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

Deposit and Income GrowthBoth deposits and incomes grew rapidly in rural China from 1994 to 1997, aperiod of higher commodity prices and healthy output growth. Deposits grew by 12percent per year and rural incomes grew by 11 percent (Table 6). While average growthin real incomes was similar across provinces over the three-year period (1994 to 1997),poorer townships grew substantially faster than richer townships. Income per capita inthe richest quartile of townships increases by 7 percent per year while in the poorest itgrew by 13 percent. This is consistent with the convergence hypothesis of theneoclassical growth model, and suggests we may be mistaken to assume that goodprojects do not exist in poor areas. However, despite lower income growth, the depositgrowth rate is higher among the higher income groups (13 percent in the richest quartileand 8 percent in the poorest). These differences are consistent with a greater propensityto save with higher income. Loans grow even more slowly than deposits, and nonperformingloans grow faster in both the richest and poorest quartiles. The poorest areasare thus characterized by high income growth (13 percent), low deposit growth (8percent), even lower loan growth (7 percent), and lower growth still in performing loans(minus one percent) because of the rapid growth of non-performing loans. Realperforming loans for the poorest quartile is slightly negative even though real incomesare growing fast. Overall, the results suggest failing intermediation in poor areas drivenby a failure of available resources to keep up with income growth and high amounts ofnon-performing loans. Richer areas have more room to maneuver because they can moreeasily mobilize deposits, but here too, poor loan performance is undermining the ability21