engendering the most dynamic organizations in

rural China (Zhao & Develtere, 2010). According to this law, the state also encourages the commercial financial institutions to provide financial services to

the FSCs by diversified means (Article 51). However, it does not provide more regulations in detail dealing with the difficulty in accessing capital. Our previous study reveals that, different from the situation in the West, debt capital does not

appear to be a widely-used traditional financing source: new co-operatives in China have difficulty even in borrowing short-term debt, not to mention

borrowing long-term loans. Also specialized/non-traditional external sources of capital such as those provided by co-operative banks do not suffice. Co-operative banks in rural areas that have been transformed from formerly RCCs can still fail

to meet the co-operatives’ demand for credit, not to mention the other commercial banks. It is partly because the co-operative itself does not have

much fixed capital assets that can be used as collateral. The factory buildings established in rural areas, for example, cannot be granted with property ownership certificate. Besides, the office building belongs sometimes to the

processing company affiliated to the co-operative, sometimes to the local public agencies that lend some office space to the co-operative, and sometimes to the

member personally (mostly the initiator of the co-operative). Moreover, the production land is owned by the rural collective, although farmer members have

the land use right. Although according to the central government’s Number One Document and other documents related, many tangible assets can be used as collateral, such as farming machines, agricultural greenhouses and warehouses,

in reality, many banks are actually not willing to accept them as collateral. Therefore, it is not only due to the fact that lending agencies are uncomfortable

with the co-operatives’ unorthodox ownership structure, but also because co-operatives in China are regarded to have little capital assets on their own which can be used as collateral. Short-term loans or micro-credits that most co-

operatives in our cases have successfully gained are actually in the name of the director or of the other large shareholders. In other words, personal assets or

creditworthiness from the core members are popularly used as collateral for the co-operative in order to gain loans from the banks.23 Consequently, in order to alleviate the problem of capital constraints and loan shortage co-operatives and

farmers face, the Number One document of 2009 emphasized to encourage FSCs to carry out credit mutual-aid. In the same year, an opinion concerning

supporting financial services to FSCs (Yinjianfa No.13/2009) has been issued, fostering pilot program of establishing RMCs based upon FSCs through a resource mix structure.

Credit co-operatives as social enterprises: A conceptual rationale

Social enterprises are typically characterized by a combination of social and economic dimensions. They are enterprises with social objectives. According to

the EMES approach they have economic and entrepreneurial dimensions on the one hand and social dimensions on the other hand. Four criteria are supposed to

reflect their economic and entrepreneurial dimensions, five indicators reflect their social dimensions (Defourny & Nyssens, 2008):

- Economic and entrepreneurial dimensions of social enterprises including, a

continuous activity producing goods and/or selling services, a high degree

23 This section draws upon Zhao (2011).

11

of autonomy, a significant level of economic risk, and a minimum amount

of paid labor. - Social dimensions of social enterprises, namely, an explicit aim to benefit

the community, an initiative launched by a group of citizens, a decision-making power not based on capital ownership, a participatory nature, which involves various parties affected by the activity, as well as a limited

profit distribution.

According to the EMES approach, the economic activities constitute in itself support for the social dimension of social enterprises. The idea of connecting the nature of the economic activities to the social mission of social enterprises is

intrinsically intertwined with the dual nature of co-operatives (Fauquet, 1951; Fairbairn, 1994) as one of the three pillars of the social economy (Defourny &

Develtere, 2009; Defourny, Develtere & Fonteneau, 1999). Theoretically, the social dimension of co-operatives has been described by Laidlaw in his idea of building co-operative communities (1980). MacPherson’s emphasis on the

“common capital” system of co-operatives, instead of regarding co-operatives as mere conglomerations of members (2004) is also well inspiring.

However, balancing social and economic dimensions is considered as a major

challenge for social enterprises. Social enterprises typically find themselves in a trilemma between the exigencies of market, state and civil society (Develtere & Raymaekers, 2005; Gijselinckx, Develtere & Raymaekers, 2007; Gijselinckx &

Develtere, 2008). As far as the exigencies of the market and civil society are concerned, they continuously have to find a balance between economic and

social objectives.24 Concerning CFIs, as one important model of social enterprise, two aspects of them are regarded as highly important: poverty outreach and financial sustainability. In many cases, these two aspects are hardly achieved at

the same time, and there seems to be a conflict between the two.

When we look at the situation of RMCs in China in accordance with the two dimensions aforementioned, we can see that:

- From the perspective of social dimensions, RMCs have mostly an explicit

aim to benefit the township or administrative village based community where the FSCs are located (Article 2). They are in most cases initiated by

no less than 10 big shareholders of the FSCs, and afterwards absorb more small shareholder members from the FSCs (Article 9:2). Besides, a participatory governance feature is also witnessed, and many RMCs are

operated on the basis of “one member one vote”. Although extra voting is allowed, the total number one RMC has shall be no more than 20% of the

total number of its basic votes (Article 23). Furthermore, it is regulated that RMCs’ surplus distribution shall demonstrate the principle of capital accumulation and sustainability (Article 49).

- From the perspective of economic dimensions: RMCs provide continuously financial and credit services (deposit, loan and settlement business) to

their members (Article 41-43). Different from other poverty-alleviation projects, they enjoy a high degree of autonomy. This is because share capital from the members appears always to be RMCs’ most important

financial source, therefore being capable of remaining as member-controlled organizations. As one type of CFIs, RMCs bear a significant level

24 This section draws upon Zhao and Gijselinckx (2011).

12

of default risk, which may endanger their sustainability. And finally, they

are required to recruit qualified directors, managers and working staff (Article 9:4).

From the above analysis it becomes evident that managing default risks is, in fact, the key to ensure a RMC’s sustainability. Generally speaking, default risks

consist of two forms: involuntary and voluntary ones (Ghosh, Mookherjee & Ray, 2000). The former one is related to the capability to repay (Stiglitz & Weiss,

1981; Stiglitz, 1990), whereas the latter refers to the willingness to repay (Besley & Coate, 1995). Indeed, the studies of Adams and Vogel (1986) and Braverman and Guasch (1989) suggest that both are problems in the early

phases of economic development when reliable forms of collateral are hard to come by (cf. Besley & Coate, 1995: 3). Following the logics by Stiglitz (1990),

we can presume that a RMC has one significant advantage over RCCs or other formal institutions, i.e. they have more detailed knowledge of the borrowers. They therefore can separate out high-risk and low-risk borrowers and monitor

the borrowers more effectively, making sure that the funds are used productively and thus lowering the default rate.25

Before comparing RMCs with commercial financial institutions in the next section,

we should conclude this section by emphasizing the aforementioned difference between RMCs and government or NGO-initiated mutual credit projects. The fact that in the latter cases, government funds or other third party funds (rather than

members contribution) appear always to be the most important financial source, impedes to a great extent a high degree of autonomy those organizations can

enjoy. This may be one of the most important reasons why such initiatives have the difficulty to develop in the long run. On the contrary, RMCs can enjoy a basic independence from the government, a feature that helps inform internal

motivation for a good management and is therefore conducive to a sustainable development.

