Academic journal article Journal of East Asian Studies

Multiple Principals and Collective Action: China's Rural Credit Cooperatives and Poor Households' Access to Credit

Academic journal article Journal of East Asian Studies

Multiple Principals and Collective Action: China's Rural Credit Cooperatives and Poor Households' Access to Credit

Article excerpt

Ample empirical evidence suggests that Rural Credit Cooperatives (RCCs), which are the core credit institutions in rural China, are not accountable to their member households. This article argues that this conundrum can be explained by an institutional analysis of the credit cooperatives using the multiple principals--agent framework: the credit cooperatives as agents are accountable to multiple heterogeneous principals--with multiple conflicting objectives. The multiple principals are (1) the County RCC Unions, which exercise control using the evaluation criteria on which the remuneration of grassroots RCC officers is assessed; (2) local party secretaries, who exert influence through top personnel appointment and dismissal in the credit cooperatives; and (3) member households, which are a "collective" principal. In a multiple-principals scenario, the "collective" principal has weaker control over the agents due to the "collective action" problem.

KEYWORDS: Principal-agent, multiple principals, collective action, China's political economy, credit cooperatives


The Rural Credit Cooperatives (RCCs), or nongcun xinyong hezuoshe, which have been the core credit institutions in rural China since the Communist revolution in 1949, are hardly meeting the credit demands of the very constituencies they are supposed to serve. They are plagued with mountains of bad debt, which consists largely of non-performing loans to township and village enterprises (TVEs); (1) they have facilitated huge flows of financial resources from rural to urban areas and from agriculture to industry; (2) and poor households are increasingly left behind in credit access. (3)

As the only formal credit organizations with a network extending to the grassroots level (township), the RCCs are the major--and often the only--formal providers of credit to rural households in China. (4) At the end of 2002, there were 35,544 RCCs with legal entity status nationwide, (5) which was the widest network among all the financial institutions in China. The RCCs, collectively, had deposit savings of 1.98 trillion yuan and loans of 1.39 trillion yuan, which was the second highest level of individual savings deposits in the country and the fourth highest level in terms of the total amount of loans and deposits. Nonetheless, the RCCs are plagued with mountains of bad loans and suffer from chronic financial losses. According to official estimates, at the end of 2002, the nonperforming loans were 514.7 billion yuan, or 37 percent of total loans; the cumulative losses were 131.4 billion yuan; and 19,542 RCCs, or 55 percent of them, had a negative net worth or were technically bankrupt. (6)

Three-quarters of China's population still reside in the countryside, where the main source of income is agriculture. The Rural Credit Cooperatives have been a channel for reallocating capital from agricultural households to finance the development of local government-owned TVEs and state-owned enterprises (SOEs). As indicated in Table 1, households' savings accounted for more than 80 percent of total deposits but constituted only 37 percent of total loans. Aside from the small share of loans that go to agricultural households, the mounting bad debts (most of which are loans to the TVEs) also rob many credit cooperatives of the valuable funds they need to conduct lending activities, which further reduces the credit supply to the very constituents they are supposed to serve.

Despite their importance in supporting the growth of the rural economy and in raising the living standards of agricultural households, there are to date few studies on the credit cooperatives, specifically on why they fail to provide credit access to households. Loren Brandt (7) examines the extent to which credit demands of poor households during the 1990s were met by the rural financial institutions. Andrew Watson (8) provides a historical account of the organizational transformation of the Rural Credit Cooperatives but falls short of providing a clear answer to the cause of the problem. …

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