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

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Draft August 2001Are China’s Financial Reforms Leaving the Poor Behind?Loren BrandtDepartment of Economics, University of TorontoAlbert ParkJFK School of Government, Harvard UniversityDepartment of Economics, University of MichiganWang SanguiInstitute of Agricultural Economics, Chinese Academy of Agricultural SciencesPaper prepared for the conference on“Financial Sector Reform in China”JFK School of Government, Harvard UniversitySeptember 11-13, 20012
Are China’s Financial Reforms Leaving the Poor Behind?1. IntroductionSince economic reforms began, the Chinese state has shifted the locus of controlover the allocation of resources from the fiscal to the financial ledger (Sehrt, 1999).Under the planning system, funds were mobilized by setting prices to concentrate profitsin state-owned industry (Naughton, 1995). During the reform period, market competitioneroded the profitability of SOEs, and the government struggled to establish an effectivetaxation system to generate revenue (Wong, Heady, and Woo, 1995). However, byasserting its control over the banking system, the state was able to continue directingnational resources to support its most important political constituency--urban workers instate-owned enterprises (Brandt and Zhu, 2000). This strategy was facilitated by therapid growth of individual private savings in state-owned banks, which have come todominate China’s national savings (Kraay, 2000). 1The financial system has increasinglybecome the key mechanism by which the government attempts to realize its distributionalgoals.Government allocation of resources in China as well as in many other developingcountries has been biased against rural areas and in favor of urban areas, undoubtedlywidening urban-rural disparities (Putterman, 1992; Park and Rozelle, 1998; Lipton,1984). Transfers through the banking system are only one aspect of this urban bias,which also includes extraction of taxes, fees, pricing policy, procurement quotas, and1 According to official data, most of the increase in deposits was by urban residents, although the urbanruraldistinction is not always clear because rural residents may deposit funds in any bank. In 1998, thepercentage of individual deposits from rural areas (defined as deposits in Rural Credit Cooperatives) was20 percent, compared to 26 percent in 1990. Urban deposits in 1998 were 8.1 times that in 1990, ruraldeposits were 5.7 times as great. On a per capita basis, the deposits of urban residents in 1998 were nearly10 times that of rural residents. Individual deposits accounted for 55 percent of all deposits in all financialinstitutions in 1999, with the second largest category being enterprise deposits (34 percent).3
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 14 and 15: time. This is not to say that house
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

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