This paper reviews and study of RCCs financial system and role in economic development of China. RRCs are important reforms of china. It improves the performance consistently every year and constituted about 12.3 % all financial loans in China. Rural Credit Cooperatives Development in China constituted an integral and important part of rural reforms in China. Keywords: Rural Credit Cooperatives, Financial system, Economic development, Reform

Du, Yuneng

Jingdong, Luan

Rehman, Abdul

Zhang, Liting

English

This paper reviews and study of RCCs financial system and role in economic development of China. RRCs are important reforms of china. It improves the performance consistently every year and constituted about 12.3 % all financial loans in China. Rural Credit Cooperatives Development in China constituted an integral and important part of rural reforms in China

Abdul Rehman

Luan Jingdong

Yuneng Du

Liting Zhang

CiteSeerX

Rural Credit Cooperatives RCCs Financial System and Role in Economic Development of China

International Institute for Science, Technology and Education (IISTE): E-Journals

Research Journal of Finance and Accounting                                                                                                                                    www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.5, 2015  196 Rural Credit Cooperatives RCCs Financial System and Role in Economic Development of China  Abdul Rehman1, Luan Jingdong2, Yuneng Du3, Liting Zhang4 1. Abdul Rehman, PhD Candidate College of Economics and Management Anhui Agricultural University China, E-mail: zayan78611@yahoo.com 2. Luan Jingdong, Dean of College of Economics and Management Anhui Agricultural University China, E-mail: luanjingdong@ahau.edu.cn 3. Yuneng Du, Lecturer College of Economics and Management Anhui Agricultural University China, E-mail: Duyuneng@ahau.edu.cn 4. Liting Zhang, Undergraduate Student, College of Economics and Management Anhui Agricultural University China Abstract This paper reviews and study of RCCs financial system and role in economic development of China. RRCs are important reforms of china. It improves the performance consistently every year and constituted about 12.3 % all financial loans in China. Rural Credit Cooperatives Development in China constituted an integral and important part of rural reforms in China.  Keywords: Rural Credit Cooperatives, Financial system, Economic development, Reforms  1. Introduction Rural Credit Cooperatives was created in 1950s. In the beginning they were not commercial enterprises like the banks. Like in different countries, farmers and small enterprises has not direct access to capital. It is not easy for them to get credit from banks. There are above 800 million rural inhabitants in china that are engaged in farming, fishery, husbandry and forestry. There are above 20 million township and village enterprises (TVEs), which playing an important role in the economic growth of the country. In 1998 four banks of china, Bank of China (BOC), Agricultural Bank of China (ABC), Construction Bank of China (CBC) and Industrial & Commercial Bank (ICB) merged 10, 728 branches in five provinces of country (Mu 2003). The most of the branches are in the rural areas. Agricultural Bank of china (ABC) is supposed to serve the rural sector of the country and also making policy of thousands rural credit cooperatives (RCCs). In 1990s agricultural banks has been decreasing the support in the agricultural sector due to allocation of resources which expanded to cities and industries. Now rural credit cooperatives are the only one or main force for serving and peasants the TVEs. RCCs had 2.2 trillion RMB of deposits and 1.6 trillion RMB for loans at the end of June 2003 and accounted about 12 % of total deposits and near 11% of total loans by the all financial organizations. Rural Credit Cooperatives (RCCs) has 696.6 billion RMB loan for agricultural development and about 84 % total loans for agriculture from all other financial organizations (Mu 2003).   According to the management rules of rural credit cooperatives (RCCs), RCCs is an organization in which all members could buy shares, benefits and implement democratic management. RCCs had been the core of the financial system and played an important role in rural household savings. It has different agricultural projects in rural areas for development. Members, who join mostly under the administrative forces, never managed the business organizations and they have no freedom to with draw the membership (Xie 2001). RCCs were managed by the Agricultural Bank of China (ABC) at the end of 1996 and afterwards they were restructured as a separate set of independent institutions. RCCs are still partially under the control of the local governments, which intend to increase the supply of agricultural production to capital. However, RCCs has some problems related to control, poor services, low quality of employees and high financial risks. 