On Institutional Changes And Direction Of China's Rural Cooperative Finance

This paper adopts theories and frameworks of New Institutional Economics to analyze the institutional vicissitudes of Chinese Rural Cooperative Finance (CRCF), including its historical happenings, development as well as recent reforms, from which we come to a conclusion that CRCF has been locked in an inefficient state and deviated from the normal track. The root of the problems is identified as government interference. The moral hazard and adverse selection of Rural Credit Cooperatives' managers and informal constraints of Chinese culture interact with government interference so that they build up a vicious circle and finally get self-reinforced. To break it, essentially, government has to exit from the operation management of CRCF. A sound structure of corporate governance has to be established. Last but not least, non-state-owned financial institutions such as Rural Commercial Banks should be encouraged. However, due to the unbalanced development of rural economies, nowadays other financial institutions such as cooperative finance and policy finance should co-exist with commercial banks. Those existent informal finance in rural areas should be further regulated and finally channeled into formal institutions. Thus, a multi-actor, multi-level financial system comes into being in rural China so as to support economic development in that area better.