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

More documents

Recommendations

Info

time. This is not to say that households found it easier in 1997 than in 1994 to obtainloans, as total lending declined over this period. These findings are consistent with otherresearch showing that a relatively high proportion of farmers in poor regions have at leastsome access to formal credit (Park and Wang, 2000). 9Ironically, it may be households inricher areas that have greater difficulty obtaining individual loans because banks so preferlending to enterprises. However, richer households have greater savings (and deposits)and so generally are more able to self-finance common expenditures such as for fertilizerand school fees. From this perspective, household credit demand does not necessarilyrise with income, unless rural residents shift to self-employment activities that requiregreater financing.4. Changes in financial intermediation in rich and poor areas from 1994 to 1997Financial intermediationTo assess whether China’s financial reforms are leaving the poor behind, werequire a financial performance measure that will enable us to compare the extent offinancial intermediation in rich versus poor areas over time. Financial development isfrequently measured by the amount of financing normalized by the value of economicoutput, e.g., the ratio of total loans to GDP. In this paper, we restrict attention to formalfinancial intermediation in the form of credit, excluding equity financing and informal9 One piece of supporting evidence for unmet household credit demand was the success of RuralCooperative Foundations (RCFs, or nongye hezuo jijinhui) in the 1990s. These quasi-formal institutions,under the administrative jurisdiction of the Ministry of Agriculture, tended to be established in moreindustrial areas and lent mainly to households. However, there is also evidence that they merely crowdedout household lending by incumbent RCCs and so did not increase overall household lending (Park, Brandt,and Giles, 2000). RCFs were banned by the government in 1999.14
orrowing. 10A consistent finding in cross-country studies is that the level ofdevelopment as measured by GDP per capita is positively associated with the degree offinancial depth (Gertler and Rose, 1996). Park and Sehrt (forthcoming), however, findthat this relationship does not hold for provinces in China, implying regional barriers toefficient intermediation.Because GDP is not calculated at the township level in China, we adopt adifferent measure--the ratio of outstanding loans per capita to rural income per capita.Income per capita is a net rather than gross measure and does not include retainedearnings in enterprises or other income that does not accrue to households. It is expectedto be highly correlated with, but to rise less than proportionally with GDP. Relative to ameasure using GDP, this could lead us to overstate the relationship between the level ofdevelopment and depth of financial intermediation.We also make a second adjustment. Many banks in China have large amounts ofoverdue loans with dubious repayment prospects. If loans that should be written off aslosses are kept on the books, they can present a misleading picture of the true extent offinancial intermediation and net flow of funds. Fortunately, our survey providesinformation on overdue, or non-performing loans. We can thus divide total outstandingloans into “performing” and “non-performing” loans. Even though some overdue loanscould be providing a meaningful intermediation function, we consider the amount ofperforming loans relative to income to be a superior measure of effective financialintermediation. We report financial intermediation rates using both total outstandingloans and performing loans (Table 2).10 During this period, TVEs could not be listed in capital markets. Informal borrowing is probably at leastas important as formal financing for households in rural areas (Brandt, Giles, and Park, 1997) but relativelyunimportant for firms.15
Page 2 and 3: Draft August 2001Are China’s Fina
Page 6: analyze changes in the degree of fi
Page 10 and 11: which is of great interest to those
Page 12 and 13: deposits of surplus funds in higher
Page 16 and 17: We find that from 1994 to 1997 the
Page 18 and 19: survey found an average overdue rat
Page 20 and 21: different provinces, both conducted
Page 22 and 23: of banks to provide new loans. The
Page 24 and 25: We also examine the components of i
Page 26 and 27: decisions that increase branch prof
Page 28 and 29: anches. Note that our sample size d
Page 30 and 31: What are then the implications of o
Page 32: greater scope for reforms that can
Page 35 and 36: Naughton, Barry. 1995. Growing Out
Page 37 and 38: Table 2Financial Intermediation Ind
Page 39 and 40: Table 4Loan-Deposit Ratios, 1994 an
Page 41 and 42: Table 7Decomposition of Changes in
Page 43 and 44: Table 9Governance by Income Quartil
Page 45 and 46: Table 11Changes in Governance betwe

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

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?