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

Are funds flowing out of poor areas?We measure the net flow of funds by the ratio of outstanding loans to deposits ineach financial institution. A financially self-sufficient bank should have a loan-depositratio less than one because of reserve requirements (13 percent nationally but higher forsome local branches, especially RCCs before 1996 when they were regulated by ABCs).Higher loan-deposit ratios imply that more local resources are being lent locally ratherthan being intermediated for use in other areas, such as through bank deposits inheadquarter banks or other banks, or through inter-bank lending. 12If funds tend to flowout of poor areas, we would expect such areas to have lower loan-deposit ratios. Banksborrowing funds from their headquarters or from other banks could have loan depositratios exceeding one.Table 4 presents loan-deposit ratios broken down by province, income per capitaquartile, and bank type. Overall, more funds flowed out of rural areas in 1997 than in1994, as evidenced by the fall in the average loan-deposit ratio for the full sample from0.71 to 0.64. For all financial institutions nationwide, the ratio of loans to deposits fellfrom 1.01 to 0.91 over this same period (State Statistical Bureau, 1999). 13Thus, ruralareas consistently are net contributors of resources for lending elsewhere, but the degreeof this bias did not shift significantly in the mid-1990s. These loan-deposit ratios aresimilar to those found in a 1996 national survey of 94 RFIs in six provinces and in the1997 China Rural Poverty Survey conducted in six poor national poor counties in12 In addition to deposits, funds can come from the bank’s own capital, net borrowing, and other sources.Because we are unable to clearly separate other sources and uses of funds into those that originate or areinvested locally and those that are borrowed from or invested elsewhere, we treat deposits and loans as theonly purely local source and use of funds. A better measure of net outflow would account for all sourcesand uses of funds.13 The high loan-deposit ratios for all banks and ist subsequent decline largely reflect relending by thePeople’s Bank of China to state-owned banks, which through the 1980s accounted for as much as 30percent of funds, but since the mid-1990s has tightened considerably.19