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in 1984. By the end of 1992, various types of rural cooperative foundation had been established in 37% of townships and 15% of villages all over the country. In the early stage, their funding sources were largely collective funds, and loans mainly targeted local village farmers.

      Enhanced productivity provided impetus for the commercialization of previously policy-oriented financial businesses. The rural branches of the ABC and RCCs began developing commercial credit with idle funds. Although credit size and term structure were strictly controlled, the credit target shifted. From 1980 to 1994, ABC and RCC loans to rural industries grew twelvefold, much faster than the growth rate of other loans, and the share of rural industry loans rose from 13.8% to 33.2%.

      Phase 3. Formation of the Current Rural Financial System (1993–1996)

      The PRC’s financial reforms launched in 1993 and 1996 have been characterized by drastic changes in rural financial institutions and their lending responsibilities. In terms of rural finance, the reforms aimed to separate policy operation from commercial operation, to commercialize the operation of the ABC, and to make RCCs into real credit cooperatives controlled by their members. In these ways, the reforms sought to improve the efficiency of financial intermediaries and to reduce the proportion of nonperforming loans. Prior to the reforms, formal finance in rural areas of the PRC was dominated by the ABC, which was responsible both for commercial and policy lending in agriculture and for managing RCCs.

      Commercialization of the Agricultural Bank of China

      Before 1994, the ABC was a pure policy bank; its primary tasks were to support agricultural production, manage RCCs, and develop the rural economy. In 1994, the ABC separated its commercial operations from its policy functions and began commercializing. In September 1996, the ABC divested itself of the RCCs and changed its development focus from the rural financial market to urban commercial financing at the county level and above.

      The Role of Rural Credit Cooperatives

      The role of RCCs as the major force in the rural financial system has been enhanced. By the end of 1995, there were 50,000 financially independent RCCs, and RCC loans accounted for more than 60% of total agriculture loans. With the promulgation of the State Council’s 1996 Decision on Rural Financial System Reform, a series of reforms was undertaken. These efforts focused on safeguarding rural financial stability, improving services, and managing risks. Major changes have taken place in the rural financial system, which is based on cooperative finance and encompasses both commercial and policy finance.

      The Role of the Agricultural Development Bank of China

      Prior to the creation of the Agricultural Development Bank of China (ADBC), the ABC and the China Construction Bank took charge of medium-and large-scale infrastructure loans for agriculture, forestry, animal husbandry, and irrigation as well as for technological advancement and other policy operations. The Third Plenum of the Fourteenth Communist Party of China Congress in November 1992 spelled out the overall objectives of the PRC’s financial system reform.² The following month, in December 1992, the State Council promulgated the Decision on Financial System Reform, charging the ADBC with managing policy loans—which at that time included loans for agriculture procurement, storage, and processing—and loans for integrated agriculture development and poverty alleviation.

       Major changes have taken place in the rural financial system, which is based on cooperative finance and encompasses both commercial and policy finance

      In line with the spirit of the decision, the ABC transferred to the ADBC CNY186 billion worth of policy lending, to separate policy and commercial operations. However, the management of subsidized poverty loans, an important part of agriculture policy lending in the PRC, was returned to the ABC in 1998, following a marked deterioration in the quality of poverty loans.

      Phase 4. Pilot Rural Financial Reform (1996–2002)

      In response to problems—especially risks—that emerged in rural financial reform during the 1990s, the authorities stepped up their management efforts. Major policy measures included putting rural finance in order and advancing reform. In line with the basic strategy set by the 1997 Central Financial Working Conference, state-owned commercial banks were required to shrink institutions at (and below) county level, and small and medium-sized financial institutions were to be developed to support local economic development. State-owned commercial banks, including the ABC, therefore gradually streamlined their county and subcounty branches.

       The comprehensive financial reforms launched in 1996 pushed the ABC to become profit oriented

      Since the mid-1990s, the operational environment of rural financial institutions has undergone significant changes. First, many township-owned and state-owned enterprises at and below county level have been privatized, and private small and medium-sized enterprises have thrived. By 2000, the output share of state-owned enterprises declined to below 30% of total enterprise output. Second, the rural labor market and other factor markets, excepting the capital and land markets, have been largely liberalized. Third, development of information technology has enhanced regulation and consumer discipline. Fourth, the legal environment has improved, with strengthened enforcement and an increased supply of valid collateral. Finally, the development of informal credit and the entry of foreign banks have intensified competition in the finance sector.

      Agricultural Development Bank of China and the Agricultural Bank of China

      Also since the mid-1990s, a financial system featuring the coexistence of cooperative banks and policy banks has been taking shape in the PRC’s rural areas.³ In 1994, the newly established ADBC took up policy financing functions such as managing the fund supply for acquisition of agricultural products; poverty reduction loans; and lending for comprehensive agriculture development, small-scale rural infrastructure, and technological upgrading.

      In August 1996, the State Council promulgated the Decision on Rural Financial System Reform, further clarifying the guiding principles for rural financial system reform to include establishing and improving a rural financial system based on cooperative finance, complemented with commercial and policy finance under a clear division of labor, and further improvement of rural financial services. In line with this decision, the RCCs were spun off from the ABC and reformed on a cooperative pattern.

      The comprehensive financial reforms launched in 1996 pushed the ABC to become profit oriented. The management of RCCs was shifted to the newly established Interministerial Coordination and Leading Group for Rural Financial Reforms in 1996, and then the leading group joined the PBC in 1997. In 1998, the ADBC assumed exclusive responsibility for crop procurement loans, and other policy operations were undertaken by the ABC. Between 1998 and 1999, the State Council decided to shift from the ADBC to the ABC the special lending for comprehensive agriculture development; poverty reduction; enterprises affiliated with crop, cotton, and oil production; and People’s Bank of China agriculture loans. Moreover, efforts were made to crack down on illegal and informal financial activities, which included closing down and liquidating rural cooperative foundations across the country. In 1999, the rural cooperative foundations were overhauled to restore rural financial order. The PBC provided funding support to promote RCCs and extend to rural households microcredit and collective-guaranty loans, and pilot RCC reform was initiated in Jiangsu Province in 2000.

      Rural Credit Cooperatives since 1996

      Since 1996, RCC reform has gone through three stages, with the first stage occurring between 1996 and 1998. Following the 1996 Decision on Rural Financial System Reform, the RCCs were separated from the ABC and began a transformation into cooperative financial institutions with farmers as shareholders and members as management. RCC reform in various regions of the country was implemented under the direction of the State Council, but the result was unsatisfying. RCCs were left with heavy historical burdens, poor asset quality, and high potential risks, and their services fell

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