III. Co-operative or commercial institutions?: A legal framework

comparison

China’s current rural financial system is structured by policy financial institutions,

commercial financial institutions, CFIs, and other types of institutions. Among them, CFIs are officially considered to consist of RCCs and RCBs, as well as RMCs. However, as we discussed above, RCCs and RCBs are CFIs in name only.

Therefore RMCs seem to be the only CFIs in China. Whereas commercial financial institutions include ABCs, rural commercial banks, VTBs, postal savings banks

and insurance companies (Jiao & Yang, 2006), it turns out clear that only VTBs are community-based ones. Therefore, in what follows we will analyze these two organizations in China. It appears also interesting since both of them are

recognized by the CBRC as new players of rural financial institutions in China, but the policy seems to have a great interest in the commercial one (VTBs) rather

than the co-operative one (RMCs).26 In order to attract more private investment to increase the access to financial

services in disadvantaged rural areas, the CBRC has lowered the entry threshold

25 In this situation, we regard a RMC as a local moneylender (cf. Stiglitz, 1990: 352), who, albeit being a formal financial institution as well, is operating at a local level, where borrowers, depositors and working staff of a RMC know each other well. 26 As we mentioned above, the CBRC plans to have 161 RMCs yet 1027 VTBs by the end of 2011 (Table 1).

13

of banking sector in rural areas and encouraged the creation of VTBs. As Table 2

shows, it is regulated that the registered capital of a VTB at county/municipality level shall be no less than 3 million Yuan, or no less than 1 million Yuan for the

one at town/township level. This is much lower in comparison with the required registered capital for a RCB (no less than 20 million Yuan). however, in order to manage the default risks, the CBRC requires that at least one initiator or

contributor shall be a banking institution, who shall be also the controlling shareholder or sole shareholder of a VTB. Moreover, the controlling shareholder

who is a banking financial institution shall hold at least 20% of the bank’s total equity. Since commercial banking institutions are mostly not interested in farmer credit in rural areas due to low profits, high repayment risks and operational

costs, they tend also to be less willing to invest in VTBs due to a lack of a great economic incentive for them. But since it is required that the shareholders of

private capital (i.e. individual natural persons and their related parties, or the individual non-bank financial institutions or non-financial enterprises), shall hold no more than 10% of the bank’s total equity, the private capital also tends to be

discouraged to invest in the VTBs. Therefore, it would be difficult to anticipate a rapid development of VTBs in rural China. As Table 1 shows, there were 349

VTBs by the end of 2010. It would be a great challenge to fulfill the CBRC plan, which means there should be 678 more VTBs established in 2011. Another

problem concerning VTBs is that, although they are called village and township banks, their operation becomes to gradually leave away from the grassroots farmers. For example, it is said that the first VTBs in China, Huimin VTB in

Jincheng Town in Yilong County of Sichuan province, gradually focuses on business at county level after establishing a sub-branch in the county. Moreover,

some recently established municipality-based VTBs have even set their headquarter in the cities. 27 One plausible explanation is that VTBs are more willing to provide loans to county-based small enterprises rather than credit-

demanding small farmers.28 This seems to be against the very purpose of and anticipation towards their establishment.

Table 2 The comparison of VTBs and RMCs in China

Commercial financial institutions Co-operative financial institutions

VTBs RMCs

Legal status Rural commercial financial institutions (A.2) community-based, mutual banking institutions (A.2)

Business regions

Within the scope of county or town at rural central western areas or other poverty-stricken areas (A.59)

Within the scope of town or village at rural central western areas or other poverty-stricken areas (A.66)

Business types

Deposit from the general public, loan, domestic settlements; the acceptance and discounting of negotiable instruments; inter-bank lending; bank card business; issuing, honoring and underwriting of government bonds; receipt and payment of money and for insurance companies (A.38)

Deposit from and loan to the members, settlement business (A.2)

Operation Open for the local public, not allowed to grant loans to those other than local borrowers (A.5)

Closed operation (only for members) (A.45)

Requirements At least one initiators/contributors shall be a banking institution; registered capital≥3,000,000 Yuan (county/municipality level) or≥1,000,000 Yuan (town/township level), etc.. (A.8)

initiators ≥10; registered capital≥300,000 Yuan (county/town level) or≥100,000 Yuan (administrative village level), etc.. (A.9)

Initiators Chinese & foreign banking institutions, Chinese enterprises and individuals

Farmers, small enterprises

Members - Farmers or small enterprises in rural county/town or villages, members of FSCs (but not restricted to members of one FSC). (A.2)

27 “VTBs are not village and township based?”, http://co.zgjrw.com/News/2011111/ruraleconomics/884417625800.shtml (accessed 11-01-2011). 28 “why are VTBs considered good but hardly attractive?”, http://finance.ce.cn/rolling/201102/28/t20110228_16547178.shtml (accessed 28-02-2011).

14

Equity financing

Public deposit and bank financing (A.2); the controlling shareholder or sole shareholder must be a banking institution. The controlling shareholder who is a banking financial institution shall hold at least 20% of the bank’s total equity. The individual natural persons and their related parties, or the individual non-bank financial institutions or non-financial enterprises, shall hold no more than 10% of the bank’s total equity (A.25)

Member deposit, bank financing and social donation (A.41)29; the biggest shareholder shall hold no more than 10% of the total equity (A.20).

Governance Corporate governance in accordance with PRC Company Law (A.30)

Basic votes & extra votes ≤20% of total votes (A.23)

Foreign investment

Allowed (foreign financial institutions) Not allowed

Supervision CBRC [Yinjianfa No.5/2007], PRC Commercial Banking Law CBRC [Yinjianfa No.7/2007]

Source: Tabulated by the authors.

In China, there exist no such co-operative law for CFIs. RMCs operate on the basis of criteria set by the CBRC (Yinjianfa No.7/2007) and thus under banking

authority supervision.30 When comparing RMCs with VTBs, we can see clearly this local-based, grassroots feature of RMCs: most of them are required to operate at

the town or administrative village level rather than the county level. This is conducive to reducing the operational costs and risks, because RMCs tend to have better information about local borrowers’ efforts and/or abilities of loan

repayment than does the bank (and VTBs). Moreover, the required registered capital of a RMC is much lower, requiring one tenth of that for a VTB. All the local

farmers and small enterprises can be the initiators of a RMC, rather than a banking institution as the controlling shareholder. RMCs are member-based organizations, which means that they are not profit-driven, a feature significantly

different from VTBs. Members of a agricultural co-operative (a FSC in China) are also encouraged to join the RMCs. However, the membership is not restricted to

members from one FSC. Such requirement helps diversify a RMC’s loan portfolio composition and therefore reduce the default risk. Being a CFI, RMCs operate on a basis of participatory governance. This means every member has one basic

vote. In order to attract capital contribution, extra voting is allowed. However, the total extra votes shall be no more than 20% of the total votes a RMC has.

