The structure and reform of rural finance in China

Abstract

Purpose - Historically, China's political attempts to provide access to rural credit has met with mixed results and an institutional structure that often strays from intended policy goals. Unlike Robin Flood of English lore, the emergence of financial institutions in China appears to have robbed from the poor to lend to the rich, with actions that severely depleted the lending resources required for rural development. Historically, there has been a close correspondence between financial depression and the many policy-driven financial institutions that dominated the rural financial system in China. More recently, ongoing reforms are dedicated towards a gradual liberalization within the system. Therefore, the purpose of this paper is to rethink the structure of rural finance in China, reviewing the current reform and putting forward the policy implications. Design/methodology/approach - The paper explores the context of agricultural transition and political process as defined by the various interlinkages across the Chinese rural financial system. Findings - The paper finds that there has been negligible progress in the evolution of the rural financial market in China. The policy-led financial institutions ended up as merely a disbursement window and a costly drain on state budget. Institutional changes were locked in by patching up the existing institutions. The ongoing reforms projected by policymakers promote competition among different institutional lenders and thus potentially improve the financial services in rural areas. Originality/value - This paper analyzes the new-round reform of rural finance in China and brings forward the future direction of rural finance in China.

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