Are China's Financial Reforms Leaving the Poor Behind - Harvard ...

deposits of surplus funds in higher level branches of the same bank. Thus, townshipABC branches deposit funds with the county ABC branch, and RCCs deposit funds withthe county RCC association (lianhehui). The ABC is a national bank, but transfersamong RCCs typically occur only among branches within the same counties. Many bankmanagers have an approved credit quota based on a county plan or on an agreementlinking lending amounts to the amount of deposits. In most cases, the quota can beadjusted if the manager can justify the need for more funds. Managers also are oftenrestricted in the size of loans that can be issued without approval from the county ABCbranch or RCC association, and local discretion in individual loan decisions hasdecreased over time (Shen and Park, 2001). The county banks play an important role inregulating and supervising township bank branches, although the township banks remainindependent accounting units. Managers have almost no options for fund use other thanlocal lending and deposits in higher level banks. The internal interest rates for suchdeposits (usually set very low), the credit quota, and the riskiness of local projects thusare major factors affecting loan allocation decisions.In Table 1, we provide summary balance sheet information from the ruralfinancial institutions we surveyed. Dependence on deposits as a source of fundsincreased from 58 percent in 1994 to 64 percent in 1997, suggesting a decline rather thanan increase in interbank lending. This dependence is particular high, and growing in poorareas, suggesting that deposit mobilization may play an important role in determining theamount that financial institutions in such areas can lend. The overall size of the financialinstitutions, as measured by total assets, is nearly ten times as great in the richest quartile12