Moreover, the biggest shareholder shall also hold no more than 10% of the total equity. One great disadvantage RMCs may have comparing with VTBs is regarded the capability of mobilizing deposits. Since deposits from non-members

are prohibited, there tends to be a limit to the deposits a RMC can attract from its members. In China’s central and western rural areas or other state or

province-defined poverty-stricken areas, this threshold tends also be quickly reached. This may inhibit RMCs’ further development. Besides, although they are co-operative not-for-profit organizations, they do not enjoy preferential policies

on taxation and savings reserves, nor do they have access to the subsidies that RCCs can receive.

IV. Rural mutual co-operatives: Evidence from the field

Local context

The empirical evidence presented in this section is mainly based on primary data collected from fieldwork in Xinhe RMC (hereafter, XH) located in Jinyun county of

29 In fact, it is quite difficult for a RMC to obtain bank financing, and there is very few social donations. Therefore, members’ deposits are in most cases the only capital resource. 30 Although according to Cuevas and Fischer (2006: 33), there is a certain tendency for their legal frameworks to move towards the writing of specialized law for CFIs, we are rather doubt about this possibility in China.

15

Lishui municipality, the poorest area in Zhejiang. Although Zhejiang is an affluent,

coastal province in China, there exists a great gap between economically strong and backward areas. In 2009, the per capita GDP in Hangzhou (the highest in

the province, 63,471 Yuan) is 2.7 times of that in Lishui municipality (23,520 Yuan). As mentioned in section I, Zhejiang was chosen in the study partly because it was the pioneering province in China where co-operative institutions

were most vibrant (Xu & Huang, 2009). Zhejiang established its local co-operative regulation as the first one in China even before the promulgation of a

national co-operative law. This demonstrates that the co-operative development in Zhejiang is well-advanced compared with that in the other areas in China. While in Jinyun county, the co-operative movement has also a long history. This

is in part due to the fact that there is a great number of agriculture population in this mountainous area. In 2009, the ratio of agriculture population to non-

agriculture population in Jinyun is 8.9, the third highest in the province (among 101 districts, cities and counties) (Table 3). During the field visit in autumn 2010, we have conducted in-depth interviews with the management team of our case

and local officials responsible for RMCs’ development, trying to assess its organization and operations, its mission and principal activities, as well as the

lending technologies that ensure its outreach and sustainability.

Table 3 Total households and population (2009)

Total households (10,000 households)

Total population (10,000 persons)

By sex (10,000 persons) By Agriculture and Non-agriculture (10,000 persons)

Male Female Agriculture Non-agriculture

ZJ province 1604.17 4716.18 2400.16 2316.02 3282.23 1433.95

LS region 90.95 257.39 133.54 123.84 212.29 45.10

JY county 17.74 45.02 23.29 21.74 40.48 4.55

Source: Zhejiang Statistical Yearbook 2010.

In 2007, when the CBRC decided to expand the project of establishing new type

rural financial institutions from 6 pilot provinces to a total of 31 provinces, autonomous regions and municipalities nationwide, Zhejiang government was

most interested in VTBs and MCCs 31 rather than RMCs. Later on, when two farmers went outside to learn the experience, RMCs started to come into existence, albeit without registration. In October 2009, when a provincial

registration regulation for RMCs (Zhe Gongshangqi No.16/2009) in Zhejiang was finally promulgated, the development of RMCs in Zhejiang started to accelerate.

At the beginning, Zhejiang CBRC decided to establish four pioneering RMCs. For an area where a RMC is encouraged to establish, it should have a high level of agriculture-based industrial development, which means a high level of

agricultural co-operatives development. As Jinyun fulfills this requirement, with the great local demand for financial services, it applied for the establishment of

XH, who becomes then one of the four pioneering RMCs launched in Zhejiang. The establishment

The establishment of XH is based on one poultry FSC called Jinghe (JH).32 It

came into being because the members of JH always faced the capital constraints

31 In 2010, there were 29 listed MCCs, 14 coming from Zhejiang. China finance information website: http://www.cfi.net.cn/p20100904000582.html (accessed 04-09-2010). Also for VTBs, Zhejiang government has planned to operate 30 VTBs during the 2009-2011, but no such plan for RMCs. See CBRC working plan (Yinjianfa No.72/2009). 32 In 2009, JH was the only FSC that was granted four stars, showing that it was the all-best FSC of the area (Jinnong No.65/2010).

16

during the season to buy the feedstuffs and duckling, and such difficulty could

not be satisfactorily solved by the local formal financial institutions such as RCCs. Therefore, XH’s original mission was to solve the JH members’ difficulty in raising

enough circulating capital. As a consequence, its membership is strictly based upon the membership of JH. This means every member of JH is qualified to become a member of XH. This is done also because they try to reduce the risk of

default from outside members. By using the agricultural co-operative mechanisms, it should be easier for borrower monitoring and contract

enforcement. XH has attracted 335 members providing equity capital of 3.69 million Yuan. As

with other member-owned co-operatives in Zhejiang, it is characterized by the fact that there co-exist a small number of major shareholders and a big number

of small shareholders. As Table 4 shows, in order to be in accordance with the regulation (no more than 10%), three biggest shareholders hold each 9.49% of the total shares. However, a majority of members (227) holds each a minimum

share of 2,000 Yuan. On the first general assembly on 22 December 2009, 37 representatives were elected. They then voted to elect a board of directors (5

members) and a board of supervisors (3). As can be seen from Table 4, most management members are major shareholders, but not all major shareholders

belong to its management team. This demonstrates that besides capital contribution amount, local prestige and reputation are equal important to become a RMC’s leader.33 After all, RMC is a member-owned organization. This

means that the leaders are not appointed from above (like the situation in RCCs), but elected by the members. After this meeting, XH submitted its establishment

application to the local CBRC branch. According to the regulation, the establishment of a RMC shall satisfy a certain requirements, such as having complete organization and management, as well as having up-to-standard

business site, safety measures and other facilities relevant with the business thereof. As a consequence, XH has invested a lot during the preparation stage.

The manager, Mr Zhu, estimates that the amount reached a total of more than 500,000 Yuan. This includes office rental costs, the costs of office equipments and business promotion, etc.. On 5 January 2010, a charter was promulgated at

the first meeting of representatives. According to it, voting powers do not depend on the equity provided. The voting system is based on a combination of “one

member one vote” and “one member multiple votes”. This means that every member has one basic vote, and those having more than 5% of total shares may enjoy extra votes. The ceiling of total extra votes is 20% of the total basic votes.

