Establishing a comprehensive and efficient rural credit system providing finance for both the commercial (agricultural and non-agricultural) sector of the rural economy and small-scale farming, is among the most pressing issues on China’s reform agenda today.
The OECD Workshop on "Rural Finance and Credit Infrastructure in China" brought together over 60 participants, including a high-level Chinese delegation representing various institutions dealing with rural finance. The World Bank, FAO, European Bank for Reconstruction and Development, Asian Development Bank, PlaNet Finance (NGO on finance issues) and 11 OECD Member countries also participated.
The meeting was prepared by the NME/AGR Division in close co-operation with the Chinese Ministry of Agriculture and the DAF Outreach Unit for Financial Sector Reform. The Workshop benefited from the financial contribution from the Japanese Ministry of Finance.
Core questions addressed at the Workshop:
• What kind of institutional framework would be most suitable for rural finance in China?
• What steps are necessary in the medium term to develop such a framework?
• What are the preconditions for enhancing investment in rural areas?
• What is the link between reform of rural finance and the overall reform of the financial system?
• What should be the role of government within the reform process and thereafter?
Credit programmes (e.g. guarantees, subsidies) are just one option and not necessarily the most effective policy instrument for achieving economic growth and/or reducing rural poverty. Policy makers need to clearly identify specific objectives, target populations and socio-economic constraints before considering the best policy approach. The main role for government should be to create the right environment, to facilitate savings and investment by the private sector.
Outflows of finance from rural to urban areas that stem from rational investor decisions will not be solved through financial reforms alone. Policy makers must address the potential for profitable investment in rural China overall and the preconditions for creating a favourable investment climate. It will be important to get the sequencing and rate of reforms right. The rural financial sector remains part of the overall financial system and reforms in rural finance will need to be embedded in overall financial reform in order to be effective.
It is essential to provide effective financing and channel resources to the dynamic parts of the rural economy (non-agricultural activities and the competitive parts of Chinese agriculture) which will be the main source for growth, employment creation and sustained income rises for the rural population. There is a need to remove old, restrictive policies (e.g. interest rate liberalisation, competition among existing credit institutions, state authorities routing money to state enterprises at the expense of more productive segments of the economy) before contemplating new programmes.
Arrangements will also need to address existing poverty directly through small-scale but still effective microcredit operations integrated as much as necessary into the overall financial system and supervision. The emergence of informal/illegal lending is of growing importance for small-scale farmers and tiny businesses in rural areas that lack collateral and are virtually excluded from the formal financial sector. The high costs and risks of informal lending make this a second best option for the poor and highlights the need for reforms to the formal sector.
Chinese version papers from this Workshop are listed below: