A Study On The Performance And Capital Flow Of The Rural Credit Cooperatives In China

Rural Credit Cooperatives (RCCs) have played a crucial role in rural Financial system. Now there are more than 20 000 RCCs that provide financial services for more than 900 million farmers. Since 1990, not only RCCs themselves couldn't achieve sustainable development, but also their capabilities of providing financial services are limited and couldn't meet fanners' diversified demand. At the same time, outflow of rural financial capital has shown an increasing trend. These serious issues are drawing more and more attention of policy-makers and academic circle.This research is conducted by adopting empirical analysis and descriptive statistics and using 1997 and 2002 survey data of 118 RCCs and 111 township enterprises in four county of Shanxi and Sichuan provinces.I first described the performance of RCCs in the middle and western China. The performance of the sample RCCs had deteriorated between 1997 and 2002 and RCCs in better off areas performed much better, resulting in a widening gap between RCCs in different townships. Effective financial intermediation of RCCs in poor areas decreased dramatically.RCCs in middle and western part of China have to depend on large amount of subsidies to continue their operation. Subsidies for RCCs can help improve their performance, but even all the accumulated non-performing loans are eliminated, some of the RCCs are still unable to achieve sustainable development.Using revolving funds to replace overdue loans are common practice of RCCs, which resulted in unreliable accounting records and fake profit. As a result, the achievements of RCC reform are easily exaggerated.There are serious governance problems in the RCC system though minor improvement had been achieved during the period of 1998 and 2002. The reforms of governance structure of RCCs in poor areas are lagged further behind. The power structure and incentive mechanism are untouched in the reform. The major problems facing RCCs in terms of governance are blurry property right, conflict of interests, inappropriate incentive and monitoring mechanisms. All these problems have led to short term oriented behaviors without anyone responsible for the long term development of RCCs.Regression results reveal that RCCs performance is closely related to governance indicators. Governance variables such as incentive, loan structure, types of household loans and the frequency of replacement of RCC directors have impact on RCC non-performing loans. Outside competition can help improve the quality of RCC loan portfolios.Surplus fund of RCCs are transferred to RCC County Union that will make further transfer to the outside. There are three channels for RCC County Union to transfer their funds out, i.e. contracted large amount of deposits in commercial banks, large scale loans and purchase of government bond. The total amount of outflow of RCC capital increased while the ratio of the outflow to deposit decreased during 1998 and 2002.Regression result shows that the outflow ratio of RCCs capital is positively related to the non-performing loan ratio, indicating that badly performed RCCs transfer more fund out. One percent point increase in non-performing loan leads to the increase of outflow ratio by 0.97 percent point. One percent point increase in non-performing loan also leads to the increase of outflow ratio of the financial...