Besides, each member shall have no more than 2 extra votes, and the total number of members having extra votes shall not exceed 10.

On 3 February 2010, XH finally started its business. On this first day, it absorbed more than 5,800 thousand Yuan in deposits, and provided 580 thousand Yuan

loans. One example came from Mr. Xu, a member of 45 years old. He had 20,000 ducks and operated a 100-mu large (approximately 6.67 ha) fish pond

outside the region. Every March he needed a great amount of capital to buy ducklings and fingerlings. By providing a minimum share of 2,000 Yuan, he successfully borrowed 120 thousand Yuan from XH (within 10 minutes) on the

first day of its operation. But before that, he always had the problem with the

33 The director of board of supervisor is also the director of one local company. The other leaders are mostly well-known farmers having high yield experiences (interviews in the field).

17

high interest rate of the rural informal loan, or the difficulty in providing physical

collateral required by formal financial institutions (RCCs).

Table 4 equity structure of XH RMC (2010)

Equity (10,000 Yuan)

No. (persons)

% of each member Management (no.)

Extra vote (no.)

35 3 9.49 x (3) x (2*3)

30.6 2 8.29 x (1) x (2*2)

30 1 8.13 x (2*1)

10.4 1 2.82 x (1)

10 4 2.71 x (2)

5 1 1.36 x (1)

2 6 0.54

1.6 1 0.432

1.2 3 0.33

1 31 0.27

0.8 1 0.22

0.6 7 0.16

0.4 47 0.11

0.2 227 0.054

Deposit and loan services

There were no forced savings at XH and loans were not linked to deposits. A member is not required to make a deposit in order to receive a loan. XH

emphasizes voluntary deposit mobilization. In spite of this, XH tries to attract deposits by offering attractive interest rates and ensuring the quality of service

(safe and confidential accounts, for instance). Besides, there was no physical collateral requirement for a loan application. The most important requirement for

a borrower is to have a guarantor. However, this guarantor is not necessarily a member of XH. An applicant who is eligible to receive the loan must be credit-worthy and have good reason for the expense or investment. Another

requirement for a borrower is a maximum age limit of 60 years old. (meeting minutes). After three months of operation, however, this requirement was

adjusted (meeting minutes). On this latter meeting minutes report, it says, “due to the need for our co-operative business development and members’ actual demands, borrowers’ age limit was reconsidered. For borrowers of less than 65

years old, having good health, credit-worthiness and qualified household capability, the agent will make an investigation and decide (to grant the loans or

not)”. Therefore, we can see that this grassroots institution can bring a flexible management depending on the needs of both the organization and members. But it is also clear that such flexibility was offered with some extra conditions

required. This seems understandable from the viewpoint of capital safety concern.

According to its loan policy (to conform to the regulation set the CBRC), the maximum loan amount to one member shall not exceed 15% of its net capital, and the maximum total loan amount to the ten biggest borrowers shall not

exceed 50% of its net capital. They can adjust their interest rates in accordance with benchmark rates set by the PBC. However, the interest rate cap on deposit

should be the same as the benchmark rate, whereas the interest rate cap on loan at most 4 times of that set by the PBC. By the end of 2010, XH has absorbed 12,470 thousand Yuan in deposits, and provided a total of 12,130 thousand Yuan

of loans to 74 members, averaging 163.9 thousand Yuan per borrower. The maximum loan size is 500 thousand Yuan, whereas the minimum loan size is 30

thousand Yuan. Because the loan targets are exclusively members of the

18

agricultural co-operatives, all the loans were used for livestock rearing. The rate

of growth of the loans disbursed was 79.3% in 2010, while deposits grew 74% over the same period, suggesting members’ significant demand for capital

service (both deposit and loan) (Table 5). However, the number of borrowers accounts for only 22% of the total members, most of whom having investment projects. While the number of depositors accounts for 58% of the total members.

This reflects that (1) most members have some spare capital. By using saving services of XH, they not only can receive the same interest rates of deposit as

the other formal financial institutions, but also can enjoy the profit distribution as a co-operative member. This latter point is the very difference between a CFI and a commercial bank. Therefore, many members feel that XH indeed belongs

to themselves. However, (2) not all the members have the demand for investment. When they have no such demand, they also tend to diminish their

capital needs.

Table 5 operational characteristics of XH RMC (2010)

Quarter 1 Quarter 2 Quarter 3 Quarter 4 2010 change

total deposits (10,000 Yuan) 714.7 1037.71 1005.77 1247 532.3

deposit growth(%) 23.22 45.20 -3.08 23.98 74.48

total loans (10,000 Yuan) 676.5 822.5 1075.5 1213 536.5

loan disbursements growth(%) 1066.38 21.58 30.76 12.78 79.31

XH offers two deposit products: (1) demand deposit accounts, which earn very

little interest, and (2) term deposit accounts (normally 3-12 months), which pay a certain percentage of annual interest rates based upon those set by the PBC. The policy is to match the organization’s term structures of assets and of

liabilities by trying to collect longer term deposits (3-12 months) and disbursing seasonal shorter-term loans. However, demand deposit accounts are by far the

preferred savings instrument. They attracted two-thirds of the total volume of deposits collected. This phenomenon seems surprising when one is aware of the fact that most agricultural economic activities are seasonal and in such situation,

they could predict income flows and thus choose a rewarding alternative means. We assume this might partly because longer-term of savings are more difficult to

collect in the poorer region. Besides, convincing members to deposit more requires that members perceive benefits from doing so. Since XH is still quite young, members may need some time to gain their trust in it.

Sustainability and Outreach

In section II we mention that the key to ensure a RMC’s sustainability refers to managing default risks. The involuntary default risk concerns the capability to

repay (Stiglitz & Weiss, 1981; Stiglitz, 1990), whereas the voluntary default risk refers to the willingness to repay (Besley & Coate, 1995). In order to manage

both voluntary and involuntary default risks, XH created a loan investigation commission, consisting of all members from board of directors and board of supervisors. For a loan with an amount of more than 120,000 Yuan, it needs to

get the approval by the investigation commission. Although the borrower does not need to provide physical collateral, he needs to provide a guarantor. This

guarantor is required to be less than 60 years old. Besides, members of the investigation commission are in principle not allowed to be the guarantor

(meeting minutes). When there comes a loan application, the commission pays a visit to the borrower’s family first, to investigate how the loan is planned to be