2. RCCs System and Reforms In previous performance, RCCs enjoyed a net profit of 23.3 billion RMB and non-performing loan rate just 5.6 percent in 2010. The improvement in their assets quality can be largely attributed and bailouts from the central government. In 1990s RCC system was simply unsustainable. The capital adequacy ratio and net equity of RCCs were in negative territory, it means their liabilities were so enormous that they were eating equity of shareholders. RCCs are both the primary holders of rural household’s savings and the primary providers of household credit. In 2007, the PBOC provided two forms of financial assistance 168 billion RMB debt-for-bonds swaps and 830 million RMB in earmarked loans to assist RCCs in deposing bad assets and writing off historical losses. RCCs are the best as a myriad of locality based credit institutions with varying financial performance and asset quality. Reforms have also transformed some credit cooperatives into rural commercial banks and rural cooperative banks. Though rural credit cooperatives are largely profit-oriented institutions, they are strongly encouraged to lend to rural households and agricultural borrowers. Research Journal of Finance and Accounting                                                                                                                                    www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.5, 2015  197 2.1 Loans and Interest Rate 1. Legal Interest Rate The state council approval and authorized by the state council formulated by the people’s bank of China rate for all kinds of legal interest rate.  2. Benchmark Interest rate   The people bank of china, commercial banks and other financial institutions of deposit and loan interest rate as the benchmark interest rate. 3. The Contract Rate  Lender according to legal loan interest rate stipulated by the people’s bank of China and the floating scope of complicity, agreed with the borrowers and the same would be specified in the loan contract with specific loan interest rates. 2.2 Loan Conditions For applying loans it has following conditions for borrowers; 1. Borrowers have the ability to debt-services payments on schedule. 2. In addition to the natural person and not approved by the department of industry and commerce registration of enterprise legal person. 3. Rural loan has basic account or a general deposit account and keep it within the certain margin. 4. For guarantee and mortgage it must be conform to the provisions of the loan guarantor, he loan pledge. 5. Rural assets and liabilities of the borrowers shall not be higher than 70%. 6. Rural borrowers must according to the regulations of the people’s bank of China credit card. 2.3 RCCs Incentives The main reason of RCCs includes all efforts to improve the regional financial infrastructure to encourage and take an active interest in the microfinance. It’s not an easy task and RCCs may not use any sources of refinancing for the microcredits operations. Strong incentives are required to convince RCCs to change the way of operating, but getting them interested is particularly difficult given their current situation. Crises in the financial sector have induced PBC to tighten controls under which RCCs and other financial institutions operate. RCCs need to be provided with funds at attractive costs and terms compared with those of other sources of refinancing but will not reduce the incentive to mobilize deposits. A dependency or 'lock in' to donor funding must be avoided. It would be appropriate that the RCCs receive funding at a rate not exceeding the rate at which PBC lends to RCCs. Financial intermediation at the local level improves once complementarity among the interlinked elements of the local financial infrastructure is strengthened. This calls for the various civil-society organizations and other actors to collaborate with RCCs in providing credit in rural areas. However, the present financial situation of the RCCs does not allow them to invest in enhancing outreach capability and capacity building, so RCCs require grant funding for these purposes.  