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concentrated in the hands of skilled farmers, which prevents agricultural production from fluctuating due to the migration of labor and also forces industry to nurture agriculture through subsidized scales of production, increasing agricultural income. This marks the intermediate phase.

       Most coastal regions have gone through the industrialization phase, so they have a high proportion of nonagricultural labor and well-developed small townships

      In western regions, the issues of sannong center on the issues of farmers. To a large extent, subsistence guaranty depends on fiscal transfer. At the same time, the government can use mandatory education and vocational training to help farmers find jobs in nonagriculture sectors. These regions are in the primary stage of the building of a new countryside.

      A New Rural Financial System: Satisfying Multilayered Financial Needs

      The new type of rural finance is based on industrialization, urbanization, and the building of a new rural countryside. It serves more than just sannong, and the financial service providers include both RCCs and a variety of financial institutions. At present, the opening of the rural financial market in poor areas provides new opportunities for the development of rural finance, and a brand-new era is unfolding. In May 2005, the People’s Bank of China launched pilot microfinance lending companies in Guizhou, Inner Mongolia Autonomous Region, Shaanxi, Shanxi, and Sichuan, signaling a key step forward in the opening of rural finance. In December 2006, the China Banking Regulatory Commission issued an opinion on reforming RCCs and encouraging banking financial institutions to increase their presence in rural areas. In addition, permission was granted to form three new types of rural banking financial institutions: village and township banks, community credit cooperatives, and lending companies. Gansu, Hubei, Inner Mongolia Autonomous Region, Jilin, Qinghai, and Sichuan pioneered the pilot programs, and if these turn out to be a success, a series of grassroots financial innovations will promote bottom-up rural financial reform.

      The new rural finance may encompass several rural financial innovations and services. The first innovation is in financial services for microenterprises or individual businesses, which encourages entrepreneurship and represents an important means of increasing the employment and income of farmers. To date, such financing needs have been met through informal lending. The emergence of microfinance institutions, lending companies, and village and township banks signifies the partial legalization of informal finance and diversifies the available financing channels.

       The first innovation is in financial services for microenterprises or individual businesses, which encourages entrepreneurship and represents an important means of increasing the employment and income of farmers

      Second, with rapid economic development and urbanization and the resulting decrease in the farming population comes the opportunity to develop large-scale plantation and animal husbandry enterprises, which may become the most important elements of production. At the same time, prices for agricultural produce have increased in recent years, so such enterprises have good prospects and have become major recipients of rural credit. More importantly, some specialized farmers’ associations will become carriers of credit, linking borrowers with lenders. The combination of rural lending shops with specialized production organizations will become a major form of rural finance in the future.

      Third, the transformation of farmers into city dwellers and the steady cash flow of migrant workers in urban areas during the process of urbanization will generate a heavy demand for consumer credit. Farmers will need funds for their children’s education, for homes, for marriage, and for the purchase of durable consumables. Financial institutions can design relevant financial products to provide farmers with consumer credit. With migrant workers’ cash flow as a guaranty, the risks of consumer credit are controllable.

      Fourth, sannong must be supported in a commercially viable manner, guided by fiscal policies and based on laws such as the Community Reinvestment Law that encourage financial institutions to tap the rural credit market in poor areas. Credit support for sannong should be a goal of the government rather than of financial institutions. For example, the government wishes to expand credit coverage for low-income populations and lift them out of poverty. However, due to the high credit risks associated with low-income populations, any financial institution is bound to ask for a relatively high-risk premium in the form of a high interest rate, government-subsidized interest, tax reductions, or other preferential policies. Only in this way can government objectives to support sannong be combined with the functions of financial institutions. In fact, not only the Agricultural Bank of China but also other financial institutions and investors should be encouraged to participate in the process of supporting sannong at the wholesale or retail levels.

      Finally, there is a growing demand for wealth management in rural areas. Farmers’ increased income improves their ability to accumulate wealth and increases their need for wealth management. The wealth management market in the PRC will gradually expand from cities to rural areas. Suitable wealth management products can improve farmers’ property gains and generate intermediary commissions for financial institutions, representing an important future component of rural finance.

PART I

      CHAPTER 1

      Rural Financial Reform

      History of Rural Finance in the People’s Republic of China

      Rural financial reform in the People’s Republic of China (PRC) has been slow and has lagged behind general economic reform. The reform process has occurred in five phases, beginning with the monobanking system and then moving through the resumption of rural financial institutions, the formation of the rural financial system, explorations of rural financial reform, and finally, a new round of rural financial system reform. The ultimate objective of the new round of reform is to build up a modern rural financial system.

      Phase 1. The Monobanking System (1949–1978)

      During the period of the planned economy (before 1978), the central government was in charge of resource allocation, including credit allocation. Almost all enterprises, including banks, were state owned, and investment decisions were made by the government’s planning department. There was no real market.

      The People’s Bank of China (PBC), established in the 1940s under the leadership of the Ministry of Finance, was the supervisory authority and the sole practitioner in rural finance. It was established as a central bank but also functioned as a commercial bank. Deposit and lending outlets were set all over the countryside. The agriculture department of the PBC had branches from provincial to township levels.

      Launching the Rural Credit Cooperatives

      In 1951, the government promulgated a series of regulations on cooperatives and a new type of institution—the rural credit cooperative (RCC)—was launched to offer credit services exclusively to rural households. By 1954, under the slogan “One village, one cooperative,” 124,000 RCCs had been established in the country. In 1955, the number reached 159,000. In 1956, the administrative mergers of districts and townships reduced the number of RCCs to 103,000; these covered close to 100 million rural households. By 1957, rural credit cooperatives were firmly established in the country. Subsequently, RCCs gradually deviated from the cooperative system and were put under the management of the PBC until after the Cultural Revolution. Throughout the 1960s and 1970s, RCCs served as implementing agencies for rural credit and savings plans. RCCs and the agriculture department of the PBC thus formed the rural financial system.

      Establishing the Agricultural Bank of China

      The Agricultural Bank of China (ABC) was established in 1955 with a mission to raise funds from rural areas and to support industrialization and agricultural production. At that time, the ABC was entrusted (by the PBC) with the supervision and management of the RCCs. In 1957, the ABC merged with the PBC. A few years later, the ABC was supervising the distribution of budgetary agriculture funds and central bank lending to rural areas.

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