19

spent or invested. This may reduce the involuntary default risk XH may

encounter. Afterwards the commission also needs to visit the home of the guarantor to see if he is creditworthy and capable to be. If the borrower would

be unwilling to repay, the guarantor would bear the joint responsibility. In this case the voluntary default risk would also be controlled. Moreover, for a loan amount of below 120,000 Yuan and below 60,000 Yuan, the director Mr. Yu and

the manager have the rights to approve respectively. Since Mr. Yu is also the director of JH (the local agricultural co-operative), he has much detailed

knowledge of the members/local farmers and therefore can separate out high-risk and low-risk borrowers and monitor the borrowers more effectively, making sure that the funds are used productively and thus lowering the default rate. And

because the manager is retired from the local RCC, he has much deep knowledge on managing financial institutions. As one staff during the interview said, “the

recently-established XH just started to learn to operate for the first time. Without manager Zhu we would know nothing (on operating it)”. Moreover, to ensure that management evaluates loans carefully, the manager can receive a

remuneration at the end of the year.34 This use of performance-based incentives for management makes more sense when it is coupled with management

discretionary powers over important decisions, such as screening loan applicants, deciding whether to grant the loan and for what amount (although a small-

amount less than 60,000 Yuan), and pursuing contract enforcement. In this situation, “proper incentives given to management through profit sharing should be a key ingredient of the good performance of XH” (one local official during a

group interview). Normally it takes no more than 3 days during the approval process. And “when the signature is signed, the applicant can get the loan

immediately” (the manager). Furthermore, there are two working staff (around 30 years old), both being members as well (each providing a share of a minimum amount of 2000 Yuan). They know borrowers and depositors well and may have

better information about individuals’ efforts and/or abilities to repay. Therefore they also tend to play an important screening and monitoring role in the process

of providing lending services for the applicants. Finally, “for those loan borrowers in default, they will receive negative credit evaluation and be refused to get the access to further credit” (the manager). This can be an effective incentive device,

as Stiglitz and Weiss (1983) emphasized in an earlier study. Due to a lack of good alternatives to gain access to financial services, the borrowers tend to keep

a stable relationship with the organization. This also increases the incentives to repay. During the time of our visit, there were already 12 members who in advance repaid their loans. There were no default or arrears.

Keeping default losses at minimum levels is only one side to ensure XH’s

financial sustainability. The other side depends also very much on the ability to cover operational costs and other financial expenses with its own revenues. Through Table 6 we can see, XH’s operational costs is the biggest expenses for

the organization. These include employees’ salaries 35 , expenses incurred for opening of business36, utility bills, etc.. Another cost refers to business tax. Since

34 If 100% of loan (a base number of 10 million Yuan) can be repaid, the manager gets a bonus of 20,000 Yuan. If 95.5% of loan can be repaid, he gets a bonus of 10,000 Yuan. If 100,000 Yuan out of 10 million Yuan are not duly repaid, there is no bonus nor penalty. But if more than 1% of total loan cannot be duly repaid, he gets a penalty of 10,000 Yuan. And if this defaul rate reaches more than 2%, he will not longer be appointed (meeting minutes). 35 Currently there are four persons receiving salaries in XH, with a total of 10,300 Yuan monthly. 36 As we mentioned above, XH invested more than 500,000 Yuan for the business start-up, including office rental costs, the costs of office equipments and business promotion, etc.. Since the payment is on a basis of installment plan, only a part of such costs is paid and thus included in the financial statement.

20

the average loan size is far more than 50,000 Yuan (regarded as small-sum loan),

XH needs to pay such tax (5% of revenues from loan interests). During the time of our visit, XH was still not able to cover its costs with its overall incomes.

However, the manager was optimistic by saying that “the cost will decline later and we will become profitable since it is really costly at the beginning”.

Table 6 financial statement of XH RMCs (unit: 10,000 Yuan)

Costs Incomes

operational cost 24.19 Interests revenue 43.17

Tax 2.33 Service fee 0.03

Interests cost 5.8 Total incomes 43.2

Loan loss reserves 10.76

Depreciation of fixed assets 1.36

Total costs 44.44 Surplus -1.24

Although XH is located in the poorest area in Zhejiang, its members generally do not have much capital demands for non-agricultural or consuming purposes. By

far the loans asked were mostly used for poultry production investment. This shows that the members, although in a disadvantageous situation facing credit

constraints, are not the poorest farmers without production. Such economic capability in agricultural production is also required by the CBRC in order to become a pilot institution. But there are two points which indeed show this

member-based, not-for-profit feature of XH. First, the interest rates on loans set by XH are decided to be less than rates charged by the local RCC. For example,

when XH started the business, its monthly rate on loan was set as 8.19‰ (85% above the benchmark rate), lower than 8.41‰ (90% above the benchmark rate) charged by the local RCC. Through this method XH is able to satisfy the

members’ capital demand by providing cheap loans for productive purposes. This may possibly also help avoid the incentive (moral hazard) and selection problems

faced by any credit market (Stiglitz, 1990). Second, although the interest rates on deposits should be no higher than the benchmark rates, the members can nevertheless get a percentage of the surplus distributed. This may provide a

further incentive for members, since 70% of the patronage distribution is meant to allocate to the depositors.37

The biggest difficulty mentioned was that “the members are too few” (the manager). There were currently 335 members, all based upon the membership

of JH, the agricultural co-operative. According to the regulation (cf. Table 2), the members of a RMC are not necessarily restricted to one FSC. And in reality,

“there are still many more farmers who have such capital demands and are willing to join us” (the manager). However, since membership enlargement should be approved by the CBRC, it would become no easy procedure at one

time. Actually, XH was more ambitious before registering under the CBRC. Originally it aimed to enlist more members and absorb a much higher amount of

registered capital (such as 10 million Yuan) through bank financing from the RCC. But the local officials of the CBRC regarded it as too risky and unsecure. Therefore they suggested: “since the very first RMC (in the province) only has a

registered capital of 3.5 million Yuan (from 103 members), it would be better for you to lower the sum.” Moreover, the local authority also “disagreed about the

idea of bank financing acted by the RMC” (the manager), although it is legally allowed by the CBRC. Currently XH plans to enlarge its membership to more than

37 After drawing 10% of public accumulation funds, XH allocates 50% of distributable surplus to shareholders, and another 50% according to patronage principle (among which, 70% to depositors, and 30% to borrowers).

21

1,000 households. But such plan seems also quite challenging. This is because,

during the time of our visit, XH had still a deficit, therefore, its members were not expected to get surplus distribution. “They can accept this situation (i.e.

receive no surplus distribution) at the beginning. But in a long run (i.e. after two or three years), if this situation continues, the members will definitely withdraw” (the manager). Therefore, the management seems also under great pressure if

the membership would be enlarged.