3. Rural Credit Cooperatives RCCs Assets and liabilities  Rural Credit Cooperatives Assets from 2005 to 2012 at the end of December are shown in the following table: Years at the end of December Foreign Assets Reserve Assets Deposits with Central Bank  Cash in Value Claims on Government Claims on Central Bank Claims on other Depository corporation Claims on other Financial Corporation Non-Financial Claims  Claims on other Resident Sectors Other Assets Total Assets Unit 100 million RMB 2005 14.7 4779.7 4314.1 465.6 1019.9 31.5 3373.2 115.9 18551.9 456.8 3410.6 31754.3 - 2006 13.3 5293.7 4776.5 517.2 1020.5 245.8 3134.1 165.6 20458.3 565.9 4090.7 34987.8 - 2007 9.4 7853.8 7226.3 627.5 898.6 201.1 3792.6 186.9 13375.9 11240.5 3537.0 41095.7 - 2008 9.7 8948.3 8340.4 607.9 1197.1 379.6 6755.1 211.5 16015.9 12471.1 3879.3 49867.7 - 2009 15.0 9366.1 8675.3 690.9 1061.2 267.5 7021.1 282.2 20003.6 14497.7 3527.8 56042.1 - 2010 1.9 10191.3 9474.5 716.8 743.0 128.5 8353.1 1164.3 17511.8 18504.5 3607.9 60206.3 - 2011 5.8 12399.6 11568.7 830.9 731.8 140.8 10755.3 1146.7 18528.0 20204.4 3687.5 67599.9 - 2012 5.4 10549.0 9609.1 939.9 537.8 94.5 14604.8 1940.1 20120.4 21751.7 3253.7 72893.3 -   Table1. Research Journal of Finance and Accounting                                                                                                                                    www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.5, 2015  198 Graphically it can be shown in the following fig:  Graph1.  Rural Credit Cooperatives RCCs liabilities from 2005 to 2012 at the end of December are shown in the following table: Years at the end of every year Liabilities to Non-financial Institutions Deposits Included in Broad Money Demand Deposits of Enterprises Time Deposits of Enterprises Household savings Deposits Deposits Excluded from Broad Money Transferable Deposits Other Deposits  Other liabilities Liabilities to Central Bank Liabilities to other Depository crop Liabilities to other Financial corp. Deposits Included in Bond Money Foreign Liabilities  Bonds Issue Paid in Capital Other Liabilities Total Liabilities Unit: 100 Million RMB 2005 27698.1 27645.0 4436.1 1462.4 21746.6 29.3 2.0 27.3 23.8 639.6 845.7 65.8 0.0 0.0 0.0 1717.8 787.3 31754.3 - 2006 30426.8 30372.6 4921.6 1473.1 23978.0 29.0 2.7 26.3 25.2 401.8 1081.5 12.8 0.0 0.0 0.0 1720.4 1344.6 34987.8 - 2007 35289.5 25329.2 6422.6 1612.9 27203.8 20.1 2.9 17.2 30.2 408.1 1298.7 23.9 0.5 0.0 0.0 1887.6 2188.1 41095.7 - 2008 41766.8 41715.9 6804.9 1875.6 33035.3 19.8 4.1 15.7 31.2 413.5 2386.2 42.7 0.0 0.0 0.0 2014.0 3244.4 49867.7 - 2009 47466.9 47398.2 9205.2 2017.6 36175.5 23.1 7.8 15.3 45.6 512.5 2295.3 101.3 0.0 0.0 0.1 2102.0 3564.1 56042.1 - 2010 50563.7 50500.5 10083.2 2029.8 38387.5 6.1 1.3 4.8 57.1 780.8 2403.1 204.9 0.0 0.3 0.1 2152.1 4101.3 60206.3 - 2011 55846.8 55702.7 10876.7 1914.7 42911.3 7.2 1.0 6.2 136.9 1107.6 2652.9 412.6 44.4 0.0 6.0 2353.6 5220.4 67599.9 - 2012 60029.1 59914.7 10708.8 2135.2 47070.7 9.7 0.8 8.9 104.7 1314.7 3103.6 602.5 255.1 0.2 0.0 2357.8 5485.5 72893.3 - Table2.   Yearsat theendofDecemberForeignAssetsReserveAssetsDepositswithCentralBankCashinValueClaims onGovernmentClaims onCentralBankClaims onotherDepositorycorporationClaims onotherFinancialCorporationNon-FinancialClaimsClaims onotherResidentSectorsOtherAssetsTotalAssetsSeries8 2012 5.4 10549 9609 939.9 537.8 94.5 14605 1940 20120 21752 3254 72893Series7 2011 5.8 12400 11569 830.9 731.8 140.8 10755 1147 18528 20204 3688 67600Series6 2010 1.9 10191 9475 716.8 743 128.5 8353 1164 17512 18505 3608 60206Series5 2009 15 9366 8675 690.9 1061 267.5 7021 282.2 20004 14498 3528 56042Series4 2008 9.7 8948 8340 607.9 1197 379.6 6755 211.5 16016 12471 3879 49868Series3 2007 9.4 7854 7226 627.5 898.6 201.1 3793 186.9 13376 11241 3537 41096Series2 2006 13.3 5294 4777 517.2 1021 245.8 3134 165.6 20458 565.9 4091 34988Series1 2005 14.7 4780 4314 465.6 1020 31.5 3373 115.9 18552 456.8 3411 31754050000100000150000200000250000300000350000400000450000Unit: 100 million RMBTotal Assets and others..Research Journal of Finance and Accounting                                                                                                                                    www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.5, 2015  199  Graph 2. 4. Problems in RCCS  Rural Credit Cooperatives have some problems in China’s rural finance. Following are some problems with details; 1. Loss Due to Operating  Rural Credit Cooperatives RCCs of China has operating loss of 23% of the total number of credit cooperatives in 1987. When china’s market of economy established in 1993, rural credit cooperatives increased his loss and it reached 19% to 52.19%. In 1997 loss reached to 64.23% in RCCs. 2. Unhealthy Credit Management  Unhealthy Credit Management is also problem of RCCs. The faith breaking behaviors and the maintenance of the credit order finally should depend on the deterrent force of laws, which is same to the construction of the Chinese rural credit system.  3. Asset Quality is not better A third problem in Rural Credit Cooperatives is that the quality of asset is not better. Rural credit Cooperatives (RCCs) has bad loan ratio of all loans in 1999.  