Discussions Although our case may not focuses on the poorest farmers in China, it is indeed

targeting to the needy poor, since the members are living in a mountainous, poverty-stricken area, and they have showed a significant demand for capital

services. At the same time, it has a great potential of self-sustainability. This is shown by the fact that without government subsidies or bank financing available, it depends fully on members’ contribution and deposits. It is well aware of

managing default risks (both voluntary and involuntary ones). In this situation, the director, manager and working staff tend to play an important screening and

monitoring role in the process of contract establishment and enforcement. Moreover, the use of performance-based incentives for management also tends

to ensure a good performance. By examining our case it makes clear that RMCs are truly member-based, not-

for-profit CFIs in China. This feature makes them significantly different from commercial financial institutions such as VTBs or RCCs. Besides the aspect of

member-based capital contributions, several other factors support this characteristic: (1) RMCs are founded on the principle of participatory governance. The foundation of authority within it rests with a general assembly, who elects

the board of directors that formulates policies and supervises the co-operative. This is contrary to the situation in RCCs, in which the leaders are appointed from

above. The voting system is based on “one member one vote” with a combination of “one member multiple votes”. However, the total amount of extra votes (6) does not show any equity significance in the organization when

compared with the total amount of basic votes (335), thus ensuring the democratic participatory feature. Whereas in RCCs and VTBs a corporate

governance structure is required, with the board having the controlling power. (2) Different from RCCs, There were no forced savings and loans were not linked to deposits. A member is not required to make a deposit in order to receive a loan.

(3) There is no physical collateral requirement for a loan application, and credit guarantee is accepted, another aspect distinct from the situations in VTBs and

RCCs. This credit guarantee in the RMC is through a guarantor who knows the borrower well and who wishes to take the joint responsibility in case of default. (4) Bearing its original mission in mind, it provides effective services to meet

farmers’ pressing needs by offering flexibility, streamlining service procedures, and shortening the loan application approval process. In this regard, most RCCs

cannot compete by granting loans to ordinary farmers within two or three days. (5) The RMC sets a loan interest rate lower than that charged by RCCs (and possibly by other financial institutions and VTBs). Such emphasis on service

rather than profit is dissimilar with the principles held by commercial banks. (6) As members of a co-operative organization, they can enjoy the profit distribution,

which is not the case in VTBs or RCCs. Therefore, most members feel that the organization indeed belongs to themselves.

22

There are two implications which our case appears to demonstrate. The most significant one refers to the cooperation between credit co-operatives and

agricultural co-operatives. Facing such a great difficulty in obtaining credit, the members of one agricultural co-operative come together to organize a credit co-operative. This emerged against the background of an emerging co-operative

movement in the agricultural sector in China. At the same time, this is also financially viable for the credit co-operative since its sustainable operation can be

best ensured by way of providing capital demands in production and investment. Such trend seems to set a new opportunity for developing both economic and social aspects of RMCs as true CFIs in China. However, this implication should

also be combined with the condition that it is operating in a local community with a high degree of social connectedness. In our case, more than 92% of members

(340) come from one town. The directors and manager, and all members of loan investigation commission, as well as working staff are also members. They tend to have a strong connection with borrowers and depositors. They may thus have

better information about individuals’ efforts and/or abilities to repay. This may help the institutions separate out high-risk and low-risk borrowers and monitor

the contract enforcement more effectively, thus ensuring to lower and control both involuntary (in the former case) and voluntary (in the latter case) default

risks. We suppose that such feature is also able to harness social collateral. Although in this case, we are not talking about group lending (cf. Besley & Coate, 1995), the fact that they have high connectedness with each other other than

lending activities nevertheless constitutes a powerful incentive device which may be regarded as a social collateral. Besides, there is also a social penalty function

available within the organization (i.e. those in default would be deprived of the opportunity of applying for the loan in the future).

However, our case also shows that such organization can face some severe challenges and problems: (1) Mobilizing deposits seems no easy task,

particularly at the beginning when the organization is still small in scale. At the time of our survey there were only 58.2% of total members that opened an account and made a deposit. Consequently the organization felt that it would not

be capable of granting more loans in spite of a great amount of loan demands. That is also why the management team wishes to enlarge the membership.

Bearing in mind that the organization is operating in poorer region, such threshold of deposit amounts it can mobilize within members may be quickly reached. However, (2) due to strict requirements and prudential regulations set

by the CBRC, it is not allowed to attract deposits from non-members, and it needs to get the official approval when the membership is enlarged. (3) Under

such prudential regulations, it is required to have complete organization and fulfill management conditions (i.e. up-to-standard business site, safety measures and other facilities relevant, qualified management team, etc.). As a

consequence, it had to bear high operational costs before and after the registration. It would then become a question when such costs could be covered

and the organization become financially sound. This is of great significance to ensure the organization’s sustainability. Moreover, although the management team in our case shows a great capacity (particularly in case of the manager

being retired from a RCC), we nevertheless feel concern about the situation in the further after this pilot period. (4) Although it is a not-for-profit co-operative

organization, there is no preferential treatment. On the contrary, it is required to pay business tax, since the loan granted is not regarded as small-sum loan

23

anymore. (5) According to the regulation, a RMC can obtain banking financing

and social capital donations. Our case nevertheless shows that, in reality, the bank is mostly reluctant to provide capital and there is no such donations in

capital yet. Therefore, the difficulty in financing seems the most severe one for the organization’s financial sustainability in the long run. (6) A final problem that could threaten the sustainability of the organization is related to the loan

portfolio. Since in our case, the membership is currently restricted to one agricultural co-operative, there exists a potential market risk which can endanger

the capital safety. For example, suppose that the bird flu strikes again, most loans to the duck households would possibly become default. Therefore, although it was meant to reduce the risk of default by way of refusing non-members of

one agricultural co-operative, in reality, this may play a quite opposite role. But if its loan portfolio composition can be diversified, such default risk could be

controlled and decreased. This can be achieved through, for example, enlisting members from other types of agricultural co-operatives (e.g. horticultural ones), or households with other types of production.

V. Conclusions

Before concluding, we would like to address more precisely the questions

discussed in Section I. Which advantages does the co-operative model have compared with commercial financial institutions in fighting against poverty and financial exclusion? In this paper, we have shown that financial co-operatives,

albeit highly pervasive in many countries, are poorly understood financial entities in China, both in terms of concept and practice. This makes it necessary to make

a distinction between the true co-operative model and the co-operatives in name only. By focusing on a new type of rural financial institutions, RMCs, as the only CFIs recognized by the state regulatory agency, we have examined their role in

poverty reduction and financial inclusion. In contrast to the widely-believed prediction that it is hardly probable for true credit co-operatives to establish

themselves in modern China due to excessive government intervention and China’s peculiar political culture and social context, 38 we find that such co-operative institutions are burgeoning in the field. This is because they have

certain institutional advantages as compared to commercial financial institutions. Through our empirical study it makes clear that such advantages are originated

by the fact that they are characterized as truly member-based, not-for-profit organizations. Therefore, they intend to place service ahead of profit, which meets poor farmers’ pressing needs in credit in spite of scarce collateral.

Moreover, they enjoy a basic autonomy and independence from the government, which informs internal motivation for a good management and sustainable

development. Furthermore, they are located in local communities with a high degree of social connectedness, a feature that is able to harness social collateral. Finally, they emphasize a participatory feature in decision-making process, which

makes members feel that these organizations belong to themselves. All these advantages show that they become an important model of social enterprises in

rural China which, under a more competitive environment shaped in the process of commercialization of the rural economy, may play a greater role compared with commercial financial institutions.

38 For example, Ong considers that the reason of the lack of separation between Western notions of “finance” and “public finance” explains why the financial system in China has always suffered from a lack of independence from the state, especially at the grassroots level (Ong, 2006: 398).

24

These credit co-operatives have thus the potential to combine social and

economic dimensions of poverty outreach and financial sustainability, which makes them a sustainable driver of poverty reduction. However, both the

unsuccessful experiments of RCCs’ reform during different periods, and limited impacts of VTBs’ operation on capital demands at the current stage, demonstrate that there are certain conditions that are necessary to achieve such combination.

Through our case at least two conditions turn out to be important. One is the cooperation between credit co-operatives and agricultural co-operatives. The fact

that agricultural co-operatives have mushroomed in size seems to set a new opportunity for developing both economic and social aspects of RMCs in China. To be sure, the development of RMCs has been greatly inspired by that of

agricultural co-operatives in China. However, this condition should be at the same time combined with a second one, namely local embeddedness with good

social connectedness. This can help the institutions separate out high-risk and low-risk borrowers and monitor contract enforcement more effectively, thus ensuring to control and lower both involuntary (in the former case) and voluntary

(in the latter case) default risks.

In conclusion, credit co-operatives in China, albeit still primitive as they may seem as compared to international experiences, are becoming more prominent in

rural areas with underdeveloped capital markets. Due to the limited effects of government initiatives and commercial institutions on credit demand among the rural poor, credit co-operatives have certain institutional advantages. However,

because of certain reasons, their further development is also greatly challenged. This is partly due to unfavorable external environments such as strict legal

requirements and few preferential policies. At the same time, there also exist internal reasons. After all, in such grassroots financial co-operatives, they are just taking the first steps in the crucial lesson of operation, the lesson which, if

they learn it rightly, will increase the possibility of their sustainability without deviating away from their co-operative roots. References:

Adams D. W. & R. Vogel (1986), “Rural financial markets in low-income countries: recent controversies and lessons”, World Development 14 (4): 477-487. Besley T. (1994) “How do market failtures justify interventions in rural credit markets?”, The World Bank Research Observer 9 (1): 27-47. Besley T. & S. Coate (1995), “Group lending, repayment incentives and social collateral”, Journal of Development Economics 46: 1-18. Bibby A. & L. Shaw (2005), Making a Difference: Cooperatives Solutions to Global Poverty, Manchester: Cooperative College. Birchall J. (2003), Rediscovering the Cooperative Advantage: Poverty Reduction through Self-help, Geneva: ILO. Birchall J. (2004), Cooperatives and the Millennium Development Goals, Geneva: ILO. Brandt L., A. Park & S. Wang (2003), “Are China’s Financial Reforms Leaving the Poor Behind?”, available online at: http://www.economics.ox.ac.uk/members/albert.park/papers/findist.pdf Braverman A. & J. L. Guasch (1989), “Institutional Analysis of Credit Co-operatives”, in P. Bardhan (ed.), The Economic Theory of Agrarian Institutions, Oxford: Oxford University Press, pp340-355. Country Analysis Unit (2010), “Rural banking in China”, Asia Focus, May, Federal Reserve Bank of San Francisco. CGAP (Consultative Group to Assist the Poor) (1998), “China's Emerging Micro-finance Industry”, Newsletter No. 5, January, available online at: http://www.gdrc.org/icm/country/china-mfi.html

25

Cheng E. & Z. Xu (2004), “Credit outreach and the agricultural support on lending programs: the case in Jiangsu Province in China”, available online at http://www.virginia.edu/economics/Workshops/papers/reynolds/Cheng%20Enjiang.pdf. Cuevas C. E. & K. P. Fisher (2006): “Cooperative financial institutions: Issues in governance, regulation and supervision”, The World Bank Working Paper No. 82. Defourny J., P. Develtere & B. Fonteneau (1999), Sociale economie in Noord en Zuid, Leuven: Garant. Defourny J. & P. Develtere (2009), “The Social Economy: The Worldwide Making of a Third Sector”, in J. Defourny et al. (eds.), The Worldwide Making of the Social Economy: Innovations and Changes, Leuven/Den Haag: Acco, pp15-53. Defourny J. & M. Nyssens (2008), “Social Enterprise in Europe: Recent Trends and Developments”, Social Enterprise Journal 4 (3): 202-228. Develtere P. & P. Raymaekers (2005), “Mature cooperative groups seeking new identities. The case of Belgium” Journal of Rural Cooperation 33(2): 97-109. Du X. (2008), “Current Situation and Future Prospects for Microfinance in China”, paper prepared for the World Microfinance Forum Geneva: Promoting Inclusive Financial Market, 1-2 October, Geneva, Switzerland. Fairbairn B. (1994), The Meaning of Rochdale: The Rochdale Pioneers and the Cooperative Principles, Centre for the Study of Co-operatives, University of Saskatchewan, Canada. Fauquet G. (1951), The Cooperative Sector, Manchester: The Cooperative Union. Gale F. & R. Collender (2006), “New directions in China’s agricultural lending”, Outlook Report WRS-06-01, USDA/ERS, Washington, DC. Ghosh P., D. Mookherjee & D. Ray (2000), “Credit rationing in developing countries: an overview of the theory”, in D. Mookherjee & D. Ray (eds.), A Reader in Development Economics, London: Blackwell, pp283–301. Gijselinckx C., P. Develtere & P. Raymaekers (2007), Renouveau Coopératif et Développement Durable. Leuven: HIVA-K.U.Leuven. Gijselinckx C. & P. Develtere (2008), “The Co-operative Trilemma: Co-operatives between Market, State and Civil Society”, Working Papers on Social and Co-operative Entrepreneurship WP-SCE 08-01. Guo P. & X. Jia (2009), “The structure and reform of rural finance in China”, China Agricultural Economic Review 1 (2): 212-226. Hanwell N. D. (1937), “The dragnet of local government in China”, Pacific Affairs 10 (1): 43-63. He G. (1999), “A study on rural financial repression and financial deepening from the perspective of rural household capital lending behavior”, China Rural Economy 10 (in Chinese). He G. (2001), “Characteristics of demand and supply about rural finance in China and path selection”, China Rural Economy 10: 40-45 (in Chinese). He G. (2004), “A bottom-up approach to financial institutional innovation: Baixin rural mutual cooperative of Lishu County in Jilin Province and its implication”, China Cooperation Times, 11.18 (in Chinese). He G. (2008), “An analysis of microfinance demand in China”, paper prepared for the World Microfinance Forum Geneva: Promoting Inclusive Financial Market, 1-2 October, Geneva, Switzerland. He G. (2010), “An Explanation for Rural Mutual Financial Cooperatives’ Mechanism and Performance”, The Chinese Cooperative Economic Review 1 (1): 15-27 (in Chinese). Hsu L. (1937), “Rural Reconstruction in China”, Pacific Affairs 10 (3): 249-265. Hsu P. (1929), “Rural Cooperatives in China”, Pacific Affairs 2 (10): 611-624. Huang J., S. Rozelle & H. Wang (2006), “Fostering or stripping rural China: modernizing agriculture and rural to urban capital flows”, The Developing Economies XLIV (1): 1-26. Jia X. & P. Guo (2008), “Evolution of rural finance in China: institutional ‘lock-in’ or gradualism?”, Savings and Development 4 (XXXII): 279-299. Jiang B. (2008), “In search of and develop new rural financial institutions: who is the main player?”, available online at: http://www.cgjr.org/Article/2008-10-30/20081030161440_2.shtml (accessed 30-10-2008) (in Chinese). Jiang B. (2009), “Why should we develop rural mutual co-operatives?”, available online at: http://www.cgjr.org/Article/2009-10-07/20091007080321_1370.shtml (accessed 07-10-2009) (in Chinese). Jiao J. & J. Yang (2006), Microfinance and Rural Finance, Beijing: China Financial Publishing House (in Chinese).