4. Out dated Services Rural Credit Cooperatives (RCCs) has always involve with the loan business and traditional deposit savings, out of table and intermediate business is blank due to lack in modern services and credit instruments. In 1999, RCCs loan interest income of 642% from the revenue of 35.7% and intermediate income is accounted for only 0.1%. YearsattheendofeveryyearLiabilitiestoNon-financialInstitutionsDepositsIncluded inBroadMoneyDemandDeposits ofEnterprisesTimeDeposits ofEnterprisesHouseholdsavingsDepositsDepositsExcludedfromBroadMoneyTransferableDepositsOtherDepositsOtherliabilitiesLiabilitiestoCentralBankLiabilitiestootherDepositorycropLiabilitiestootherFinancialcorp.DepositsIncluded inBondMoneyForeignLiabilitiesBondsIssuePaid inCapitalOtherLiabilitiesTotalLiabilitiesSeries8 201 600 599 107 213 470 9.7 0.8 8.9 105 131 310 603 255 0.2 0 235 548 728Series7 201 558 557 108 191 429 7.2 1 6.2 137 110 265 413 44 0 6 235 522 676Series6 201 505 505 100 203 383 6.1 1.3 4.8 57 781 240 205 0 0.3 0.1 215 410 602Series5 200 474 473 920 201 361 23 7.8 15 46 513 229 101 0 0 0.1 210 356 560Series4 200 417 417 680 187 330 20 4.1 16 31 414 238 43 0 0 0 201 324 498Series3 200 352 253 642 161 272 20 2.9 17 30 408 129 24 0.5 0 0 188 218 410Series2 200 304 303 492 147 239 29 2.7 26 25 402 108 13 0 0 0 172 134 349Series1 200 276 276 443 146 217 29 2 27 24 640 846 66 0 0 0 171 787 317050000100000150000200000250000300000350000400000450000Unit:100 million RMBTotal Liabilities and Others...Research Journal of Finance and Accounting                                                                                                                                    www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.6, No.5, 2015  200 5. Imperfect Present Rural Credit Guarantee Mode In the credit association and the country credit association, multi farmer guarantee mode should be evaluated and checked by various departments which prevent and eliminate the risk of rural credit to some extents. But with the increase of the management, credit demand, and capitals, this guarantee mode could not satisfy the rural financing demand and prevent the credit risk obviously.  Conclusion RCCs had been the backbone of the financial system and played an important role in rural household savings. It has different agricultural projects in rural areas for development. RCCs are the best as a myriad of locality based credit institutions with varying financial performance and asset quality. Reforms have also transformed some credit cooperatives into rural commercial banks and rural cooperative banks. Although rural credit cooperatives have some problems and issues to management, but RCCs are largely profit-oriented institutions, they are strongly encouraged to lend to rural households and agricultural borrowers.  References 1. Xie, Ping. “Disputes on the System Reform of China Rural Credit Cooperatives.” Financial Studies 1 (2001): 1-12. 2. Fu, Zhenquan. (2008). Study on the Chinese Rural Financial Legal System. Beijing: Thesis of China University of Political Science and Law. 3. He, Yuefei. (2008). Study on the Rural Financial System in Rural Economy. Changsha: Thesis of Agricultural University of Hunan. 4. Li, Renjian. (2007). Analysis of Problem in the Corporate Governance of Rural Credit Cooperative. Journal of Anhui Agricultural Sciences, No. 9. 5. Pang, Xumin & Li, Hong. (2005). Loans of the Credit Association Should Follow Farmers. Yili Daily (Chinese). 6. Su, Zhentian. (2006). The lack of capital element during new rural area building. The Border Economy and Culture, No. 12. 7. Xie, Yuanjie & Wang, Yunxing. (2007). Consideration about the disequilibrium financial system in rural regions of China. Memoir of Chinese Agricultural Economy Academy 8th Member Congress and 2007 Academic Symposium. 8. Zhang, Shujie. (2008). Consideration of the Rural Credit Association Ownership Form. South China Finance, No.7. 9. Du Ying Na, Wang Wen Qing, Construction of rural financial services integration model, Rural Economy, 4th ed., 2009, p.7. 10. Yue Cai Jun, Rural Financial Development on Rural Economic Growth Analysis, Anhui Agriculture, 13th ed., 2008, pp.5636-5637. 11. NIE Y．Study on multi-objective decision-making of performance evaluation model on household’s micro-finance［J］．  12. Journal of Huazhong Agricultural University: Social Sciences Edition，2009 (1): 6 －9. (In Chinese). 13. China Bureau of Statistics, Statistical yearbooks 2005-2012.    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Rural Credit Cooperatives RCCs Financial System and Role in Economic Development of China

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