26

Lai C. (1989) “The Structure and Characteristics of the Chinese Co-operative System: 1928–49”, International Journal of Social Economics 16 (2): 59-66. Laidlaw A. (1980), “Co-operative in the Year 2000”, Agenda and Reports of ICA 27th Congress (Moscow), Genève: International Co-operative Alliance. Liu M., Z. Xu, J. Yu, S. Zhou & Y. Zhao (2005), “Market-led reforms of China’s rural credit cooperatives: a proposal”, Journal of Finance Research 4: 99–113. MacPherson I. (2004), “Remembering the Big Picture: the Co-operative Movement and Contemporary Communities”, in C. Borzaga & R. Spear (eds.), Trends and Challenges for Co-operatives and Social Enterprises in Developed and Transition Countries, Trento: Edizioni 31, pp39-48. Mallory W. (1931), “Rural cooperatives credit in China: a record of seven years of experimentation”, Quarterly Journal of Economics, 45(3), pp484-498. Malone C. B. & J. B. Tayler (1923), The Study of Chinese Rural Economy, Peking: C. I. F. R. C. publication B-10. Nair A. & R. Kloeppinger-Todd (2007), “Agricultural and rural development”, The World Bank discussion paper No. 35. Oi J. C. (1999), Rural China Takes Off, Berkeley, CA: University of California Press. Ong L. (2004), “China anti-poverty loans go to favored business”, Asian Times, available online at: http://www.atimes.com/atimes/China/FH04Ad01.html (accessed 04-08-2004) Ong L. (2006), “The political economy of township government debt, township enterprises and rural financial institutions in China”, The China Quarterly 186: 377-400. Ong L. (2009), “ The communist party and financial institutions: institutional design of China’s post-reform rural credit cooperatives”, Pacific Affairs 82 (1): 251-278. Park A., L. Brandt & J. Giles (2003), “Competition under credit rationing: theory and evidence from rural China”, Journal of Development Economics 71: 463-495. Park A., C. Ren & S. Wang (2003), “Micro-finance, poverty alleviation, and financial reform in China”, paper presented at the Workshop on Rural Finance and Credit Infrastructure in China, 13-14 October, Paris, France. Park A. & S. Wang (2001), “China’s poverty statistics”, China Economic Review 12: 384-398. Riskin C. (2004), “The fall in Chinese poverty: issues of measurement, incidence and cause”, paper prepared for the Keith Griffin Festschrift Conference at Political Economy Research Institute, 23-24 April, University of Massachusetts, Amherst. Shen M., J. Huang, L. Zhang & S. Rozelle (2010), “Financial reform and transition in China: a study of the evolution of banks in rural China”, Agricultural Finance Review 70 (3): 305-332. Stiglitz J. E. (1990), “Peer monitoring and credit markets”, The World Bank Economic Review 4 (3): 351-366. Stiglitz J. E. & A. Weiss, (1981), “Credit rationing in markets with imperfect information”, American Economic Review 71 (3): 393-410. Stiglitz J. E. & A. Weiss (1983), “Incentive effects of termination: applications to the credit and labor markets”, American Economic Review 72: 912-927. Sun T. (2008), “The policy and legal framework for microfinance in China”, paper prepared for the World Microfinance Forum Geneva: Promoting Inclusive Financial Market, 1-2 October, Geneva, Switzerland. Tam O-K. (1988), “Rural finance in China”, The China Quarterly 113: 60-76. Turvey C. G. & R. Kong (2008), ‘‘Vulnerability, trust and microcredit: the case of China’s rural poor”, United Nations University-World Institute for Development Economics Research paper no. 2008/52. Watson A. (1998), “Conflicts of interest: reform of the rural credit cooperatives in China”, MOCT-MOST Economic Policy in Transitional Economies 8 (3): 23-40. World Bank (2009), From poor areas to poor people: China’s evolving poverty reduction agenda: an assessment of poverty and inequality in China, the World Bank Report, March. Xie P. (2003), “Reforms of China’s rural credit cooperatives and policy options”, China Economic Review 14 (4): 434-442. Xu X. & S. Huang (2009), Moving towards New Co-operation: Research on the Development of Farmers’ Specialized Co-operatives in Zhejiang Province, Beijing: Science Press (in Chinese).

27

Yue Z. (2002), A Study on Modern Cooperative Financial Institution, Beijing: China Financial Publishing House (in Chinese). Zhang G. (2000), An Introduction to Cooperative Finance, Chengdu: Southwestern University of Finance and Economics Press (in Chinese). Zhao L. (2011), “Capital formation in new co-operatives in China: policy and practice”, Euricse Working Papers No.015-11. Zhao L. & P. Develtere (2010), “New co-operatives in China: why they break away from orthodox co-operatives?”, Social Enterprise Journal 6 (1): 35-48. Zhao L. & C. Gijselinckx (2011), “Multi-stakeholder co-operatives in China: a resource mix structure approach”, Social Enterprise Journal, under review. Zhou L. & R. Lin (2005), “The effects of interest rate adjustment in China: a case study of Fujian province”, Financial and Trade Economics 5: 7-13 (in Chinese). Zhu L., Z. Jiang & J. Von Braun (1997), Credit Systems for the Rural Poor in China, New York: Nova Science Publishers Inc..